Actuaries Needed to Solve Ethical Problems
from Volume 24, No. 1 edition

Editor's Note: This article is the first in a series written by representatives of either the CAS Committee on Professionalism Education (COPE) or the Actuarial Board for Counseling and Discipline (ABCD).

Neat little problems of addition, subtraction, multiplication and division took on new dimensions when we began to use these tools for solving problems described in narrative terms. It was quite a shock for some of us to change from a simple A "2+2=4" type of problem to, "How many pieces of fruit do John and Mary have if John has two apples and Jane has two pears?"

We face a similar, albeit more mentally demanding, dilemma when we familiarize ourselves with the professional standards of practice, conduct, and qualifications. Just how do these fit into real life situations? There is no simple answer. Each situation is unique and there are bound to be differences of opinion on how each situation relates to the neat set of articulated standards. In the end, it is the actuarial profession itself that determines how these standards are to be interpreted in real life situations. As part of this process, the CAS COPE and the ABCD solicit your comments on the applications of professional standards of conduct, actuarial standards of practice, and actuarial qualification standards in specific simulated fact situations. All comments received will be condensed and summarized in future articles on an anonymous basis.

Consider the following scenario:

Perfection Mutual Casualty Insurance Company (PMC) is an established, medium-sized midwestern carrier operating in 15 states. Historically, its primary lines have been personal auto and homeowners. It expanded its market in 1993 to write commercial lines coverage, including workers compensation, on small businesses.

PMC had retained Pat Firmly, FCAS, MAAA to review its reserves since 1985. Firmly has generally found PMC's reserves to be adequate and has issued unqualified statements of actuarial opinion to that effect since such opinions were required.

In November 1995, while conducting a preliminary review of experience to be used for determining reserves for the 1995 annual statement, Firmly noted that the experience for commercial lines had deteriorated sharply and PMC would probably have to show a reduction in surplus at year end. PMC management argued that Firmly's analysis relied too heavily on industry development factors for long-tail lines and was otherwise unrealistic as far as its projections of IBNR reserves. Firmly also informed management that one of its off-shore reinsurers had recently defaulted on claims payments to another one of his clients and its ability to pay amounts due PMC were in doubt.

Shortly thereafter, PMC terminated its contract with Firmly. In February 1996 PMC retained Harry Hyde, FCAS, MAAA to issue an actuarial statement of opinion on its 1995 reserves. After accepting the assignment, Hyde asked Firmly to furnish his workpapers from prior years. Firmly refused and accused Hyde of stealing one of his best accounts by promising a favorable opinion. Hyde then reviewed the combined lines experience furnished by PMC and issued an unqualified actuarial opinion to the effect that PMC's reserves were within an acceptable range. These reserves produced a nominal increase in PMC's surplus.

What standards of conduct, practice, and/or qualifications are involved in this scenario? Did Firmly comply with these standards? Did Hyde comply? What did each do right, if anything? What did each do wrong, if anything? What would you have done if you were Firmly or if you were Hyde? If you were either of those actuaries, would you file a complaint with the ABCD? If so, what would you ask the ABCD to do?