Ethics and Professionalism: A Consulting Actuary’s Perspective Mary Frances Miller CASE Meeting 4/1/03

Topics Qualification Qualification Judgment Judgment Peer Review Peer Review Documentation Documentation

Qualification What are my responsibilities? PRECEPT 2. An Actuary shall perform Actuarial Services only when the Actuary is qualified to do so on the basis of basic and continuing education and experience and only when the Actuary satisfies applicable qualification standards. What are my responsibilities? PRECEPT 2. An Actuary shall perform Actuarial Services only when the Actuary is qualified to do so on the basis of basic and continuing education and experience and only when the Actuary satisfies applicable qualification standards.

Qualification How do I decide if I’m qualified? How do I decide if I’m qualified? Do I have enough education? Do I have enough education? Exams Exams Other sources Other sources Do I have enough experience? Do I have enough experience? Same assignment Same assignment Similar assignment Similar assignment Is my continuing ed sufficient? Is my continuing ed sufficient? Am I up to date on current practice? Am I up to date on current practice? Is my recent continuing ed applicable to this? Is my recent continuing ed applicable to this?

My qualifications Education Education 10 CAS exams (1988 syllabus) 10 CAS exams (1988 syllabus) CPCU / ARe CPCU / ARe Experience Experience Personal Lines ratemaking – Personal Lines ratemaking – Reinsurance ratemaking & reserving Reinsurance ratemaking & reserving Risk retention consulting Risk retention consulting Continuing Ed Continuing Ed General ratemaking and reserving up to date General ratemaking and reserving up to date SoA Group Health Exam 8 – read partial syllabus SoA Group Health Exam 8 – read partial syllabus AAA Specific Qual Std for NAIC opinions AAA Specific Qual Std for NAIC opinions

What am I qualified to do? Slam dunk: the stuff I do every day Slam dunk: the stuff I do every day Reserves and forecasts for risk retainers Reserves and forecasts for risk retainers WC / GL / AL / HPL / E&O / Prop / EPL / Pollution WC / GL / AL / HPL / E&O / Prop / EPL / Pollution Reserve opinions for single parent and group captives, risk retention groups, self-insured workers compensation reserves, risk pools Reserve opinions for single parent and group captives, risk retention groups, self-insured workers compensation reserves, risk pools Ratemaking for risk pools & rrg’s Ratemaking for risk pools & rrg’s Forecast allocations Forecast allocations

What am I qualified to do? A little stretch: things I do less often A little stretch: things I do less often Doctors’ MPL Doctors’ MPL Self-insured health reserves Self-insured health reserves Insurance company reserves Insurance company reserves Large commercial Large commercial “Standard” coverages “Standard” coverages Cash flow studies (not really DFA) Cash flow studies (not really DFA)

What am I qualified to do? A bigger stretch: things I can do with some additional preparation A bigger stretch: things I can do with some additional preparation Captive feasibility studies Captive feasibility studies Do I know enough about venues & taxes? Do I know enough about venues & taxes? Are my accounting skills sufficient? Are my accounting skills sufficient? Can I get adequate peer review? Can I get adequate peer review? Self-insured individual long term disability Self-insured individual long term disability Am I making the right assumptions? Am I making the right assumptions? Am I applying appropriate techniques? Am I applying appropriate techniques? “Simple” DFA “Simple” DFA

What am I NOT qualified for? Health insurance ratemaking Health insurance ratemaking Assessment spiral Assessment spiral Personal lines ratemaking Personal lines ratemaking Although I would be comfortable with a peer review role Although I would be comfortable with a peer review role Commercial lines ratemaking – most lines Commercial lines ratemaking – most lines Other benefits work Other benefits work Complicated DFA Complicated DFA

Actuarial Judgment 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 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.

Actuarial Judgment Changing Conditions—The actuary should consider the likely effect of changing conditions on the subject loss and loss adjustment expense reserves. The actuary should consider whether there have been significant changes in conditions particularly with regard to claims, losses, or exposures that are new or unusual and that are likely to be insufficiently reflected in the experience data or in the assumptions used to estimate loss and loss adjustment expense reserves...

Actuarial Judgment The actuary should obtain information from the entity regarding the significant changes in the practices or philosophy used by the entity’s claims personnel and ascertain whether such changes are likely to have a material effect on the results of the actuary’s reserve analysis or on the risks and uncertainties associated with the reserves.

Actuarial Judgment The latest diagonal in the incurred triangle is up; No apparent changes in the payment pattern The latest diagonal in the incurred triangle is up; No apparent changes in the payment pattern Reserve strengthening or deterioration? Reserve strengthening or deterioration? What are the consequences of my assumption if I’m wrong? What are the consequences of my assumption if I’m wrong? How can I frame my questions so that the client doesn’t know the “right” answer? How can I frame my questions so that the client doesn’t know the “right” answer?

Actuarial Judgment Incurred diagonal is down; payment pattern is unchanged Incurred diagonal is down; payment pattern is unchanged Reserve weakening or improved experience? Reserve weakening or improved experience? What are the consequences if I’m wrong? What are the consequences if I’m wrong? How many additional tests should I do? How many additional tests should I do? How should I document my judgment? How should I document my judgment?

Peer Review Pre-Project Planning Pre-Project Planning Do I understand the problem? Do I understand the problem? Have I made the right assumptions? Have I made the right assumptions? Am I using the best methodology? Am I using the best methodology? What other things should I consider? What other things should I consider? Talk through the project with a knowledgeable colleague Talk through the project with a knowledgeable colleague At SAS, we include this step for essentially all projects that are not routine At SAS, we include this step for essentially all projects that are not routine

Peer Review Calculation Review Calculation Review We all make mistakes We all make mistakes Good spreadsheet design and consistency in presentation of exhibits eliminate many mistakes Good spreadsheet design and consistency in presentation of exhibits eliminate many mistakes But may cause me to be lazy in my judgments! But may cause me to be lazy in my judgments! Can be conducted by an analyst Can be conducted by an analyst Does every calculation need to be checked? Does every calculation need to be checked?

Peer Review Methodology Review Methodology Review Do my assumptions make sense? Do my assumptions make sense? Did I use the right techniques? Did I use the right techniques? Do my conclusions follow from the data and calculations? Do my conclusions follow from the data and calculations? Will my conclusions make sense to the client? Will my conclusions make sense to the client? At SAS, this is a required step, conducted pre-release by a credentialed actuary At SAS, this is a required step, conducted pre-release by a credentialed actuary

Control Cycle: The next time around How accurate was my last projection? How accurate was my last projection? Was I consistently off? Was I consistently off? Prior assumptions were incorrect Prior assumptions were incorrect Or does the variation appear random? Or does the variation appear random? Stuff happens Stuff happens Do my changes in conclusions make sense in light of the current data? Do my changes in conclusions make sense in light of the current data? Can I explain what happened to the client? Can I explain what happened to the client?

Documentation What did we agree to do? What did we agree to do? Who, what, when, how much? Who, what, when, how much? Contract or engagement letter is best Contract or engagement letter is best Could be informal with a regular client Could be informal with a regular client Minimum confirmation of a telephone call Minimum confirmation of a telephone call

Documentation What data did we ask for? What data did we ask for? What did we get? What did we get? Was it what we needed? Was it what we needed? Was it consistent with prior data? Was it consistent with prior data? Or was it internally consistent? Or was it internally consistent? What did I do to fix it? What did I do to fix it? Who did I talk to – e:mails to confirm? Who did I talk to – e:mails to confirm? What constitutes documentation that the data didn’t need adjustment? What constitutes documentation that the data didn’t need adjustment?

Documentation Was I qualified? Was I qualified? Should I document in the project? Should I document in the project? What standards applied to the project? What standards applied to the project? Did I follow them? Did I follow them? How do I document this? Do I need to? How do I document this? Do I need to? What techniques did I use? What techniques did I use? Should I document what I decided NOT to use? Should I document what I decided NOT to use?

Documentation Did I release any draft conclusions to the client? Did I release any draft conclusions to the client? What do I mean by a draft? What do I mean by a draft? Did I document that to the client? Did I document that to the client? What changed in the final report? What changed in the final report? Did I meet with the client? Did I meet with the client? What did I learn that changed my assumptions? What did I learn that changed my assumptions?

Documentation Can another actuary follow my calculations? Can another actuary follow my calculations? Was there peer review? Was there peer review? What did the peer reviewer conclude? What did the peer reviewer conclude? Did I make appropriate changes? Did I make appropriate changes? Did I follow up with the client? Did I follow up with the client? Were they satisfied? Were they satisfied? Was there additional follow up? Was there additional follow up? Auditors, regulators, etc. Auditors, regulators, etc.

Professionalism Don’t leave home without it.