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Ethical Issues Forum
More Than One Best Estimate?

Editor’s Note: This article is part of a series written by members of the CAS Committee on Professionalism Education (COPE). Its intent is to stimulate discussion among CAS members. Therefore, positions are sometimes stated in such a way as to provoke reactions and thoughtful responses on the part of the readers. Responses are welcomed. 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.   

Rick A. Pointed, FCAS, works for a small actuarial consulting organization. He has been the appointed actuary for Lone State Insurance, a single state commercial liability insurer, for five years. A couple of weeks after he completes his annual reserve opinion, Lone State contacts Rick and asks him to complete a rate analysis. To save time and money, they ask him to use the same year-end data that he used for the reserve analysis. Rick agrees and gets started right away.   

Rick begins his analysis with a look at Lone State’s loss development factors (LDFs). The LDFs have always been based on Lone State’s own loss experience, with consideration given to some industry comparison factors. The experience is somewhat volatile, but still worth considering, in Rick’s opinion. As a reserving actuary, Rick has tended to pick on the low end of what he considers a reasonable range of selections. For the rate filing, Rick realizes that Lone State will benefit considerably if he selects higher LDFs, especially since the insurance department is likely to accept only a portion of the requested rate increases.   

Is it okay for Rick to vary his LDFs by project for the benefit of his client?   

Rick cannot change his opinion to produce a more favorable result for his client. His loss development selections should be the same for both analyses. Actuaries are expected to provide an unbiased analysis based on the data provided. He cannot choose a different set of unbiased “best estimate” selections. This would be a violation of the principles of ratemaking, which state that cost estimates should be reasonable, not excessive, not inadequate and not unfairly discriminatory. By purposely selecting higher loss development factors, Rick’s recommended rate changes may be excessive.   

Rick does not know Lone State’s true loss development. There are a number of reasonable selections. Certainly, Rick can reconsider them and make changes as long as the selections remain in the reasonable range. In addition, Rick should factor into his selections the historical tendency of the department to reduce the filed change. Rick’s client expects him to act in its best interest. By identifying his role as a consulting actuary for Lone State, it is clear that he is an advocate for them. It is justified and prudent for Rick to change his selections based on the prospective nature of the estimated loss provisions required for ratemaking. If Rick reviews his factors and determines that they can reasonably be higher, then he should make that change. As long as the selected factors are reasonable, then the estimated loss costs will not be excessive, and Rick will not be in violation of the actuarial principles.   

Yes, but he should restate his reserve estimate.   

There is only one best estimate. This is what Rick should be using. He should not select factors that would produce a favorable result for his client. Although there is a range of reasonable selections, Rick’s best estimate should tend toward the middle of this range. In order to produce the best rate change estimate and the best reserve estimate, Rick should reselect the loss development factors in the middle of the reasonable range and use the same factors for both analyses. As stated in Precept 1 of the Code of Professional Conduct, actuaries have a responsibility to the public, as well as their client. By providing unbiased estimates for both analyses, Rick is upholding the reputation of the actuarial profession.

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