Stan Khury wrote a wonderful article about major board initiatives that they tried to effect without first obtaining the “consent of the governed” (“Undivided,” Actuarial Review, November-December 2021). The two most important were the proposed merger with the SOA and the recent effort to increase the role of the executive staff. As it happened, the board did wisely poll the membership before voting on the proposed CAS-SOA merger, only to discover that the membership was broadly against the proposed merger. In fact, a merger between the CAS and the SOA would have been horrific. The recent effort to increase the role of the executive staff without input from the membership was especially troubling. When a few members rose up and presented valid arguments against the proposal, they did the right thing and turned out to be successful. The board should have solicited comments beforehand. I was on the board of directors twice, and I can attest that there were sometimes differences between the views of the board and my perspective as an insurance regulator. My point is that Khury’s article was very insightful and well written. The board avoided two serious mistakes when the “consent of the governed” was revealed. The problem is not with the board election procedures. The problem is with common group dynamics in psychology, in which members are too eager to come to a consensus. This can be corrected by following Khury’s suggested comparison with the Actuarial Standards Board’s procedures.
—Richard J. Roth Jr., FCAS
I am writing to share my support for the ideas in Stan Khury’s article, “Undivided,” and the specific suggestion he put forth: “That the board of directors adopt an explicit procedure that any major changes to policy, organization or other important aspects of life of the CAS be subject to an exposure process similar to that the ASB successfully has used for many years.” Two of the reasons for my support are, firstly, that the CAS Board of Directors has correctly been looking for ways to improve member engagement; adopting Khury’s specific suggestion would be one effective way to do this. Secondly, Khury’s example of the rescinding/reinstatement of the Ratemaking Statement of Principles resonated with me. At that time, I remember reading the email telling me that the board had rescinded it. I remember feeling surprised and disappointed that I was not included in this decision, which affected me professionally, and concerned when reading about the frustrations of CAS stakeholders for whom the rescinding presented challenges. I believe this situation could likely have been avoided if a process like that suggested by Khury had been in place at the time. The one suggestion I would like to offer to Khury’s proposal is to clarify what defines “major changes” to which the procedure applies. I hope that sharing my support for Khury’s proposal will spur further discussion by the CAS membership and appropriate consideration by the board.
—Michael Baznik, FCAS, MAAA
It is sadly true that the CAS leadership has lost touch with the membership, as evidenced by the remarkable string of blunders that we have been led into in recent years — seeing them laid out side-by-side in his article was really something. It was like watching someone jump out of an airplane without a parachute and then watching them do it again and again. Khury is also absolutely correct that with respect to DEI: “The ideas advocated by those policies are not self-evident truths.” But therein lies the rub, as the advocates of these policies don’t see it that way, but rather view any disagreement with them as proof of so-called “white privilege” if not outright racism, sexism, etc., etc., ad infinitum. The suggestion to adopt the ASB model for major policy changes seems to me to be an excellent one, as it would serve to have the leadership and the membership in alignment before anything actually happens, instead of constantly having to clean up the mess after the fact.
—Eric Clymer, FCAS, MAAA
Race and Insurance Pricing
There is a lot of information in the article “Race and Insurance Pricing Session Defines Terms and Advises on Next Steps” (Actuarial Review, January-February 2022), but I’m afraid I found much of it gobbledygook. As far as I can tell, the article never acknowledges the elephant in the room, namely, should the rate follow the risk, even if that means members of (insert protected class here) might disproportionately have characteristics (age, driving experience, drive times, litigious territories, etc.) that correlate predictably with claims activity? If it is concluded that rate should not follow the risk, I can’t imagine the world really needs very many pricing actuaries — simply project total losses for the state, divide by number of insured vehicles and call it a day. I don’t imagine the roads would be very safe, though.
—Mark R. Proska, FCAS
In response to “Race and Insurance Pricing Session Defines Terms and Advises on Next Steps,” I have some questions that center on how the methods proposed in that session appear to be inconsistent with the “Statement of Principles Regarding Property and Casualty Ratemaking” and ASOP #12 “Risk Classification.” It seems that the article is proposing a different standard to define unfairly discriminatory rating plans other than having equal expected loss ratios across risk classifications, which in turn means the article is advocating disregarding our ratemaking principles guidelines (Principle 4). Is that correct? Does this, at least partially, explain why the CAS Board dropped those principles earlier before reinstating them? Can the authors reconcile their proposals to our current ratemaking standards? This leaves open the possibility that to comply with the methods as proposed in that article, one would knowingly create a risk classification scheme with unequal loss ratios. Unless all companies in a state step away from the equal loss ratio standard for risk classification to comply with statutory restrictions, this would expose the company to adverse selection and the actuary would not be in compliance with ASOP #12. ASOP #12 speaks to the actuary’s duty to protect the client from the effects of adverse selection when designing a risk classification system subject to statutory constraints. Are the authors advocating that state insurance laws be amended to move away from our ratemaking statement of principles and towards the methods proposed in that session?
—Michael R. Larsen, FCAS
CAS Fellows Mallika Bender, Roosevelt Moseley and Kuda Chibanda respond:
It’s important to recognize that rating plans are not entirely risk-based currently. For example, modifications are often made to risk-based indications for the youngest and oldest drivers. The system continues to function because actuaries are there to find a balance between all the different types of risk that insurers face. Proska’s points illustrate exactly why we need actuaries to be active participants in the industry discussion on race and insurance. Who better than actuaries to explore new approaches to identify and address bias that still maintain the integrity of risk-based pricing? The all-or-nothing outcome that Proska fears is less likely to occur if actuaries are engaged in the discussion. Many states prohibit the explicit use of certain protected classes in rating, and regulators are now asking whether proxies exist such that you don’t need to use protected class characteristics to achieve a biased outcome for that protected class. Actuaries who are responsible for insurance pricing may benefit from a deeper understanding of the issues, including the topics covered in the Annual Meeting session — key terms being used in the industry debate and statistical methods to enhance our actuarial toolkit. The focus of the session was not to opine on the way things should be, but rather the way things are now and how they could go in the future. We are glad that our profession is applying our expertise to continue to evolve and advance actuarial practice in this space.