The Ethical Issues Forum: The Case Of The "Adequate Rate"

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. A Case For The ABCD? and Revisiting "A Case for the ABCD" are available online.

Ethical issues include both conduct and practice. Until now, this column has emphasized conduct issues. Issues involving Actuarial Standards of Practice (ASOPs) are often ambiguous. They involve a number of judgments that are unique to each situation. Therefore, in order to stimulate thought about these issues, this column will turn to practice scenarios for discussion and perhaps debate.

Each scenario will pose an ethical dilemma that will be presented from two perspectives. Comments on these issues will be welcome from the readers and used in future articles as discussion continues.

The Case Of The "Adequate Rate"

The Actuarial Standards Board recently promulgated two ASOPs that affect most CAS members. These are ASOP #29 titled "Expense Provisions in Property/Casualty Insurance Ratemaking" and ASOP #30 titled "Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking."

In the state of Barely Adequate, the Adequate Insurance Company files for a 5 percent rate increase for voluntary private passenger automobile liability. As part of that increase, the company files a provision of 7.5 percent for policyholder dividends. This provision is calculated by Adequate’s actuary based on the provisions of a new dividend program to be implemented shortly.

The state insurance commissioner disapproved the rate filing on the grounds that the dividends are a voluntary refund of excessive profits and not a legitimate expense item.

Adequate Insurance Company appeals the decision. The administrative law judge agrees to base his decision on ASOP #29. How should he decide?

Point

Section 3.5, ASOP #29 categorizes policyholder dividends as an expense to operations. It is the job of the actuary to determine if dividends are a reasonably expected expense and are associated with risk transfer. The standard provides a number of factors that the actuary should consider when making this determinatio.It is alleged that this provision should be approved based on the facts cited above.

Counterpoint

ASOP #29, Expense Provisions in Property/Casualty Insurance Ratemaking, section 2.6, defines policyholder dividends as "nonguaranteed returns of premium or distributions of surplus."

Since policyholder dividends are non-guaranteed, the 7.5 percent provision for policyholder dividends included in Adequate Insurance Company rates is tantamount to an underwriting profit provision in excess of that allowed. Moreover, the definition of policyholder contained in ASOP No. 29 notes that distributions of surplus may fund policyholder dividends. The state of Barely Adequate submits that if the Adequate Insurance Company truly intends to return policyholder dividends that they be funded from surplus.

In the alternative, ASOP #29, section 3.5 states: ".the actuary should consider the following: the company’s dividend payment history, [and] its current dividend policy or practice."

The provision contained in Adequate’s rate filing was "calculated by Adequate’s actuary based on the provisions of a new dividend program to be implemented." Hence, Adequate’s arbitrary and excessive provision fails to comply with section 3.5.

This discussion represents two schools of thought. Which is correct? Are there any apparent violations of the Professional Code of Conduct? You can join in the discussion by sending your comments to the CAS Office either by mail or E-mail.

Actuarial Bill Of Rights

A news item in the February Actuarial Review described an "Actuarial Bill of Rights" that the ABCD had incorporated into the latest draft of its proposed revision to Article X of the American Academy of Actuaries’ bylaws. The change was in reaction to a number of comments relating to the intended transfer of some procedural material from the bylaws to the ABCD’s Rules of Procedure.

One reader took issue with the description of the proposed new language as a "Bill of Rights." He felt that it was not consistent with the claim that the ABCD has as its nature a "fact-finding, non-adversarial.charge" as the "Bill of Rights" presupposes an adversarial situation. The bottom line, as the reader states, is that the ABCD is not a court of law with the authority to award damages to injured parties. The reader asks: "Will the ABCD have police or counselors? Will there be discipline [recommendations to the membership organizations] or only admonishment and encouragement?"