Ethical Issues Forum
Editor's Note: This article is part of a series written by members of the CAS Committee on Professionalism Education (COPE) and the Actuarial Board of Counseling and Discipline (ABCD). The opinions expressed by readers and authors are for discussion purposes only and should not be used to prejudge the disposition of any actual case or modify published professional standards as they may apply in real-life situations.
ABC Insurance Company (ABC) is a publicly traded stock company domiciled in the State of Uncertainty. ABC plans to raise additional capital over the course of the next year to expand its operations into other states and lines of business. Sue Smith, FCAS, MAAA, is Chief Actuary of ABC. Sue has completed a projection of the required loss and loss adjustment expense (LAE) reserve for ABC as of December 31, 2003. Sue's best estimate of the required loss and LAE reserve is $10.0 million, with a reasonable range of $9.6 million to $11.0 million.
Because the president of ABC believes that "actuaries are always conservative" and would like to avoid showing an underwriting loss, a reserve of $9.7 million is recorded on ABC's annual statement. A reserve of $9.7 million produces a zero underwriting profit. The $9.7 million is designated as management's best estimate.
Steve Signer, FCAS, MAAA, is a consulting actuary who has been appointed by ABC's Board of Directors to provide an actuarial opinion on ABC's loss and LAE reserve as of December 31, 2003. Steve completes his analysis and estimates a best estimate reserve of $10.2 million, with a reasonable range of $9.7 million to $11.2 million. After Steve's analysis is completed but before the Statement of Actuarial Opinion (SAO) is issued, Sue shares her reserve analysis with Steve and they both express satisfaction that their estimates are so close.
Should Steve issue a "clean" opinion in this case?
ASOP No. 36 states that "(w)hen the stated reserve amount is within the actuary's range of reasonable reserve estimates, the actuary should issue a statement of actuarial opinion that the stated reserve amount makes a reasonable provision for the liabilities associated with the specified reserve."
Since $9.7 million is within Steve's reasonable range, a "clean" opinion is warranted.
While Steve would not technically be in violation of ASOP No. 36, it is problematic to issue a clean opinion related to a reserve that is below both his best estimate and the best estimate of the chief actuary. Issuing a clean opinion related to a reserve that both credentialed actuaries expect to be deficient does not fulfill the profession's responsibility to the public as defined in Precept 1 of the CAS Code of Professional Conduct:
"An Actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession's responsibility to the public and to uphold the reputation of the actuarial profession."