Professional Insight
Ethical Issues

Experienced or Out of Touch?

Ethical Issues is written by members of the CAS Committee on Professionalism Education (COPE). The column’s intent is to stimulate discussion among CAS members. Therefore, positions are sometimes stated in such a way as to provoke reactions and thoughtful responses on the part of the reader. Responses are welcomed. 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 to modify published professional standards as they may apply in real-life situations.

Brie, an FCAS, was a product actuary for 10 years before transferring to the VP of underwriting position three years ago. Wayne took over Brie’s role at the time of her transfer. Brie, along with the marketing department, has developed a new product with forms, rates and a five-year pro forma of the expected results of the new product on the company’s financial statements. Wayne, also an FCAS, is the actuary supporting Brie’s new product. Brie has reviewed Wayne’s work and believes there are flaws in the pricing assumptions. Brie meets with Wayne to go over the assumptions and the following conversation ensues:

Brie: I’m not comfortable with some of the assumptions you’ve made. OK, not just some. Most. I think most of your assumptions are inappropriate. They don’t give an accurate picture as to how we expect this program to perform.

Wayne: That’s ridiculous.

Brie: It’s not ridiculous. Let’s start with your LDF picks. You use a countrywide average LDF. You need to pick something specific to this state. Why didn’t you?

Wayne: I’m not comfortable using our state-specific data. We haven’t written a lot of business in that state to date. Now, we hope to change that with this new program. But until we do and build up some history, I’m not going to rely on it.

Brie: Forget about our own data. Why not use state-specific industry data? It has more than enough volume to be credible.

Wayne: But it reflects the industry mix. Remember, the book of business we’re going after is very different from that. Additionally, the industry data only reflects industry-average closure patterns and reserving patterns. With all the changes that have happened in our claims organization the last several years, our losses are not going to emerge the same way as the rest of the industry. Using our own countywide data takes care of that.

Brie: But the legal and regulatory environment in this state is very different than that of the rest of the country. That gets muted when you use the countrywide data. Besides, most of the claims organization changes in practice have been in place for a couple of years. It’s more stable now. How can it really be that different from the rest of the industry? The legal environment is the most important factor in picking the LDFs. You need to change them to statewide industry patterns.

Wayne: Look. Who’s the actuary here, you or me? I know you had this job before me, but it’s my job now and it’s my call. If you want to be an actuary again, we have lots of openings right now. Go ahead and post for one and schedule some interviews if you like! In the meantime, let me worry about the LDF picks.

Brie: It’s not just your LDF picks. It’s your trend picks as well! You’re using long-term averages for everything! Frequency trend, severity trend, exposure trend — none of them use less than the last decade!

Wayne: I think you’re exaggerating a bit, don’t you? Besides, what’s wrong with using long-term averages for selecting trends? We’re trying to project the long-term profitability of this program, after all. You of all people should know how cyclical these things are!

Brie: But look how much things have changed over the last couple of years! The economy has driven frequency down to levels I’ve never seen before. Tort reforms are actually working, and the Fed has taken inflation risk pretty much off the table. Sure, it’s only been a couple of years, but why wouldn’t you expect these things to continue in the time period we’re considering? You need to be more responsive to the new reality — not just default to some long-term averages because that’s the way it’s always been done!

Wayne: Look, you’re entitled to your opinion. And I do appreciate having someone in your position who actually speaks the language of an actuary. But you can’t second-guess everything I do just because you used to have my job. It’s counter-productive. You need to focus on the underwriting side of things and let me take care of the actuarial side. I’m happy to bring in your qualitative and business insights to let them inform my analysis. But at the end of the day, it is just that — my analysis. You need to let me make the calls I’m paid to make.

Brie: Listen, don’t get me wrong. I respect the work you do. I’m glad the chief put you in this position after I moved on. But you’re not being reasonable on this. You need to reconsider your assumptions and put in picks that are more appropriate. If you don’t, I may have no choice but to go over your head and talk to the chief myself.

Wayne: Go ahead! I know you two are buddies from when you used to work together. But I’m his guy now, and he’ll listen to me on this. It’s my work product, and I have to use the assumptions that I feel are most appropriate. What I have now is my best estimate, and I’m not going to change it.

Should Brie talk to Wayne’s boss about changing his assumptions?

Yes

Just because Brie has moved into a non-actuarial role in the company does not mean that her actuarial expertise is no longer valid. Her suggestions aren’t random. She has valid reasons for suggesting the alternate assumptions; getting it right is the best thing for the company. If Wayne won’t even consider her opinion, she needs to approach his boss. The company has made a substantial investment in this new product and Wayne’s overly conservative assumptions could sabotage it before it even gets off the ground.

No

Brie has been out of the actuarial loop for three years. She is not privy to the internal discussions within the actuarial department related to assumptions, data and trends. In addition, her perspective has changed. Her judgment is clouded due to the pressures and goals related to her new role. She can no longer view the actuarial analysis objectively.

Considerations

  • CAS Code of Professional Conduct
  • Precept 1. An Actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession’s responsibility to the public and to uphold the reputation of the actuarial profession.
  • Precept 10: An Actuary shall perform Actuarial Services with courtesy and professional respect and shall cooperate with others in the Principal’s interest.

If Brie has continued to meet her CAS CE requirements and maintained her membership in good standing with the CAS, does your answer differ?