From the Readers

A Job Well Done

Dear Editor:

I enjoyed Stan Khury's editorial, "The Franchise," very much. It illuminated the heart of the subject in a way that rang true for me. Thank you.

For the CAS's sake, I hope Stan will continue to be involved with the CAS after rotating off the Board and out of the Editor-in-Chief position. Although Stan has many talents, his ability to see and describe matters from a fresh, clear perspective has been especially valuable to the CAS. I'm sure it's valuable in any other endeavors he is pursuing as well though. Best regards.

Patrick J. Grannan, FCAS

Practicing Free from Undue Influence

Dear Editor:

Many in the actuarial profession got a sobering wake-up call when we read the latest American Academy of Actuaries Actuarial Update publication. Two headlines caught our attention: "Out of Job for Upholding Standards, Says Canadian Pension Plan Actuary" and "Actuaries and Independence." The first article was an interview with Bernard Dussault, formerly the chief actuary for Canada's federal insurance and pension programs. Mr. Dussault expressed his belief that he had been removed from his post on August 25 by his boss, John Palmer, Canadian Superintendent of Financial Institutions, because he refused to change certain figures in his actuarial report. In the interview, Mr. Dussault indicated that he was asked to change the figures "because otherwise it would embarrass the minister."

In the second article, Peter Morse, president of the Canadian Institute of Actuaries, addresses the importance of actuarial independence. Mr. Morse's excellent piece concludes as follows:

In summary, it is important that an actuary, particularly one whose work is directly or indirectly relied upon by parties beyond the direct recipient of the work, must practice free from undue influence. Whether this freedom comes from the nature of the actuary's appointment, the standards of the profession or the moral strength of the individual actuary, it must exist or the profession's generally very strong reputation will fall, and the punch line of the old actuarial joke, "What do you want the answer to be?" will be heard too often.

At the end of the day it is the public and the company's stakeholders (policyholders, stockholders, employees, Board of Directors, etc.) who benefit most from actuarial independence. The publicity surrounding the Canadian situation gives the "public" a rare glimpse into the unfortunate reality that can in some instances taint the management/actuary relationship.

Mr. Dussault's situation is unfortunate. However I hope some good can be made to come out of it. In that spirit I would suggest the following:

• If ever there was a "boundaryless" issue between the CAS, SOA, AAA, and CIA—professionalism and strong support for actuarial independence ought to be it. Let's use this incident as a great opportunity to work together on an important issue!
• We (all the actuarial societies) need to do a better job educating the public and the various stakeholders on:

  1. What is an actuary?
  2. What kinds of things do actuaries do?
  3. How do the things actuaries do directly affect you?
  4. Why should you care about actuarial independence?
  5. What can you do to strengthen actuarial independence?

• I believe that in particular, regulators, rating agencies and Boards of Directors can play a vital role in strengthening actuarial independence. How about stimulating some structured dialogue with these constituencies about doing just that?

I believe that if the profession responds proactively to situations such as Mr. Dussault's we can:

• minimize the number of such regrettable occurrences
• strengthen actuarial professionalism within our membership
• strengthen the respect for actuaries and actuarial professionalism held by the public and our various "stakeholders."

Susan T. Szkoda, FCAS

Bornhuetter-Ferguson Modification

Dear Editor:

The premise underlying the BF method ("Brainstorms: New and Improved Bornhuetter_Ferguson," November 1998 Actuarial Review) is that unrecorded loss dollars (by accident/policy year) are a function of expected, rather than reported losses. Combining the two concepts, as suggested in the 11/98 article of the Actuarial Review, would therefore compromise the distinguishing feature of the BF method, i.e., establishing IBNR (I prefer IBNER—Incurred But Not Enough Recorded) on a basis that is independent of losses reported to date.

I suggest this modification of the BF method: Select an IBNER ratio of premiums earned that is not based upon a portion of the initial expected loss ratio. Instead, select the ratio after a review of updated/restated IBNER loss ratios of prior accident years at the same age of development. This alternative would satisfy both the independent status of the IBNER estimate as well as the criticism of subjectivity otherwise involved.

Ruth E. Salzmann, FCAS