Ethical Issues Part II:
Actuaries Respond in Theory

by Jerome A. Scheibl

Editors Note: This article is one of a series written by members of the CAS Committee on Professionalism (COPE) and the Actuarial Board for 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 Professional Standards as they may apply in real life situations.

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The February Actuarial Review asked readers to comment on the implications of professional standards of conduct, practice and qualifications involved in a hypothetical situation. The situation involved an insurer who abruptly terminated its contract with its consulting actuary as the actuary was conducting the year-end reserve analysis. Readers were asked to focus on the manner in which the terminated actuary and the successor actuary conducted themselves.

Briefly, the situation was this: Perfection Mutual Casualty Insurance Company (PMC) terminated its contract with Pat Firmly, consulting actuary, after Firmly noted in a November analysis that PMC's experience for commercial lines had deteriorated sharply and would probably result in a reduction in surplus at year-end. PMC management argued that Firmly's analysis relied too heavily on industry development factors for long-tail lines and was otherwise unrealistic as far as its projections of IBNR reserves.

Harry Hyde, consulting actuary, was retained by PMC in February to issue an actuarial statement of opinion on its year-end reserves. Hyde requested Firmly to furnish his workpapers for prior years. Firmly refused and accused Hyde of stealing one of his best accounts by promising a favorable opinion on lower reserves. Hyde used crude combined lines experience furnished by PMC management and issued an unqualified actuarial opinion to the effect that PMC's reserves were within an acceptable range. These reserves produced a nominal increase in PMC's surplus.

Readers' Responses

As of press time, this is what the readers had to say. One reader suggested that the ABCD send counselors to visit Hyde as Hyde accepted PMC's assertions apparently without question. This same reader observes that "...we must not allow our professionalism to become corrupted by marketing, claims, or underwriting mythologies." Another reader stated that Hyde's work should have been peer reviewed and that his evaluation should be monitored for its performance over time.

As for Firmly, a reader felt that he appeared to have "done all the right things" although there may have been room for satisfactory resolution with his client if reasonable flexibility would have permitted it.

The same reader expressed an opinion that Firmly's refusal to furnish workpapers was appropriate as Hyde had no a priori expectation to such workpapers and Firmly had no obligation to furnish them. However, Firmly had no basis for his accusation against Hyde and should not have made it. Accordingly, he feels that Firmly could (or should) be reported to the ABCD.

Observations

Two questions arise regarding Hyde's performance. In accepting this assignment, did he "...act honestly and in a manner to uphold the reputation of the actuarial profession..." (Precept 1), and did he "...perform professional services with integrity, skill, and care" (Precept 2)? Certainly he was aware that Firmly was dismissed because of a disagreement with PMC regarding reserve levels. While Hyde had no obligation to arrive at the same conclusions as Firmly, he would have been prudent to have requested PMC's consent to consult with Firmly in order to prepare adequately for the assignment and to make an informed judgment as to whether there were circumstances involving a potential violation of the Code of Professional Conduct (Annotation 11-3).

At any rate, Hyde's knowledge that his reserve recommendations differed from Firmly's enhanced his responsibility to carefully document his work to support his alternative opinion (Annotation 11-2 and Actuarial Standard of Practice No. 9).

ABCD does not automatically counsel actuaries every time someone suggests it do so. Before the ABCD could counsel Hyde (or recommend that Hyde's membership organizations take stronger action against him), the ABCD would first consider whether Hyde's conduct had apparently breached applicable standards of professionalism. If so, the ABCD would then conduct an investigation before determining how to deal with Hyde's conduct. If Firmly obtained a copy of Hyde's opinion and submitted it to the ABCD, this is one instance where the ABCD might well decide to investigate and (at least) counsel Hyde in better practice.

Understandably, Firmly was upset over losing a client because he had done what he felt was right and resented what appeared to be a willingness by Hyde to compromise his integrity. While the Code of Professional Conduct does not supersede the constitutional right of free speech, it does require that discussions between actuaries or observations to third parties should be conducted objectively and with courtesy (Annotation 11-1). Hyde could have had cause for requesting a disciplinary investigation against Firmly if Firmly's accusations amounted to a breach of courtesy, or if his public comments were such that they reflected on the reputation of the actuarial profession or were found by the courts to be acts of libel or slander.

ASOP No. 9 provides that "Documentation should be available to the actuary's client or employer, and it should be made available to other persons when the client or employer requests, assuming appropriate compensation...." Although Firmly may have had ownership rights to his "workpapers," he had the obligation to furnish such "workpapers" to Hyde in exchange for a reasonable compensation. As a practical matter, however, Firmly would not be required to furnish any material of a proprietary nature such as computer programs (Annotation 11-3).

The Next Problem

Barbara Seville, FCAS, MAAA, and actuary for the state of Euphoria discovered a major deficiency in loss reserves for the Domiciled Casualty Co. during a regular department examination of the company's financial condition. Further examination revealed that the company's actuary, Robin Banks, ACAS, had grossly misrepresented the company's workers compensation financial loss reserves by truncating loss development at five years, consistent with the unit statistical plan, and failing to provide for IBNR reserves. Banks also established rates for automobile liability which included no expense loadings. Banks was the only actuary employed by the company.

Is Seville obligated to file a complaint with the ABCD against Banks? If so, on what grounds? Would Seville be required to act differently if she were an actuary for a reinsurer or an auditing firm reviewing Domiciled's financial condition?

Send your comments, anonymously if you wish, to the Editor, Actuarial Review.