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Ethical Issues Forum
Doubt of the Benefit 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.
In the state of East Dakota, workers compensation costs have been unexpectedly increasing by significant amounts over the past five years. As a result, workers compensation rates have historically been inadequate and have been blamed for causing a large number of insolvencies in the state. In the wake of mounting losses and the continuing instability in the workers compensation marketplace, many insurance companies in the state have withdrawn from the market or have restricted writing policies.
In an attempt to bring stability back to the market, the East Dakota legislature recently passed a workers compensation benefit reform measure that has been claimed by politicians to reduce workers compensation costs by an estimated 30 percent. Because of the highly publicized nature of this bill, the East Dakota Department of Insurance has notified all workers compensation insurers in the state that their rate filings must recognize the impacts of this new legislation by including an explicit 30 percent reduction in the rates. Otherwise, their rate filings will not be approved.
Actuary Bob is preparing a workers compensation rate filing on behalf of his employer, Insurance Company X, in the state of East Dakota. Insurance Company X, like most other workers compensation insurers in the state, is teetering on the brink of insolvency. Bob has reviewed the new legislation and believes that the measure will not reduce the workers compensation costs at all. Bob believes his rates will be inadequate if he includes an explicit 30 percent reduction in his rate estimates. In addition, another year of inadequate rates will likely force his company into insolvency. Therefore, Bob plans to include the mandatory 30 percent decrease in his estimated rates but then plans to offset this reduction by increasing the tail factor used in his analysis. Although the new tail factor used in his analysis is unreasonably high, Bob believes the overall results of his analysis produces his best estimate of the workers compensation rates. Is Bob violating the standards?
No
Bob understands that his tail factor is unreasonably high; however the Statement of Principles Regarding Property and Casualty Insurance Ratemaking focuses on the rate, not the individual assumptions used to develop the rate. Bob needs to do whatever he can to ensure that his estimated rates comply with the four Principles:Principle 1: A rate is an estimate of the expected value of future costs.
Principle 2: A rate provides for all costs associated with the transfer of risk.
Principle 3: A rate provides for the costs associated with an individual risk transfer.
Principle 4: A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.
If Bob reduces his tail factor to within a reasonable range and incorporates the mandatory 30 percent rate reduction, his resulting rates will violate the Statement of Principles because his rates are expected to be inadequate.
Yes
Bob's attempt to offset the required 30 percent rate decrease is dishonest and evades the law. His actions are in violation of Annotations 1-2 and 1-4 of the Code of Professional Conduct.Annotation 1-2: An Actuary shall not provide Actuarial Services for any Principal if the Actuary has reason to believe that such services may be used to violate or evade the Law or in a manner that would be detrimental to 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.
Actuarial Standards requires us to follow the law. As stated in the introduction to the Code of Professional Conduct: "Laws may also impose obligations upon an Actuary. Where requirements of Law conflict with the Code, the requirements of Law shall take precedence." Bob's should not attempt to offset the mandatory 30 percent rate reduction and should start looking for a new employer.
