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Ethical Issues Forum
Having Difficult Discussions

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.

Truthful Actuary (TA) is the chief actuary at XtraLT (XLT) Insurance, a publicly traded multi-line insurance company. TA’s corporate team reviews the loss reserves on a quarterly basis, with a year-end review in time for the year-end earnings release. BeLoyal Actuary (BLA) is the corporate actuary responsible for conducting the analysis and producing the results. As a result of his year-end analysis, BLA concludes that the Longest Tail (LT) segment of business is experiencing significant adverse development and requires a substantial reserve increase. There had been some indication of modest development in prior analyses but the actuarial team proceeded with caution until they could conduct a more thorough review. XLT has had a recent change in management and has struggled to recover from significant losses under prior management. The new management team has made many internal changes and results have improved significantly, gaining them well-earned praise from the board, shareholders, and staff.

Anticipating the reaction to his conclusions, BLA has produced a more detailed study than usual, limited because of time constraints and resources, but with enough evidence to support his findings. TA receives the report, reviews the study, and concurs. He presents the findings to the senior team.

Given the impact on the financial results, there is considerable discussion, which is expected since the results are likely to disappoint shareholders and the board. TA has always been respected by the senior leadership of the company and has been considered an integral part of the management team. This report, however, appears to be straining that relationship. TA is also a conscientious manager of his professional team. He is open, direct, and clear in all of his dealings with his staff, providing as much information as he can to explain business situations, so that his team understands the environment in which they are operating. His team appreciates this and is very loyal and dedicated, and supportive of him.

The senior team is understandably upset with the findings, especially the head of the LT line of business, who may be next in line to be CEO. The head of LT had been briefed prior to the meeting by TA and BLA and could not refute the findings. She was prepared to counter the recommendation, however, and ask for more time to investigate. Upon review, the CEO and CFO accept the results, but they are upset that the issue was not identified earlier. Knowing they must balance market perception with financial responsibility, they push back on the conclusion, admonish TA and request a more thorough study of the results to “be sure.”

TA now returns to his team to discuss the next steps. How does TA communicate with his team? What actions should TA take, considering both the pushback and requested delay by the senior team as well as anticipating BLA’s and his team’s reaction to the perceived rejection of the valid study? How does he address the professional issue regarding altering his reserve opinion?

Among many alternatives, consider these:

Alternative 1
TA discloses to his team the reaction of management by saying, “They were very upset and angry, and didn’t mince words. Not only do they want to know why this wasn’t identified earlier, they want to defer any change until we have studied it further. Given the impact to the profitability plan and the stock price, it could permanently damage the credibility of the company management. Let’s go over these results and be sure to take a careful look at the assumptions, invite further discussion with the LT management, and then get back together to decide how to handle this. Both the CFO and CEO want to be involved in all of the discussions, so we need to be prepared.”   

Alternative 2
TA violates his operating principles and decides not to disclose the details of the contentious meeting, fearing that his team may react in a way that inadvertently and unintentionally results in supporting the deferral. They may feel pressured to revisit borderline decisions or change assumptions, creating a more optimistic conclusion to eliminate the tension. They won’t like the fact that their boss is under attack. To avoid involving his team in this thorny situation, TA acquiesces to management’s request and asks his staff to do additional studies. By doing so he feels satisfied that he has discharged his professional responsibility to reveal the news, and he is optimistic that the further discussions with LT may result in operating changes that improve results. In any event, the study shows that if no changes are made, the financials will continue to deteriorate to the point that TA and his team will be vindicated.

Alternative 3
TA is not comfortable with the conclusion of the meeting. He feels that the study is conclusive and sufficient to take the necessary reserve action now. He also fears that left unchecked, the operating processes will continue to erode profitability. TA understands the implications of public perceptions and is sympathetic to the long-term view taken by management, but the evidence is strong. The actuarial study, although subject to time and resource constraints, went beyond just numerical analysis, having included many discussions with employees of the LT business unit. Nothing in those discussions changed the key assumptions sufficiently to eliminate the projected need for a reserve increase. TA decides to engage senior management in another discussion of the matter immediately and to take the view that a significant reserve action is not only necessary, but that he cannot sign off on the financials or sign an opinion until action is taken.

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