Code of Professional
Conduct and Relevant
Actuarial Standards of
Practice
March, 18, 2008
Ratemaking Seminar
Boston
Agenda
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Code of Conduct/Code of Professional Ethics
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Relevant Actuarial Standards of Practice
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Case Studies
Code of Professional
Conduct
Code of Professional Conduct
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Definitions
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Precepts & Annotations
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Canadian Issues
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Code of Ethics for Students
Key Definitions within Code
Actuarial Communication
 Actuarial Services
 Actuary
 Confidential Information
 Law
 Principal
 Recognized Actuarial Organization
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Precepts and Annotations
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Professional Integrity
Qualification Standards
Standards of Practice
Communications and Disclosures
Conflict of Interest
Control of Work Product
Confidentiality
Courtesy and Cooperation
Advertising
Titles and Designations
Violations of the Code of Professional Conduct
Professional Integrity
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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.
Qualification Standards
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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.
Standards of Practice
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PRECEPT 3:
An Actuary shall ensure that Actuarial Services
performed by or under the direction of the
Actuary satisfy applicable standards of practice.
Communications and Disclosure
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PRECEPT 4:
An Actuary who issues an Actuarial
Communication shall take appropriate steps to
ensure that the Actuarial Communication is clear
and appropriate to the circumstances and its
intended audience and satisfies applicable
standards of practice.
Communications and Disclosure
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PRECEPT 5:
An Actuary who issues an Actuarial
Communication shall, as appropriate,
identify the Principal(s) for whom the
Actuarial Communication is issued and
describe the capacity in which the Actuary
serves.
Communications and Disclosure
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PRECEPT 6:
An Actuary shall make appropriate and timely disclosure to
a present or prospective Principal of the sources of all
direct and indirect material compensation that the Actuary
or the Actuary's firm has received, or may receive, from
another party in relation to an assignment for which the
Actuary has provided, or will provide, Actuarial Services for
that Principal. The disclosure of sources of material
compensation that the Actuary's firm has received, or may
receive, is limited to those sources known to, or reasonably
ascertainable by, the Actuary.
Conflict of Interest
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PRECEPT 7:
An Actuary shall not knowingly perform Actuarial
Services involving an actual or potential conflict of
interest unless:
 the Actuary’s ability to act fairly is unimpaired;
 there has been disclosure of the conflict to all present
and known prospective Principals whose interests
would be affected by the conflict; and
 all such Principals have expressly agreed to the
performance of the Actuarial Services by the Actuary.
Control of Work Product
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PRECEPT 8:
An Actuary who performs Actuarial Services
shall take reasonable steps to ensure that such
services are not used to mislead other parties.
Confidentiality
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PRECEPT 9:
An Actuary shall not disclose to another party
any Confidential Information unless authorized
to do so by the Principal or required to do so by
Law.
Courtesy and Cooperation
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PRECEPT 10:
An Actuary shall perform Actuarial Services with
courtesy and professional respect and shall
cooperate with others in the Principal's interest.
Advertising
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PRECEPT 11:
An Actuary shall not engage in any advertising
or business solicitation activities with respect to
Actuarial Services that the Actuary knows or
should know are false or misleading.
Titles and Designations
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PRECEPT 12:
An Actuary shall make use of membership titles
and designations of a Recognized Actuarial
Organization only in a manner that conforms to
the practices authorized by that organization.
Violations of the
Code of Professional Conduct
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PRECEPT 13:
An Actuary with knowledge of an apparent,
unresolved, material violation of the Code by
another Actuary should consider discussing the
situation with the other Actuary and attempt to
resolve the apparent violation. If such discussion
is not attempted or is not successful, the Actuary
shall disclose such violation to the appropriate
counseling and discipline body of the profession,
except where the disclosure would be contrary
to Law or would divulge Confidential Information.
Violations of the
Code of Professional Conduct
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PRECEPT 14:
An Actuary shall respond promptly, truthfully, and
fully to any request for information by, and
cooperate fully with, an appropriate counseling
and disciplinary body of the profession in
connection with any disciplinary, counseling or
other proceeding of such body relating to the
Code. The Actuary's responsibility to respond
shall be subject to applicable restrictions on
Confidential Information and those imposed by
Law.
Canadian Rules of
Professional Conduct
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The Rules of Professional Conduct in Canada require
that certain procedures must be followed when a
member is aware of a violation of the Rules.
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Affirmative responsibility to act to correct violation
No confidentiality agreement or employment protections exist
Code of
Professional Ethics
Code of Professional Ethics for
Candidates
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Effective with the May 2008 exams
Similar to Code of Conduct for members
CAS now consistent with other societies (e.g.
CPCU and CFA Institute) in requiring candidates
to abide by ethical standards
Code of Professional Ethics for
Candidates
 Rules
1 & 2 = Precept 1: Integrity
 Rule 3 = Precept 10: Courtesy
 Rule 4: Exam discipline
 Rule 5 = Precept 12: Titles/Designations
 Rule 6 = Precept 9: Confidentiality
 Rule 7 = Precept 14: Respond
promptly/cooperate
Code of Professional Ethics for
Candidates
 Precepts
not addressed by Candidate Code
Precept 2: Qualification Standards
 Precept 3: Standards of Practice
 Precepts 4-6: Actuarial Communications
 Precept 7: Conflict of Interest
 Precept 8: Control of Work Product
 Precept 11: Advertising
 Precept 13: Discussing/Disclosing Violations
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Actuarial Standards
of Practice
Actuarial Standards of Practice and
Ratemaking
Actuaries need to be aware of the
applicability of the different ASOPs to the
work that they perform
 The Council on Professionalism of the
AAA has developed the “Applicability
Guidelines for Actuarial Standards of
Practice”
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Applicability Guidelines
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These guidelines are not meant to be exhaustive
and only provide “non authoritative” guidance
Ultimately, it remains the actuary’s responsibility to
identify the standards that apply to each assignment
and to appropriately apply such requirements
These are updated periodically and it is the
actuary’s responsibility to keep current with changes
to ASOPs
The guidelines are not standards of practice
 These
were not promulgated by the Actuarial
Standards Board
ASOPs Applicable to Ratemaking
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Up to 10 ASOPs may apply to the different actuarial
tasks related to product development/ratemaking/pricing
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# 9 Documentation and Disclosure
# 12 Risk Classification
# 13 Trending Procedures
# 23 Data Quality
# 25 Credibility Procedures
# 29 Expense Provisions
# 30 Treatment of Profit and Contingency Provisions and Cost of
Capital
# 38 Using Model’s Outside Actuary’s Area of Expertise
# 39 Treatment of Catastrophe Losses
# 41 Actuarial Communications
ASOP #9: Documentation and Disclosure in P/C Insurance
Ratemaking, Loss Reserving and Valuations
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Defines documentation and disclosure required
Issues addressed and recommended practices
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Extent of documentation
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Prevention of misuse
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Actuary’s client or employer, or other if requested by client/employer
Signing of work product
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Take reasonable steps to ensure that an actuarial work product is presented
fairly, clearly, and identify the actuary as the source of actuarial aspects
Who should have access to documentation?
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Required whether or not there is legal or regulatory requirement for
documentation
Describe sources of data, material assumptions, methods and changes
Sufficient for another actuary practicing in the same field to evaluate the work
If required by law or regulation or by client/employer to provide
documentation, should provide in writing
Be sure to meet qualification standards
Disclosure of reliance on others’ work
Repeal pending
ASOP #12: Risk Classification
(for All Practice Areas)
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Provides guidance with respect to designing, reviewing, or
changing risk classification systems
Appropriate to exercise considerable professional
judgment when providing such services, including making
appropriate use of statistical tools
Issues addressed and recommended practices
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Selection of risk characteristics
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Establishing risk classes
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Related to expected outcomes
Rates would be considered equitable if differences in rates
reflect material differences in expected cost for risk
characteristics
Based on results of measuring or observing risk characteristics
Testing risk classification system
Reliance on data provided by other
ASOP #13: Trending Procedures in P/C Insurance
Ratemaking
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Provides a basis for assessing procedures appropriate for
estimating future expected values by analyzing historical data
and other relevant information
Proceedings and Syllabus provide extensive information on
alternative procedures
Issues addressed and recommended practices
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Historical insurance data
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Data from book of business being priced
Other insurance data
Non-insurance data
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Be familiar with and consider various methods for measuring trends
Select trending procedures with appropriate consideration to the
analysis of historical insurance data
 Economic and social influences
 Criteria for determining trending period
 Actuarial judgment
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ASB has released a revision exposure draft for this ASOP
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Comment deadline is May 1, 2008
ASOP #23: Data Quality
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Provides guidance regarding:
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Selection of data
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Review of data
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Accuracy is responsibility of those supplying the data
Actuary should disclose such reliance
Use of Data
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Informal examination of obvious characteristics of the data
Review for reasonableness and consistency, unless deemed not necessary or not
practical
Reliance on data supplied by others
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Understand intended use and consider desired and possible alternative data elements
Is the data adequate to satisfy analysis purpose?
Disclosures with regard to data quality
Accuracy and validity of actuarial analyses are dependent on the quality of
data used
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An actuary performs an analysis with available data and sufficiently discloses
material data limitations, and their implications
 This standard does not require audit of data
ASOP #25: Credibility Procedures Applicable to Accident,
Health, Group Term Life and P/C
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Provides guidance in the selection of a credibility procedure and the
assignment of credibility value to sets of data including subject
experience and related experience
Credibility blends information from subject experience with other
related experience to improve estimates of expected values
Issues addressed and recommended practices
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Selection of credibility procedure
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Select procedures that do the following:
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Produce results that are reasonable
Do not tend to bias the results in any material way
Are practical to implement
Give consideration to the need to balance responsiveness and stability
Choice of related experience
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Be familiar with and consider various methods
Similar frequency and severity characteristics
Homogeneity of data
ASOP #29: Expense Provision in P/C Insurance
Ratemaking
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Provides guidance in estimating costs for P/C insurance
ratemaking other than
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Incurred losses
Provision for profit and contingencies
Investment expenses
Federal and foreign expenses
Issues addressed and recommended practices
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Categorization of expenses
Determination of expense provisions
Policyholder dividends
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Classified as an expense to operations
Residual market and statutory assessments
Provision for reinsurance
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Depends on State regulations
ASOP #30: Treatment of Profit and Contingency Provisions
and the Cost of Capital in P/C Insurance Ratemaking
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Provides guidance in estimating the cost of capital and
evaluating underwriting profit and contingency provisions
Rates should provide for all expected costs, including cost of
capital associated with the risk transfer
Issues addressed and recommended practices
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Basis for cost of capital estimates
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Investment income from insurance operations and on capital
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Investment risk can result in a significantly different yield than the
stated yield
Several approaches can be used to estimate investment income
Contingency provision
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Consider the relationship between risk and return
Cost of capital likely to vary from one insurer to another
Capital needed to support risk transfer has an opportunity cost
Include if assumptions used in the ratemaking process produce cost
estimates that are not expected to equal average actual costs, and if
difference cannot be eliminated otherwise
Not intended to measure variability of results, and not expected to be
earned as profit
Different bases to express cost of capital
ASOP #38: Using Models Outside of the Actuary’s Area of
Expertise (P/C)
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Provides guidance in using models that incorporate specialized
knowledge outside the actuary’s own area of expertise when
developing work product
Actuary’s level of effort in understanding and evaluating a model
should be consistent with the intended use of the model and its
materiality to the results of the actuarial analysis
Issues addressed and recommended practices
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Determine appropriate reliance on experts
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Basic understanding of models
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Consider limitations, modifications and assumptions needed
Determine that appropriate validation has occurred
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Understand basic components, user input and output
Evaluate whether the model is appropriate for intended application
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May rely on experts if needed
User input: Review ASOP #23 “Data Quality”
User output: Compare with alternate models, historical results and
review sensitivity
Determine the appropriate use of the model
ASOP #39: Treatment of Catastrophe Losses in P/C
Ratemaking
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Provides guidance in evaluating catastrophe exposure
and in determining a provision for catastrophe losses and
LAE
Issues addressed and recommended practices
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Identification of catastrophe perils or events that differ
materially from the expected losses
Identification of catastrophe losses in historical data
Use of historical insurance and noninsurance data in
determination of provision
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Determine the extent to which available data is fully
representative of long-term frequency and severity
Adjust to reflect future conditions (e.g., changes in exposure to
loss, trends, etc.)
Review relationship between LAE and incurred losses
ASOP #41: Actuarial Communications
(for All Practice Areas)
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Provides guidance for written, electronic or oral actuarial communications
Applies to all actuarial communications, with some exceptions (e.g. testimony),
between an actuary and a principal
 Guidance applies to the extent practicable in the particular circumstances
Issues addressed and recommended practices
 General Requirements (as appropriate)
 Identify Principal, clearly state scope and any limitations or constraints
 Form and content clear and appropriate to audience
 ASOP #41 establishes minimum requirements, other ASOPs may supersede
 Requirements for Specific Communication Types
 Significant findings should be in writing or electronic form
 Compliance with Other Standards
 Compliance with law, regulation, or another profession's standards may be
sufficient to deem compliance with this standard
 Responsibility to Other Users
 Take reasonable steps to ensure the communication is clear and presented
fairly
 No obligation to communicate with any person other than the intended
audience
Revisions currently considered by the ASB
CAS Statement of Principles for Ratemaking, Loss
Reserving and Valuations
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Ratemaking Principles
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1: A rate is an estimate of the expected value of future costs
 2: A rate provides for all costs associated with the transfer of risk
 3: A rate provides for the costs associated with an individual risk transfer
 4: A rate is reasonable and not excessive, inadequate, or unfairly
discriminatory if it is an actuarially sound estimate of the expected value
of all future costs associated with an individual risk transfer
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Ratemaking – Considerations
Data – relevance, organization, homogeneity, credibility
Loss development, trends, catastrophes, policy provisions, mix of
business
 Reinsurance, operational changes, external factors
 Class plans, individual risk rating
 Actuarial judgment
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Case Studies
Case Study #1
Assume that you filed a rate change of +10% and it is sitting in
the Department of Insurance for quite a while (Prior Approval
state/province). A new analyst decides to run a more current
indication which utilizes two additional quarters of data that is
not included in the 10% change waiting for approval. This
new indication shows a -2.0% need. The new analyst shares
this information with you and you have seen the answer.
What do you do?
Case Study #2
Suppose your marketing department is really pushing a new
business discount in order to get a boost in growth. You have
no actuarial support for the discount because you do not
collect data on it. The competition does not have this discount
either. As an actuary, would you file a discount that has no
known support?
What would you do?
Case Study #3
You are an ACAS in the ratemaking department of ABC
insurance company. Your boss, an FCAS, asks you to put
together a homeowners rate filing that he intends to sign.
Your analysis results in a rate increase indication of 2.0%.
Your boss reviews your work and says that management
wants a 5.0% increase and asks you to make some changes
to some assumptions that will get the desired rate increase.
You think these changes are somewhat arbitrary and that
they result in a rate indication that is at, if not above, the very
high end of a reasonable range. Your boss is the only actuary
signing the rate filing report.
What do you do?
Case Study #4
You are doing the final review of a personal auto rate filing
when you discover an error that not only was made in this
filing, but also the prior filing which was approved by the
Insurance Department and implemented.
Your prior indication was 17%, and you implemented the
entire indication. Had this error been found the corrected
indication would have been 4.5%.
What would you do?
Case Study #5
You are the actuary for a reinsurance company trying to set an
excess auto reinsurance rate for a small domestic company
that does not have credible data. You also reinsure a larger
company, which writes basically the same business in the
same state, and who has supplied you with ample data that
could be used to set the rates for the smaller company.
Do you use the data, as a collateral source, to develop rates for
the smaller company?