Conflict of Interest?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.
Theodore Thorough, FCAS, MAAA, is an independent consulting actuary who just took on a new client, Niche Insurance Company (Niche). Niche's policyholders are small duct cleaning businesses to which Niche has been providing very profitable general liability (GL) coverage. Over the last two years, Niche has expanded its business by offering commercial auto and workers compensation coverage to the same client base. The new business is not as profitable as the traditional GL coverage and Niche is experiencing some financial pressures.
The president of Niche Insurance Company, Alex Allthat, has asked Theodore to provide a loss reserve opinion for the complete book of business. In reviewing the GL data, Theodore notices that the paid-to-incurred ratios are increasing and the case outstanding reserve per open claim is somewhat low. As directed by section 3.5.2 of Standard of Practice #36 addressing statements of opinion regarding loss and LAE reserves, Theodore asks Mr. Allthat for contact information for the person in charge of Niche's claim handling function, in order to inquire about any potential case reserving change. Mr. Allthat indicates that he personally oversees the claims handling function and can answer any questions. Through the course of the discussion, Mr. Allthat insists there has not been any change in case reserve philosophy and offers no explanation for the changes that Theodore has observed other than to vaguely indicate that they have been doing a better job of handling claims. In addition, Mr. Allthat asks Theodore why he is looking for reasons to increase the reserves, especially when this improvement in claims experience can really help Niche's bottom line. Theodore wonders whether Mr. Allthat is being entirely truthful or whether his concern over the final reserve requirement may be affecting his answers.
Should Theodore accept the word of Mr. Allthat as the company claims handler that there has not been any change in case reserve philosophy and use the data as provided to develop the reserve estimate?
Yes
Theodore only suspects that Mr. Allthat is being less than truthful. He does not have any conclusive evidence to the contrary. He followed all of the guidelines specified in the Statement of Principals regarding loss reserves, as well as the Standards of Practice and Code of Professional Conduct. In doing so, he contacted the company to inquire about the observed change in claims handling and was assured that there have been no changes in procedures or conditions. If material, Theodore could identify the potential adverse deviation indicated by a case reserve adjustment analysis, as described in section 3.3.3 of Standard of Practice #36 regarding statements of opinion regarding loss and LAE reserves.
No
Mr. Allthat's role as president is in conflict with his role as claims manager and may be affecting his objectivity. Because of these conflicting roles, Theodore should be more skeptical when assessing Mr. Allthat's comments regarding the case reserves. The bottom line is that Theodore has observed what appears to be a change in the case reserves. He hasn't been provided with an explanation for the change, nor has he been given a reason to ignore it. It may be a result of an as yet unidentified change and should be considered, regardless of Mr. Allthat's comments. To do otherwise would be a violation of Precept 1 of the Code of Professional Conduct regarding professional integrity. At a minimum, Theodore should disclose the change in diagnostics and describe the impact that the change could have on the reserve estimate. In addition, Theodore should thoroughly document his procedures and assumptions according to the Standards of Practice #36 for reserve opinions.
