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Random Sampler
Confidentially Speaking
By Charles L. McClenahan

"The Actuarial Report contains significant proprietary information. It is expected that the Report be held confidential and not intended for public inspection."
- American Academy of Actuaries1

"Whoever deliberately attempts to insure confidentiality with another person is usually in doubt as to whether he inspires that person's confidence in him. One who is sure that he inspires confidence attaches little importance to confidentiality."

- Friedrich Nietzsche2

I am a strong supporter of the required Statement of Actuarial Opinion on Loss Reserves. In 1973, as the actuary for the State of Illinois Department of Insurance, I was one of the first to propose such a requirement. These statements have considerably strengthened the actuary's hand in negotiations with other members of management regarding the balance sheet reserves. Yet I am troubled by the language added to the 2004 instructions regarding the confidentiality of the report.

Now I can certainly understand how some companies, some regulators, and even some actuaries would prefer that the details of the Actuarial Report not be made public. Most of the reports that I have reviewed contain detailed requirements relating to who may see the report and under what conditions. Yet the fact remains that in litigation involving reserve adequacy or solvency, the Actuarial Reports are generally required to be provided as part of the discovery process, and, I believe, it is unlikely that the NAIC annual statement instructions expressing an expectation "that the Report will be held confidential" will prove to be an effective bar to such discovery in the future. I will leave that to the lawyers to work out. My concern is for the actuaries.

Why are we condoning the confidential treatment of our work product? What is it in the Actuarial Report, or in the Actuarial Opinion Summary to be added with the 2005 opinion, that is appropriate for management and regulators to see, but not for shareholders, policyholders, or claimants? Certainly it is not the reconciliation of the reserve data to Schedule P that is a major concern. Nor does it seem likely that the "extended comments" on "risks and uncertainties" is the reason for the confidentiality.

Is it possible that the worry is that the position of the carried reserves within the actuary's range of reasonable estimates will be made public? Is our concern that companies that book reserves at or above the actuary's best estimate will be viewed as more secure than those booking at the bottom of the range?

If our employer or client carries actuarially sound reserves, should it be muzzled by an expectation of confidentiality, or should it be free to reference the actuarial work product underlying the assessment of its reserve adequacy?

Precept 1 of the Code of Professional Conduct requires that we act in such a way as to "uphold the reputation of the actuarial profession." I'm not at all certain that the production of confidential actuarial reports is the best way to do that.

1 AAA Property and Casualty Practice Note, December 2004, p. 27.
2 Friedrich Nietzsche, Sämtliche Werke: Kritische Studienausgabe, vol. 2, p. 241, eds. Giorgio Colli and Mazzino Montinari, Berlin, de Gruyter (1980). Human, All-Too-Human, "Man in Society," Aphorism 304, "Confidence and Confidentiality," (1878).

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