Ethical Issues Forum

Rate Levels On the Level?

Editor's Note: This article is part of a series written by members of the CAS Committee on Professionalism Education (COPE) and the Actuarial Board of Counseling and Discipline (ABCD). 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.

Everywhere Insurance Company (EIC) is a monoline writer of private passenger automobile insurance in 30 states. EIC has three field offices with experienced actuarial staffs producing rate indications for their respective region.

In an effort to improve efficiency and reduce costs, EIC replaced the current actuarial staff with part-time computer science college students, and retained Joe Actuary, FCAS, MAAA to build a ratemaking model that will streamline the rate indication process. The college students will download the required information into this model, which will in turn produce the resulting rate indications. The model uses a three-year average of the historical incurred loss development factors to project ultimate losses, calculates on-level premium, and uses a three-year average of the historical company expense to produce a rate-level indication. Each student can use the model to produce a computer-generated rate indication with only four hours of work per state. Joe knows that the model is generally acceptable under Actuarial Standards, but that it may not meet each individual state's requirements in respect to allowable rates of return, experience period used, credibility, and the like.

To increase the credibility of the rate filing, EIC has asked that each filing be accompanied by an actuarial memorandum issued under Joe's signature. The college student will prepare the rate indication and the corresponding memorandum that will be forwarded to Joe for his signature. The company product managers will file the proposed new rates along with the rate indication and Joe's actuarial memorandum.

After the initial $25,000 for completion of the model, Joe will be paid $200 per rate indication and memorandum ($200 translates into approximately 45 minutes at Joe's current billing rate). The process is expected to significantly reduce the required time and provide for a more efficient, less costly rate filing process.

Has Joe acted professionally in this situation?

Yes

Joe has provided the exact services requested by EIC. It is quite common for support staff to prepare rate indications at the direction of a credentialed actuary; giving Joe an opportunity to review the results of his model in advance of the filing with the insurance department only serves to ensure the quality of the rate filing process.

No

The use of a purely mechanical process by untrained employees to produce rate level indications is a dangerous situation. Unless he is going to validate the work process on a filing by filing basis, Joe's part in the process is at least irresponsible and likely unprofessional.

Whether Joe signs the rate filing or not, providing EIC with a powerful tool without the expertise and knowledge of how to use it hurts EIC and ultimately the general public at large. If Joe submits the resulting work product under his name with the minimal amount of review time provided by the fee arrangement, the actuarial profession and the public's confidence in our profession is being further damaged. Specifically, Joe would be in violation of Precepts 1 and 4 of the Code of Professional Conduct as listed below:

Precept 1: "An actuary shall act honestly, with integrity, and in a manner to uphold the reputation of the actuarial profession."

Precept 4: "An actuary shall ensure that Professional Services performed by or under the direction of the actuary meet the applicable standards of practice."

Joe should not have agreed to build the model knowing EIC's plan for its use. In addition, given the current situation, Joe should only agree to sign off on the rate filing if ample time is allocated for a review of the work product on a state by state basis.