Case Study G3: Another Actuary’s Work Institute of Actuaries of India Serving the Cause of Public Interest Indian Actuarial Profession Shruti Saxena Vaibhav Tyagi Varadaprasad Jagannathan Guide: Khushwant Pahwa

The Case Study Scenario A, PCS and course of actions Scenario B, PCS and course of actions Scenario C, PCS and course of actions Consultant v/s Employee Conclusion Agenda

The Case Study Scenario A, PCS and course of actions Scenario B, PCS and course of actions Scenario C, PCS and course of actions Consultant v/s Employee Conclusion Agenda

The Case Study 4 Acquisitive Insurance group negotiating purchase of an insurance operation, a subsidiary of Divestment Re. Part of the documentation available is an actuarial report prepared by an UK actuary.

The Case Study : Our Role 5 Actuarial Report

The Case Study : Scenarios Report complies with GN12 but assumptions are somewhat unrealistic Report does not comply with GN12, although there is no indication that the underlying work was deficient. Underlying work was incompetent for e.g. methodologies unsuited for the classes of business or using inappropriate data without adjustment. 6

The Case Study : Setting the context Report is prepared by an UK actuary. We have assumed he is also an actuary in India for IAI’s PCS and GNs to apply to him as per PCS Section 1.4 and 1.5. We are analysing case study within the terms of Professional Conduct Standards (PCS) and Guidance Notes (GN) applicable to members of Institute of Actuaries of India. Case study mentioned GN12, while APSs are mandatory in nature and GNs are recommendatory. 7

The Case Study Scenario A, PCS and course of actions Scenario B, PCS and course of actions Scenario C, PCS and course of actions Consultant v/s Employee Conclusion Agenda

Scenario A Report complies with GN12 but assumptions are somewhat unrealistic 9

Scenario A : Is the work Deficient? 10 Refer to complete report for justification of assumptions Justification Discuss concerns with author and/or management of Divestment Re Discuss Second opinion from another actuary Refer to audit/review report by Divestment Re’s actuarial consultants, if available Opinion

Scenario A and PCS If the work is deficient, PCSs to consider: PCS section 3: Standards for advice – Section 3.2: Many assignments offered to actuaries require considerable knowledge and experience for proper completion. Actuaries must not give advice, unless: a) satisfied of personal competence in the relevant matters, or b) acting in co-operation with, or with the guidance of, someone (not necessarily an actuary) with the requisite knowledge and experience. – Section 3.5: Advice should have sufficient detail and explanation for the recipient to judge both the appropriateness and implications of accepting the advice. 11

Scenario A and PCS If the work is deficient, PCSs to consider: PCS section 8: Relations to other member – Section 8.1: Criticism of other member’s work is acceptable provided it is properly reasoned and believed to be justified. – Section 8.3: Other members can hold different professional opinions and special circumstances may exist in a particular case. 12

Scenario A: Course of actions 13 Analyze and conclude Raise concern and criticize the work to Acquisitive Insurance Group and Divestment Re If unresolved, raise your criticism to professional body for breach of PCS Section 3.5 as per PCS Section and Section 4.3.5

Scenario A: Course of actions PCS PCS Section 4.3: Action to be taken on discovering a breach of guidance by another member Section 4.3.1: On becoming aware of any event which appears to be a material breach by another member of any professional guidance or other guidance, a member must take appropriate action at the earliest opportunity. Section 4.3.5: If the matter is not resolved as a result of discussions with other members, then the member must refer the matter to the professional body. It is important to maintain appropriate confidentiality in all course of actions as per PCS 2.5: Confidentiality 14

The Case Study Scenario A, PCS and course of actions Scenario B, PCS and course of actions Scenario C, PCS and course of actions Consultant v/s Employee Conclusion Agenda

Scenario B Report does not comply with GN12, although there is no indication that the underlying work was deficient. 16

Scenario B : Is the work Deficient? 17 Applicable on the author? If yes, reasons for non-compliance? GN12 Review complete report. Declaration by author on professional standards. Report Any special circumstances under which report was prepared? Purpose of report. Special Circumstances Second opinion from another actuary Opinion

Scenario B and PCS If the work is deficient, PCSs to consider: PCS section 3: Standards for advice – Section 3.5: Advice should have sufficient detail and explanation for the recipient to judge both the appropriateness and implications of accepting the advice PCS section 4: Breach of professional guidance – Section 4.1: A material breach of PCS or GN is itself a ground under disciplinary complaint. It would also amount to strong prima facie evidence of misconduct. – Section 4.2: A failure to comply with a GN is not of itself a ground for complaint under the disciplinary procedures. 18

Scenario B and PCS If the work is deficient, PCSs to consider: PCS section 8: Relations to other member – Section 8.1: Criticism of other member’s work is acceptable provided it is properly reasoned and believed to be justified. – Section 8.3: Other members can hold different professional opinions and special circumstances may exist in a particular case 19

Scenario B: Course of actions 20 GN12 Applicability? Request relevant information. Analyze and conclude If GN12 breached and no special circumstances: Highlight to Acquisitive Insurance Group and Divestment Re If unresolved, highlight it to professional body for breach of PCS Section 4.1 as per PCS Section and Section 4.3.3

Scenario B: Course of actions and PCS PCS Section 4.3: Action to be taken on discovering a breach of guidance by another member Section 4.3.1:On becoming aware of any event which appears to be a material breach by another member of any professional guidance or other guidance, a member must take appropriate action at the earliest opportunity. Section 4.3.3: In deciding whether a breach of guidance is material, the member may need to exercise judgment. A breach which has not led to a materially adverse outcome may be regarded as material if a repetition of it in future could lead to a materially adverse outcome. If the member is unsure whether or not a matter is material, the member must seek guidance from the professional body. It is important to maintain appropriate confidentiality in all course of actions as per PCS 2.5: Confidentiality 21

The Case Study Scenario A, PCS and course of actions Scenario B, PCS and course of actions Scenario C, PCS and course of actions Consultant v/s Employee Conclusion Agenda

Scenario C Underlying work was incompetent for e.g. methodologies unsuited for the classes of business or using inappropriate data without adjustment. 23

Scenario C : Is the work Deficient? 24 Special Circumstances Justification Another Opinion Scenario A & B Review complete report Any further update(s) available? Was the report peer reviewed? Report Are older reports of Divestment Re compliant? Older Reports Implications of incompetent reports on all relevant stakeholders. Implication

Scenario C and PCS If the work is deficient, PCSs to consider: All the sections of PCS as previously mentioned in scenario A & B are equally applicable PCS section 2 and subsections: Professional Standards – Section 2.2: Member should not act in a manner which denigrates its reputation or impugns its integrity PCS section 3: Standards for advice – Section 3.2: Many assignments offered to actuaries require considerable knowledge and experience for proper completion. Actuaries must not give advice, unless: 25

Scenario C and PCS If the work is deficient, PCSs to consider: a) satisfied of personal competence in the relevant matters, or b) acting in co-operation with, or with the guidance of, someone (not necessarily an actuary) with the requisite knowledge and experience. – Section 3.3: Notwithstanding paragraph 3.2, an actuary may provide advice if the circumstances are such that, having regard to all the relevant factors, it would be contrary to the client’s interests to decline to do so. However, the actuary must make clear to the recipient that, in the absence of the constraining circumstances, the actuary would have recommended referring the matter to someone with the relevant knowledge and experience. 26

Scenario C: Course of actions 27 Judge, if there has been a material breach Seek more information and remedial action from the author and Divestment Re Analyze and conclude If material breach and no special circumstances: Highlight to Acquisitive Insurance Group and Divestment Re If unresolved, highlight it to professional body for breach of PCS Section 3.2 and Section 3.3 as per PCS Section 4.3.1, Section 4.3.3, Section and Section 4.3.5

Scenario C: Course of actions and PCS PCS Section 4.3: Action to be taken on discovering a breach of guidance by another member Section 4.3.1:On becoming aware of any event which appears to be a material breach by another member of any professional guidance or other guidance, a member must take appropriate action at the earliest opportunity. Section 4.3.3: In deciding whether a breach of guidance is material, the member may need to exercise judgment. A breach which has not led to a materially adverse outcome may be regarded as material if a repetition of it in future could lead to a materially adverse outcome. If the member is unsure whether or not a matter is material, the member must seek guidance from the professional body. 28

Scenario C: Course of actions and PCS Section 4.3.4: If the member decides that the nature of the breach is such that action is called for, the member must, in the first instance, consider discussing the apparent breach with the other member. Possible objectives of having such a discussion include: – seeking more information about the matter, so as to form a view whether there has actually been a material breach; and/or – to explore whether the matter is one where the breach can either be mitigated or be rectified entirely by the other member taking remedial action. Section 4.3.5: If the matter is not resolved as a result of discussions with other members, then the member must refer the matter to the professional body. It is important to maintain appropriate confidentiality in all course of actions as per PCS 2.5: Confidentiality 29

The Case Study Scenario A, PCS and course of actions Scenario B, PCS and course of actions Scenario C, PCS and course of actions Consultant v/s Employee Conclusion Agenda

Consultant v/s Employee A consultant is bound by the scope of his assignment, hence limited in actions A consultant’s criticism should not give him or his firm unfair professional advantage as per PCS Section 9: Publicity – Section 9.1: While publicity for the actuarial profession is encouraged, any form of publicity that might give an actuary an unjustified or unfair professional advantage, as opposed to a legitimate commercial advantage, is prohibited. Publicity which is likely to detract from the standing of the profession is prohibited, unless the criticism forms part of a justifiable debate conducted in the public interest. Professional standards applicability are same for any actuarial professional 31

The Case Study Scenario A, PCS and course of actions Scenario B, PCS and course of actions Scenario C, PCS and course of actions Consultant v/s Employee Conclusion Agenda

An actuary is always bound by GNs and PCSs. Extensive judgement is required in determining whether a breach of PCS has occurred or not. Course of actions will slightly differ in each case, however, guiding principles remain the same. Profession places considerable reliance on the conscience of all members to maintain highest standards of conduct. 33 Conclusion

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