Restoring the Credibility of Casualty Actuaries

Restoring the Credibility of Casualty Actuaries

Casualty Loss Reserve SeminarBoston, MA

Panelists: Members of the Joint Task Force on Enhancing the Reputation of Casualty Actuaries

With you today….

• Mary D. Miller – American Academy of Actuaries, VP Casualty Practice Council

• Mary Frances Miller – Actuarial Standards Board

• Mike Toothman – Actuarial Board for Counseling & Discipline

• Pat Teufel – Chair– CAS Board Task Force on Actuarial Credibility– CAS Representative to Joint Task Force

Objectives for the Session

• Provide Information– Background leading to commissioning of the CAS

Task Force on Actuarial Credibility– Recommendations of the CAS Task Force– Active Involvement of other US organizations

representing casualty actuaries

• HEAR WHAT YOU THINK

• ENCOURAGE YOUR PARTICIPATION!

Setting the Stage….

Actuaries Under Attack: Is the Profession Living Up to Its Responsibilities?

• Standard & Poors – “Whether through knavery or naiveté….”

• Morris Review – “Profession that has been too introspective, not

forward-looking enough and slow to modernize”

• Litigation Against Actuaries On Rise – “Professional negligence and malpractice,

misrepresentation and aiding and abetting breaches of fiduciary duties”

Turbulence is life force.

It is opportunity.

Let’s embrace turbulence and

use it for change.

CAS Board Response

• Meetings with Standard & Poors and other rating agencies

• Board Retreat to discuss possible responses• Task Force on Actuarial Credibility charged to:

“Identify, prioritize and investigate the feasibility of possible strategies for enhancing the perceived credibility of the casualty actuarial profession and develop action plans for implementation of those strategies considered to have the greatest potential for high impact.”

CAS Task Force on Actuarial Credibility

Recommendations

1. To enhance the transparency of the actuary’s conclusions by clearly identifying within the statement of actuarial opinion differences, if any, that exist between management’s “best estimate” of the loss and loss adjustment expense reserves as of a valuation date and the actuary’s “best estimate” of the reserve need as of the valuation date.

Recommendations

2. To enhance the public’s understanding of actuarial estimates, including the “best estimate” and the range of reasonable reserve outcomes, as well as estimates of the range of all possible settlement outcomes. To refine actuarial methodologies for estimating the underlying probability distributions for the range of loss and loss adjustment expense reserves, facilitating greater consistency in the approaches used by actuaries and improved transparency of financial reporting disclosures.

Recommendations

3. To improve the transparency of disclosures by requiring that the actuarial report contain an exhibit that summarizes changes in the actuary’s estimates from one period to the next, with extended discussion of significant factors underlying the changes.

Recommendations

4. To enhance the quality of corporate governance for property/casualty insurers by educating audit committees or boards of directors or both on the roles and responsibilities of the appointed actuary. To increase the visibility of the appointed actuary within the corporate governance arena.

Recommendations

5. To enhance the self-governance of the actuarial profession with respect to property/casualty loss and loss adjustment expense reserve opinions by requiring the appointed actuary to provide an explanatory document with the Actuarial Board for Counseling and Discipline (ABCD) whenever the change in the actuary’s reserve estimates over a defined period exceeds certain predetermined thresholds. The explanatory document would discuss the changes in the actuary’s estimates, as well as the significant factors underlying the changes.

Recommendations

6. To elevate the unique role of the appointed actuary within the statutory financial reporting environment by incorporating an Actuarial Statement within the Jurat Page of each property/casualty insurance company’s Annual Statement.

CAS Leadership

Actuarial Standards Board

ASB Process on ASOP Changes

1. Recommendation to ASB to initiate review

2. ASB charges Casualty Committee to review

3. Casualty Committee or Subcommittee develops exposure draft for ASB review

4. ASB votes to expose to members for comments

ASB Process on ASOP Changes(continued)

5. Casualty Committee receives and reviews comments – considers and responds to all of the comments

6. Casualty Committee considers and responds to all of the input and revises draft accordingly

7. ASB reviews revision and comments. – If changes are significant, draft ASOP is re-

exposed (step 4).– If not significantly changed, ASB can vote to adopt.

American Academy of Actuaries

• August 2001 – Casualty Actuarial Task Force (CATF) formed Actuarial Opinion Instructions Working Group (AOIWG)

• Monthly calls with input from AAA and other industry representatives

• Result – Revised content and format for 2004 Opinions

This is not the only game in town !

• Result – AOS required in 2005

• Result – Regulatory Guidance Briefs are published annually starting in 2004 in AAA P&C Practice Note

• Result – Specific Requirement for auditor to consult with actuary regarding data relied on


• Result – Increased regulator involvement in CLRS and other professional meetings

• Result – Better Opinions - More Disclosures


• CAS Committee on Reserves URIL Subcommittee and AAA Financial Soundness and Risk Management Committees both researching company failures and large reserve increases

• AAA sponsoring 1st Opinion ‘Boot Camp’ next month – sold out quickly – 2nd day added


• Unprecedented AAA/CAS/CATF cooperation on Risk Transfer Project

• Increased COPLFR and CATF presence at regional affiliate meetings

• New Standard on Unpaid Claim Liabilities on the horizon


Actuarial Board for Counseling & Discipline

Code of Professional Conduct

Code of Professional ConductCode of Professional Conduct

• Professional Integrity - Precept 1

• Qualification Standards - Precept 2

• Standards of Practice - Precept 3

• Communications and Disclosure - Precepts 4, 5, and 6

• Conflict of Interest - Precept 7

• Control of Work Product – Precept 8

• Confidentiality – Precept 9

• Courtesy and Cooperation – Precept 10

• Advertising – Precept 11

• Titles and Designations – Precept 12

• Violations of the Code of Professional Conduct – Precepts 13 and 14

The Code of Professional Conduct identifies the professional and ethical standards required of actuaries who belong to the Academy. The SOA, ASPA, the CAS, and the CCA have adopted identical codes.

Counseling and Discipline Overview

AAA ASPA CAS CCA SOA

Actuarial Organizations

ABCD“Interpreter““Enforcer”

Professional IntegrityQualification StandardsStandards of Practice

Communications and DisclosureConflict of Interest

Control of Work ProductConfidentiality

Courtesy and CooperationAdvertising

Titles and DesignationsViolations of the Code

Actuarial Standards of Practice (Develop, Revise, and Adopt)

Violations of the Code of Professional Conduct

ASB“Standard Setter”

DraftedQualification

Standards

Code of Professional Conduct

Role of the ASB

• The ASB is an independent entity established in 1988 as the single board promulgating standards of practice for the entire actuarial profession in the US.

• The ASB has the sole authority to develop, obtain comment on, revise, and adopt standards of practice in the actuarial profession.

• The ASB is comprised of nine persons representing a broad range of backgrounds and areas of actuarial practice, with members from the AAA, ASPA, CAS, CCA, and SOA.

• Members of the ASB are appointed by a selection committee composed of the Presidents and Presidents-Elect of the AAA, ASPA, CAS, CCA, and SOA.

ASB

AAA SOACCACASASPA

Areas of Practice: Casualty, Health, Life, Pension, and General

Role of the ABCD

• The ABCD was formed to serve the five US-based organizations representing actuaries.• The ABCD also serves the CIA relative to practice by its members in the US.• These organizations have delegated authority for counseling and discipline to the ABCD.• This includes the authority to investigate and evaluate possible violations of the Code of

Professional Conduct.– Counseling– Discipline– Requests for guidance– Mediation

CIA

ABCD

AAA SOACCACASASPA

Members “practicing” in the US

The ABCD’s board members represent all main areas of actuarial practice.

Members of the ABCD are appointed by a Selection Committee composed of

the Presidents and Presidents-Elect of the AAA, ASPA, CAS, CCA, and SOA.

Current ABCD Board MembersCurrent ABCD Board MembersWilliam J. Falk, Chairperson

Frank S. Irish, Vice Chairperson

Lawrence A. Johansen, Vice Chairperson

Linda L. Bell

Edward E. Burrows

Julia T. Philips

Richard S. Robertson

Carol R. Sears

Michael L. Toothman

Staff Liaison: Thomas C. Griffin

ABCD Board Members

Details of Counseling and Discipline Process

The ABCD addresses complaints of possible Code violations, but also answers informal inquiries and requests for guidance from actuaries who have questions concerning professional matters.

Complaints and Matters for InquiryComplaints and Matters for Inquiry

Process for addressing formal complaints:

• Complaints may come from an actuary or others using actuarial services.

• ABCD staff completes the initial review.• If not dismissed, staff refers complaint to the

“subject actuary”.• The ABCD Chairs review the subject actuary’s

response and either dismiss the case or appoint a mediator or investigator.

• Investigation can take many months.

How Cases/Complaints Arise

Informal Inquiries and Informal Inquiries and

Requests for GuidanceRequests for Guidance

In many cases, requests of the ABCD are informal:

• Generally answered by individual ABCD member.

• Response represents individual ABCD member’s opinion and not necessarily the ABCD’s view.

ABCD also responds to formal requests for guidance:

• These matters are considered by the ABCD as a whole.

• If appropriate, written formal guidance is provided.

Complainant

ABCD

Subject Actuary

ABCD“FullGroup”

Matters forInquiry

Matters forInquiry

ABCD“ChairsCommittee”

InformationReceived

InformationReceived

ComplaintsComplaints

InitialProcessing

InitialProcessing

DismissDismiss

GatherFurther

Information

GatherFurther

Information

Response bySubject Actuary


Reviewed byChairs

Committee

Reviewed byChairs

Committee

DismissDismiss

MediateMediate

InvestigateInvestigate

ABCD Formal Complaint Process Flow

Complainant

ABCD

Subject Actuary

ABCD“FullGroup”

ABCD“ChairsCommittee”



Reviewed byFull

ABCD

Reviewed byFull

ABCD

DismissDismiss

ProvideCounsel

ProvideCounsel

RecommendDiscipline

RecommendDiscipline

DismissDismiss

MediateMediate

InvestigateInvestigate

ABCD Formal Complaint Process Flow

ABCD Case Resolution ABCD cases considered during 2004:

Type of CaseType of Case Pending from 2003 and Pending from 2003 and EarlierEarlier

Received in Received in 20042004

TotalTotal

ConductConduct 66 66 1212

PracticePractice 44 44 88

Conduct & PracticeConduct & Practice 44 11 55

Requests for Requests for GuidanceGuidance

22 4444 4646

TotalTotal 1616 5555 7171

Cases by Practice Cases by Practice AreaArea

Pending from 2003 and Pending from 2003 and EarlierEarlier

Received in Received in 20042004

TotalTotal

CasualtyCasualty 55 1414 1919

HealthHealth 22 99 1111

LifeLife 22 1111 1313

PensionPension 77 2121 2828

TotalTotal 1616 5555 7171

ABCD Case Resolution ABCD cases considered during 2004:

CASES CLOSEDCASES CLOSED

Action by Individual ABCD membersAction by Individual ABCD membersReplied to requests for guidanceReplied to requests for guidance 4646

Disposition by Chairperson and Vice Chairpersons Disposition by Chairperson and Vice Chairpersons DismissedDismissed 4 4(Referred to Investigators in 2004—4)(Referred to Investigators in 2004—4)

Disposition by Whole ABCD after investigationDisposition by Whole ABCD after investigationDismissed Dismissed 1 1Dismissed with guidanceDismissed with guidance 2 2Counseled Counseled 1 1Counseled after hearingCounseled after hearing 0 0Recommended suspensionRecommended suspension 0 0

TotalTotal 5454

CASES IN PROGRESS (as of 12/31/03)CASES IN PROGRESS (as of 12/31/03)Pending investigation Pending investigation 3 3Pending hearingPending hearing 7 7Pending receipt of more information Pending receipt of more information 3 3Request for Guidance pendingRequest for Guidance pending 44

TotalTotal 1717

ABCD Case Resolution Since its inception in 1992, the ABCD completed its cases as follows:

DispositionsDispositions 19921992 19931993 19941994 19951995 19961996 19971997 19981998 19991999 20002000 20012001 20022002 20032003 20042004 TotalTotal

DismissedDismissed 1212 2424 99 1111 88 1111 1313 1010 55 2020 1616 77 55 151151

Dismissed with Dismissed with guidanceguidance

66 1010 33 ____ 55 11 55 22 88 55 44 22 22 5353

CounseledCounseled ____ 22 88 11 66 22 55 ____ 22 33 22 44 11 3636

MediatedMediated 33 11 11 ____ ____ ____ ____ 11 ____ 44 ____ 11 ____ 1111

Recommended Recommended private reprimandprivate reprimand

____ ____ ____ ____ ____ ____ ____ ____ 11 11 ____ ____ ____ 22

Recommended Recommended public disciplinepublic discipline

____ 11 22 ____ 33 ____ 11 ____ 33 ____ ____ 11 ____ 1111

Replied to requests Replied to requests for guidancefor guidance

88 88 88 1010 2828 3131 2222 3131 3636 2121 4747 3030 4646 326326

TotalTotal 2929 4646 3131 2222 5050 4545 4646 4444 5555 5454 6969 4545 5454 590590

Challenges/ WeaknessChallenges/ Weakness

1.Lack of understanding within the profession of the counseling and discipline process and the role of the ABCD (exacerbated by confidentiality issues)

2.Reliance on practitioners to self-police in many cases

3.Timing of the process

Challenges/Weakness in the Current System

Questions???

Joint Task Force for Enhancing the Reputation

of Casualty Actuaries

Role & Responsibilities

• Oversee implementation of Task Force recommendations by the various organizations representing casualty actuaries

• Communicate progress to each of the actuarial organizations

• Work through “hurdles”, if any, encountered during implementation

Progress to Date

• Confirmed agreement of all organizations on general direction for the initiative

• Changed Name for Task Force from:– Joint Task Force for Restoring Actuarial Credibility to– Joint Task Force for Enhancing the Reputation of

Casualty Actuaries

• Discussed recommendation for public disclosure of “best estimate” at length

• Preparing Survey of Opinion Writers

NOW IT’S YOUR TURN

In your opinion, based on facts and circumstances that were known or knowable as of the valuation date, was the property/casualty insurance industry under-reserved as of December 31, 2004?

A. Yes, by more than 10% of the industry’s carried reserves

B. Yes, by 1 - 9% of the industry’s carried reserves

C. No

D. No Opinion. I don’t have enough facts.

In your opinion, would a thorough reading of the statements of actuarial opinion rendered as of December 31, 2004 have identified to the users of those opinions those companies that contributed most significantly to the industry’s overall reserve position (either favorably or unfavorably)?

A. Yes

B. No

C. No Opinion. I don’t have enough facts.

The following factors have been identified as potential contributing factors to the property/casualty industry’s perceived reserve deficiency position. In your opinion, what is the most significant factor contributing to industry’s perceived US reserve deficiency?

A. Vague Accounting Terms and Guidance

B. Corporate Governance Issues (Dominance Risk)

C. Quality and/or Clarity of Actuarial Conclusions

D. Earnings Pressure

E. Unforeseeable events

F. There isn’t a problem; Why are we wasting so much time on this topic?

The following factors have been suggested as potential contributing factors to the perceived decline in the reputation of casualty actuaries with respect to the actuary’s role in determining appropriate reserve levels and in evaluating the reasonableness/adequacy of reserves recorded by management. In your opinion, what is the most significant factor contributing to the perceived decline in the reputation of casualty actuaries with respect to reserves?

A. Lack of clarity on what the actuarial estimate meansB. Need for further refinement of actuarial modelsC. Inexperience of the appointed actuaryD. Insufficient or ineffective communication by the actuary to

management and/or Audit Committee/BoardE. “Reasonableness” standard allows the actuary to sign off on

reserves that he/she believes likely may be deficientF. Accounting standards need to be revised to minimize adverse

reserve emergenceG. Other

Agree or Disagree?

• Clarifying the term “best estimate” and differentiating the actuarial point estimate from management’s recorded “best estimate” will help to provide increased clarity with respect to the actuary’s conclusions on reserves.

• The Actuarial Standards Board should consider a revision to ASOP 36, requiring that the carried reserve be at least equal to the actuary’s estimate of the indicated reserves in order for the reserves to be considered reasonable.

Agree or Disagree?

• Management of public companies is more likely today to record at its actuary’s point estimate, due to the Sarbanes Oxley Act requirement for public companies to document and test the adequacy of their internal controls.

• Most actuaries today develop a point estimate for the reserves, whether or not that point estimate is displayed in the actuarial report.

Agree or Disagree?

• Public disclosure of differences between the actuary’s point estimate and management’s recorded reserve likely will place additional pressures on the actuary to change his/her estimate.

• A procedure for periodic, independent peer review of actuarial workpapers supporting the statements of actuarial opinion, with formal reports of the peer reviewer’s conclusions and/or observations to be made either to the regulator or to an independent actuarial review board, should be implemented.

Documents

Restoring the Credibility of Casualty Actuaries