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Ethical Issues Forum
My Brother's Keeper? 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.
Two years ago XYZ Corporation (NYSE: XYZ) acquired Widget, Inc. (Widget), a privately held manufacturing company, for $100 million. Ted Knight, then chairperson of XYZ, led the acquisition team on this project. Right before the closing of this deal, Ted discovered that Widget had a self-insured workers compensation exposure. He asked his brother Tim Knight, FCAS, MAAA, to perform a "back of the envelope" analysis to determine if Widget's liability provision for this workers compensation exposure was "in the right ballpark." Tim said that he needed more time and additional information on the program, but after Ted insisted that there was not enough time to get the additional information, Tim applied countrywide industry loss development factors to the data provided by Ted and projected the required reserve for this program. Widget's liability provision of $20 million was close to Tim's estimate and the deal was closed. Tim sent the one page analysis (no text) to Ted—no report or opinion was issued and Tim was never paid for this work.
Since the acquisition, the workers compensation loss development has been considerably more than expected due primarily to a significant number of occupational disease claims that were significantly under-reserved by the claims adjusters at the time of acquisition. Payments since the acquisition (for claims occurring prior to the acquisition) are approaching $40 million with a significant number of serious claims still open. Ted Knight has been ousted from the company and his replacement is conducting an investigation into the Widget acquisition. Steve Fixit, FCAS, MAAA, is hired to review Tim's work to help better understand the situation and any appropriate legal action.
Steve contacts Tim to gather background on the situation. Tim and Steve have a very short phone conversation in which Tim shares the information presented above but refuses to discuss the issue in more detail on his attorney's advice. Steve subsequently sends a more detailed registered letter to Tim asking about how various "Considerations" from the Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves were addressed.
Does Steve have a professional obligation to report Tim to the ABCD?
No
Although not specifically documented, it is not unreasonable to assume that Tim did address the considerations in the Statement of Principles. Tim appears to have warned his brother about the implications created by the limited timeframe (which defined the parameters of his assignment). Further, Tim should not be held accountable for claims adjusters who significantly under-reserved the occupational disease claims. While one could argue with Tim's business practices, we cannot be certain that his actions materially violated the Code of Professional Conduct or the Statement of Principles and, as a result, Steve does not have an obligation to report Tim to the ABCD.Yes
Precept 13 of the Code of Professional Conduct states: "An Actuary with knowledge of an apparent, unresolved, material violation of the Code by another Actuary should consider discussing the situation with the other Actuary and attempt to resolve the apparent violation. If such discussion is not attempted or is not successful, the Actuary shall disclose such violation to the appropriate counseling and discipline body of the profession, except where the disclosure would be contrary to Law or would divulge Confidential Information."There is no documentation that Tim addressed the considerations under the Statement of Principles and he is unwilling to demonstrate that he did. Issuing an actuarial analysis without sufficient time to understand the situation, ask the relevant questions (particularly about case reserving practices), and address the necessary considerations is a violation of both the Statement of Principles and the Code of Professional Conduct. Steve must disclose the situation to the ABCD. The Code of Professional Conduct is applicable to the actuary even if the actuary performs the work gratis. Tim appears to have materially violated Precepts 1, 4, and 8 of the Code; Precept 1 by his failure to exercise appropriate care; Precept 4 by his failure to adhere to ASOP #9 (Documentation & Disclosure); ASOP #36 (P&C Loss & Loss Expense Reserves); and Precept 8 regarding his duty with respect to the control of his work product.