By Jack Cumming
When we lived in New York, we had new neighbors who came to the City from St. Louis. One day, my neighbor blurted out quite candidly, “I never would have imagined that the world needed actuaries.” We all laughed. Perhaps that is how you feel about actuaries. Actuaries are an obscure group, noted for their expertise in managing the intricacies of risk and finance. Right now, though, this obscure group is developing a new practice standard for “Continuing Care Retirement Communities and At Home Programs.” It’s open for comments until February 1.
The American actuarial profession came into being during the 19th century around the time of Honest Abe Lincoln. That was when commerce, finance, and industrialization began to supplant the earlier self-sufficient rural existence. The interdependency of commerce and finance requires mutual trust and candor. It also results in complexity. Actuaries are masters of that complexity and are called to high principles of trust and transparency.
Continuing Care Retirement Communities (CCRCs) and many other senior living enterprises require projections of probable utilization as the health condition of residents and others served changes with advancing age. There is a small cadre of actuaries who specifically address senior living, though many more actuaries are experts in the financial and risk ramifications of aging. The long term care insurance and pension industries dwarf senior living.
As it has evolved, the actuarial profession has become increasingly technical and rigid, relying on documents called Actuarial Standards of Practice (ASOPs) to codify acceptable practice. ASOP #3 has heretofore been limited specifically to CCRCs. Now, a Task Force of the Actuarial Standards Board has been formed to revise that ASOP to extend actuarial practice to Continuing Care at Home (CCaH) programs “that are not regulated as insurance entities”. This news may seem obscure, even esoteric, to many working in senior living, but it raises controversy deserving of examination.
Precedents for Consumer Trust
Life insurance companies, referred to in the ASOP as “insurance entities,” are heavily regulated at the state level by uniform codes developed by the National Association of Insurance Commissioners (NAIC). The NAIC was formed in the 19th century when the managements of some life insurance companies played loose with the assets entrusted to their stewardship. When people pay in advance for deferred benefits, there arises a temptation to divert those funds to purposes other than funding the deferred obligations.
The image that illustrates this profligacy in my mind is that of the Founder CEO, Henry Baldwin Hyde, of one of the top three early life insurance companies being driven to the office in a coach-and-four with footmen who jumped down to roll out a red carpet for him as he strode into his office. That image of luxury living from funds entrusted for deferred benefits, combined with a steady drumbeat of failing insurance companies, led to public pressure for reform.
The NAIC responded. First, by developing statutory accounting, a standard managed by state regulators. Then, by requiring that companies hold mathematical reserves for their deferred obligations. And, most recently, by enacting protections for policyholders when insurers do fail. These NAIC actions contrast with the unregulated risks in the finances of today’s senior living enterprises, particularly those that are tax exempt.
No industry likes to be regulated. Senior living is not exceptional in having trade associations, principally LeadingAge, but also Argentum and the American Seniors Housing Association, that react to oppose or modify most proposed regulation. LeadingAge does lobby for federal funding for its affordable housing members even as it opposes closer regulation of luxury housing for the affluent. Despite the industry’s predominantly reactive approach, however, the proactive legislative approach developed by the NAIC might be the best way for senior living to regain credibility among consumers.
The NAIC is not a federal agency. It is a consensus collaboration among the several states and territories of the United States to allow them to pool resources. That gives them the analytical wherewithal to determine the best legislative and regulatory standards for overseeing complex technical matters. Particularly related to finance, but also to other aspects of business practice. The NAIC is apolitical.
The NAIC has crafted a relatively uniform legal environment that facilitates nationwide operations. The NAIC’s model laws and regulations have made life insurance a trusted industry. Additionally, it has proven much easier for business enterprises to ensure regulatory rationality through the NAIC’s deliberative counsels than is possible with the lobbying environment of political tradeoffs that influences federal legislation.
The desirability of elevating senior living as an industry that consumers can trust is why the actuarial standard (ASOP #3) now under consideration is so important. It can be tempting to skirt the time-tested constraints that have put life insurance on a solid course and to glean the early profits that come from collecting revenues today with the matching benefits deferred into the future. Is it ethical to put the short-term financial interests of an enterprise above the long-term security interests of the consumers it serves?
A Risky Prospect
By condoning what the ASOP refers to as programs “that are not regulated as insurance entities,” the Actuarial Standards Board is authorizing senior living to pursue the kind of shaky operations that led to the creation of the NAIC. As a matter of history, we can note that it took the life insurance industry many decades to recover the public trust that was lost as a result of the laissez-faire operations and recurring failures of lightly regulated early insurers.
The ASOP, as now drafted, concentrates on the mechanics of financial projections. The nature of these complex projections is that they can become no more than wishful mathematical theorizing. With spreadsheets, it’s easy to create tables of numbers showing revenues exceeding costs for many years into the future with no pitfalls along the way.
As the renowned former CCRC regulator, Bob Thompson of California points out in the short video excerpt referenced at the end of this article, actuarial assumptions can be manipulated by the projecting mathematician to give the result that the fee-paying client hopes for and expects. What elevates actuaries to the status of a profession is not their adeptness with numbers but their commitment to integrity, ethics, and morality in the conduct of businesses that rely on trust for their success.
Does the World Need Actuaries?
This brings us back to where we started. Perhaps, you, like our New York City neighbor, have never considered whether the world needs actuaries. You likely would agree, however, that our world can be better if integrity governs and if we can return to an era in which a person’s handshake was their bond. Finance is complex and can be, and often is, manipulated in the interests of greed rather than to promote social values. Does the world need actuaries? It sure does.
Continuing Care at Home (CCaH) programs “that are not regulated as insurance entities” are, nevertheless, long term care insurance albeit with care management coordination similar to managed care health insurance. By extending ASOP #3 beyond CCRCs to include these unlicensed insurance undertakings, the Actuarial Standards Board is countenancing the offering of risk-sharing “insurance” contracts without the capital and reserving requirements that make insurance sound. This brings to mind the duck test. “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”
The Actuarial Standards Board has now opened the door to hear from those in the industry about how they believe the finances of the industry should be addressed. Comments relating to the proposed ASOP #3 can be sent to [email protected]. The subject line must comprise the phrase “ASB COMMENTS”. Now is your chance to let this respected group of professionals know the kind of financial integrity you would like the senior living industry to present to its consumers. Click here for Regulator Thompson’s remarks on actuarial integrity.