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 modify published professional standards as they may apply in real-life situations.
Sam Ismal, FCAS, has been the principal of his own independent actuarial consulting practice for the last 18 years. Most of Sam’s clients are small insurance companies without in-house actuaries and without a lot of claims experience. Thanks to a great friendship with an old colleague, Sam also maintains a relationship with a much larger consulting firm, Hugist Associates, where he often works as a subcontractor on particularly large projects and provides peer-review assistance when needed.
Working with Hugist has helped Sam immensely with his own client work — he has not only learned lessons from working with the data and experience of larger clients but has also benefited from having access to their comparison factors. As is typical for small firms, obtaining industry/comparison data and factors is a challenge for Sam and can often be prohibitively expensive. Thanks to Hugist, Sam has access to factors that are based on the experience of Hugist’s larger client companies. Those factors have been invaluable to Sam when reviewing the limited experience of the smaller but similar firms in his client base.
A new client has reached out to Sam. Weirneu Insurance entered a new market a few years ago and has asked Sam to evaluate its loss experience to date and analyze its current rates for the new product. Weirneu has provided Sam with considerable detail about the product including claim and market data. Sam believes that this product line has the potential to be fairly long-tailed, and despite the decent number of claims available for his evaluation, the experience data do not appear credible enough for development without supplemental factors. The market share analysis provided to Sam reveals that the company with the largest market share by far is Numeruno — a Hugist client that Sam has provided peer review for in the past.
Thanks to the peer review, Sam has access to Numeruno’s comparison factors. Numeruno’s analysis is extensive and includes account-specific development factors, claim reporting patterns, trends and other quantitative assessments. This information will allow Sam to very accurately project Weirneu’s expected loss costs. In fact, because Sam’s evaluation will be very reliable, Weirneu can confidently break into the market and attempt to take considerable market share away from Numeruno. Assuming Weirneu follows Sam’s recommendations, it could easily grow into a more substantial company and potentially become Sam’s largest client.
Assuming Sam does not disclose the source and the underlying data, is it acceptable that he considers Numeruno’s factors when evaluating Weirneu’s current rates?
According to the CAS Code of Professional Conduct, precept 9, as long as Sam does not disclose any specific proprietary information related to Numeruno’s data, there are no confidentiality issues. It is acceptable for him to utilize the data of a competitor. In fact, this is customary practice for small consultancies since they have limited access to more substantial industry data. Utilizing competitor’s factors allows a consulting actuary to provide a more accurate, quality work product.
Precept 1 of the CAS Code of Professional Conduct states that 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.” Utilizing Numeruno’s data, regardless of whether it is identified or identifiable, to assist a potential competitor is clearly improper and lacks professional integrity. Further, ANNOTATION 1-3 of Precept 1 indicates “An Actuary shall not use a relationship with a third party… to attempt to obtain illegal or materially improper treatment from one such party on behalf of the other party.” Utilizing Numeruno’s data is a moot point — Sam has a conflict of interest and should simply decline to do the work for Weirneu.
If Numeruno was Sam’s client instead of Hugist’s client, does your answer differ?
If Sam had helped with Numeruno’s full evaluation, rather than provide a peer review, does your answer differ?
Precepts 7b and 7c, indicate that an actuary can knowingly perform actuarial services even if a potential conflict of interest exists as long as his ability to act fairly is not impaired and “(b) there has been disclosure of the conflict to all present and known prospective Principals whose interests would be affected by the conflict and (c) all such Principals have expressly agreed to the performance of the Actuarial Services by the Actuary.” Is Sam required to get approval from Hugist to take on Weirneu? Does either firm need to notify Numeruno?