|
|
|
Ethical Issues Forum
Projecting Confidence 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) has been writing Hospital Professional Liability (HPL) insurance on a monoline basis for the past 20 years. The owners of this privately held company recently decided that because of market conditions, they would exit the insurance market and put their capital to use in other business ventures. The company is currently in runoff and is interested in a loss portfolio transfer (LPT) so it can completely close its operations.
ABC Insurance Company approached their reinsurer, XYZ Reinsurance Company (XYZ), about the cost of an LPT. Each party agreed to have its actuarial staff complete a reserve analysis projecting the expected value of ABC's reserves as well as the reserves at a 75 percent confidence level. After these actuarial reports are completed, ABC and XYZ would meet again to negotiate a price for the transaction.
Sue Jones, FCAS, MAAA is the sole actuary at XYZ. Sue has completed actuarial analyses of ABC's program for each of the last seven years to assist in the pricing of the annual reinsurance renewal. While the loss forecast for the prospective policy year has been the primary focus of Sue's reports, she also includes a projection of ultimate losses for the historical policy years. Loss projections were provided at an expected value level and at various confidence levels. These reports have historically been shared with ABC.
Because of their concern about the trends in industry HPL claims experience, approximately three months ago ABC retained XYZ to complete a "special" interim reserve report. While ABC has its own internal actuarial staff, the company was interested in the perspective of an outside actuary with more industry experience. ABC paid a fee of $20,000 to XYZ for this report that Sue completed. In this report, Sue stated that, given the rapid level of change in the HPL environment, there were "significant risks and uncertainties" associated with the analysis.
Bonnie Broker works for XYZ and is the manager for the ABC account. She has negotiated deals with the owner of ABC for a number of years and knows he is a tough negotiator. As a result, Bonnie has asked Sue to make this report's assumptions somewhat more conservative than those presented in the recently completed interim report. Bonnie would like Sue to increase her projections by at least 25 percent. While Bonnie wants to charge a fair price for the LPT, completing the deal will be considerably easier if she is seen "giving a little" in the price discussions with the owner of ABC.
From a professionalism perspective, can Sue change the assumptions from those presented in her most recent report?
No
It would be necessary to revise substantially the assumptions from the report completed just three months ago in order to arrive at the magnitude of increase requested by Bonnie. Changes of this degree, particularly given the upcoming negotiations, undermine the high level of confidence the general public has grown to expect from the actuarial profession.
Sue has a responsibility under Precept 1, particularly with Annotation 1-4, to uphold the reputation of the profession—manipulating the projections to make Bonnie's negotiations easier violates the Code of Professional Conduct.
PRECEPT 1—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.
ANNOTATION 1-4—An Actuary shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on the actuarial profession.
Further, Sue also must consider if her most recent actuarial report completed for ABC creates a conflict of interest or impairs her ability to act fairly as required by Precept 7 of the Code of Professional Conduct.
Yes
The assumptions in an actuarial report are often subject to considerable uncertainty and judgment. This is particularly true with the current HPL environment and was specifically mentioned in Sue's report to ABC. The Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves specifically states: "An actuarially sound loss reserve for a defined group of claims as of a given valuation date is a provision, based on estimates derived from reasonable assumptions and appropriate actuarial methods…." The Statement goes on to say "The uncertainty inherent in the estimation of required provisions for losses or loss adjustment expenses implies that a range of reserves can be actuarially sound."
As it relates to the conflict of interest issue and Precept 7, given the past relationship, each party knows that Sue is performing the work, so no further notification is required (although to be safe, Sue may want to get a letter from both ABC and XYZ for her files). As long as Sue can be impartial in providing her analysis, she is not in violation of Precept 7.
While substantial changes would be required, as long as Sue's assumptions are not unreasonable and she satisfies Precept 7, she has not violated professional standards by increasing her loss projections as requested by Bonnie.