1. The Actuary as Expert Witness Chuck McClenahan, FCAS MMC ENTERPRISE RISK CAS Seminar on Ratemaking - March, 2002

2. CAS Seminar on Ratemaking March, 2002 2 AGENDA What is an Expert Witness? Venues for the Actuarial Expert Issues for the Actuarial Expert Training for the Actuarial Expert

3. CAS Seminar on Ratemaking March, 2002 3 AGENDA (Continued) Professional Standards Working with Attorneys Practical Examples Some Advice

4. CAS Seminar on Ratemaking March, 2002 4 What is an Expert Witness?

5. CAS Seminar on Ratemaking March, 2002 5 What is an Expert Witness? “ An expert is a person who has made all the mistakes that can be made in a very narrow area.” - Niels Bohr

6. CAS Seminar on Ratemaking March, 2002 6 What is an Expert Witness? ASOP #17 - Expert Testimony by Actuaries Expert - One who is qualified by knowledge, skill, experience, training, or education to render an opinion or otherwise testify concerning the matter at hand

7. CAS Seminar on Ratemaking March, 2002 7 What is an Expert Witness? Federal Rules of Evidence - Rule 702 Testimony by Experts - If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, [an expert witness] may testify thereto in the form of an opinion or otherwise.

8. CAS Seminar on Ratemaking March, 2002 8 What is an Expert Witness? Lay (non-expert) witnesses may not offer opinion testimony Expert witnesses may offer opinions based upon knowledge, skill, experience, training or education

9. CAS Seminar on Ratemaking March, 2002 9 Venues for the Actuarial Expert Rate or other administrative hearings Arbitration, ADR, or other extra-judicial proceedings Depositions, declarations and affidavits Testimony in court

10. CAS Seminar on Ratemaking March, 2002 10 Issues for the Actuarial Expert Actuarial present values - benefits, divorce Adequacy of rates, reserves Impact of financing alternatives Actuarial malpractice Relationship between risk and return Insurance company valuation

11. CAS Seminar on Ratemaking March, 2002 11 Training for the Actuarial Expert

12. CAS Seminar on Ratemaking March, 2002 12 Training for the Actuarial Expert “ An expert is a person who avoids small error as he sweeps on to the grand fallacy.” - Benjamin Stolberg

13. CAS Seminar on Ratemaking March, 2002 13 Training for the Actuarial Expert Federal Rules of Evidence - Rule 703 The facts or data in the particular case upon which the expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence.

14. CAS Seminar on Ratemaking March, 2002 14 Training for the Actuarial Expert Three Sources for Facts or Data –Firsthand observation by expert –Presentation at the trial –Presentation outside of court

15. CAS Seminar on Ratemaking March, 2002 15 Sources for Facts or Data Firsthand Observation by Expert –Example - testimony by treating physician –Actuarial expert testimony generally not firsthand observation

16. CAS Seminar on Ratemaking March, 2002 16 Sources for Facts or Data Presentation at the Trial –Hypothetical questions, or –Expert attends trial, hears testimony

17. CAS Seminar on Ratemaking March, 2002 17 Sources for Facts or Data Presentation outside of court –Extends beyond expert’s own perception –Must be “of a type reasonably relied upon by experts in the particular field”

18. CAS Seminar on Ratemaking March, 2002 18 Training for the Actuarial Expert Additional Skills Required –Ability to explain complex issues simply –Ability to construct logical sequence of questions –Ability to stand up under cross-examination –Ability to work quickly under pressure –Good memory -short/long term- for prior testimony

19. CAS Seminar on Ratemaking March, 2002 19 Professional Standards

20. CAS Seminar on Ratemaking March, 2002 20 Professional Standards Qualification Standards ASP 17 - Expert Testimony by Actuaries ASP 9 - Documentation and Disclosure

21. CAS Seminar on Ratemaking March, 2002 21 Professional Standards Qualification Standards –Code of Professional Conduct - Precept 2 –Qualification Standards for Prescribed Statements of Actuarial Opinion

22. CAS Seminar on Ratemaking March, 2002 22 Professional Standards ASP 17 - Expert Testimony by Actuaries –Revision being considered by ASB –Standard provides good guidance and useful advice

23. CAS Seminar on Ratemaking March, 2002 23 Professional Standards ASP 9 - Documentation and Disclosure –Requires documentation whether or not there is a legal requirement –Must be sufficient for another actuary to evaluate work

24. CAS Seminar on Ratemaking March, 2002 24 Working With Attorneys

25. CAS Seminar on Ratemaking March, 2002 25 Working With Attorneys “ An expert knows all the answers - if you ask the right questions.” - Unknown

26. CAS Seminar on Ratemaking March, 2002 26 Working With Attorneys Q: Now doctor, isn't it true that when a person dies in his sleep, he doesn't know about it until the next morning?

27. CAS Seminar on Ratemaking March, 2002 27 Working With Attorneys Lawyer: "Now, Mrs. Johnson, how was your first marriage terminated?" Witness: "By death." Lawyer: "And by whose death was it terminated?"

28. CAS Seminar on Ratemaking March, 2002 28 Working With Attorneys Problems Presented by Actuaries –Threatening Subject –Personality (or Lack Thereof) –Complex Issues

29. CAS Seminar on Ratemaking March, 2002 29 Working With Attorneys Threatening Subject –Jury hates, doesn’t understand math –Actuary must make it interesting –Actuary must make it simple

30. CAS Seminar on Ratemaking March, 2002 30 Working With Attorneys Personality –“I’m not weird, just unusual” –“I understand this is difficult” –“I’m here to help you understand”

31. CAS Seminar on Ratemaking March, 2002 31 Working With Attorneys Complex Issues –Actuary must simplify –Visual aids where possible –Do not condescend or patronize

32. CAS Seminar on Ratemaking March, 2002 32 Working With Attorneys Problems Created by Attorneys –Attempting to paraphrase –Attempting to stretch or bend opinion –Attempting to summarize

33. CAS Seminar on Ratemaking March, 2002 33 Working With Attorneys Attempting to Paraphrase –Language of actuarial science very precise –Each word can be important –Ask the question as written Precise questions yield predictable answers

34. CAS Seminar on Ratemaking March, 2002 34 Working With Attorneys Attempting to Stretch or Bend Opinion –Expert has obligation to avoid misleading testimony –Limitations and underlying assumptions must be disclosed

35. CAS Seminar on Ratemaking March, 2002 35 Working With Attorneys Attempting to Summarize –Lawyers like simple answers –Rarely are the answers simple –Expert has obligation to avoid misleading

36. CAS Seminar on Ratemaking March, 2002 36 Working With Attorneys Jargon –Actuaries Have Their Own Language “Cohort” “Credibility” “Severity” “Convolution” –Best to Avoid Jargon “Group” “Weight” “Average Loss” “Possible Event”

37. CAS Seminar on Ratemaking March, 2002 37 Practical Examples

38. CAS Seminar on Ratemaking March, 2002 38 Practical Examples “ When facts are few, experts are many.” - Donald R. Gannon

39. CAS Seminar on Ratemaking March, 2002 39 Practical Examples Rate Hearing Civil Litigation Criminal Trial

40. CAS Seminar on Ratemaking March, 2002 40 Rate Hearing Generally One of Three Parties –Filer –Regulator –Consumer Advocate

41. CAS Seminar on Ratemaking March, 2002 41 Rate Hearing Quasi-judicial Before Hearing Officer (Usually Regulator) Departures from Rules of Evidence Often Pre-Filed Testimony High Degree of Actuarial Advocacy

42. CAS Seminar on Ratemaking March, 2002 42 Rate Hearing Advantages –General understanding of actuarial issues –Low expectations –Reliance on pre-filed testimony

43. CAS Seminar on Ratemaking March, 2002 43 Rate Hearing Disadvantages –Advocacy often trumps expertise –Rules, Regulations, Rulings –Politics, Politics, Politics

44. CAS Seminar on Ratemaking March, 2002 44 Rate Hearing Recommendations –Know the filing, the history, the environment –Understand the theoretical underpinnings –Don’t overstate precision or reliability –Advocacy should not define testimony

45. CAS Seminar on Ratemaking March, 2002 45 Rate Hearing Example: What is the proper profit provision and how should it be reflected in the rates?

46. CAS Seminar on Ratemaking March, 2002 46 Civil Litigation

47. CAS Seminar on Ratemaking March, 2002 47 Civil Litigation State or Federal Court Bench Trial or Jury Trial Relies Heavily on Depositions Generally Formal Expert Reports Some Actuarial Advocacy

48. CAS Seminar on Ratemaking March, 2002 48 Civil Litigation Advantages –Adequate time, documents for preparation –Much testimony through deposition –Less advocacy than rate hearings

49. CAS Seminar on Ratemaking March, 2002 49 Civil Litigation Disadvantages –Little understanding of actuarial issues –Juries lack education, focus –Cross-examination brutal

50. CAS Seminar on Ratemaking March, 2002 50 Civil Litigation Recommendations –Thorough knowledge of subject matter –Triple-check all calculations –Mock cross-examination –Be consistent with prior testimony –Document everything

51. CAS Seminar on Ratemaking March, 2002 51 Civil Litigation Example: Should the reserving actuary have anticipated all or part of the adverse development?

52. CAS Seminar on Ratemaking March, 2002 52 Criminal Trial

53. CAS Seminar on Ratemaking March, 2002 53 Criminal Trial Advantages –Interesting application of actuarial science –Chance to meet a new group of people

54. CAS Seminar on Ratemaking March, 2002 54 Criminal Trial Disadvantages –Pressure –Threats - real or implied

55. CAS Seminar on Ratemaking March, 2002 55 Criminal Trial Recommendations –Avoid advocacy at all costs –Act as though you were the expert for both sides –Keep it simple

56. CAS Seminar on Ratemaking March, 2002 56 Criminal Trial Example: What are the chances that four homes owned by a single individual over a nine year period would be substantially destroyed by fire through random occurrence?

57. CAS Seminar on Ratemaking March, 2002 57 Some Advice “If the world should blow itself up, the last audible voice would be that of an expert saying it can’t be done.” - Peter Ustinov

58. CAS Seminar on Ratemaking March, 2002 58 Some Advice Rate hearing experience before litigation Deposition before court testimony Mock cross-examination If you don’t love it, don’t do it

59. CAS Seminar on Ratemaking March, 2002 59 The Actuary as Expert Witness “If your mind is empty, it is always ready for anything; it is open to everything. In the beginner’s mind there are many possibilities; in the expert’s mind there are few.” - Shunryu Suzuli