2004 Casualty Loss Reserve Seminar -- Sessions 2 & 5
A Legal Eye For
The Actuary Guy
(and Gal)
R. Timothy Muth
Sandra Zunker Brown
Reinhart Boerner Van Deuren s.c.
1000 North Water Street
Milwaukee, WI 53202
(414)-298-1000
www.reinhartlaw.com
First, The Caveats
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This is general advice only—for specifics,
consult your own attorney.
There are no guarantees: lawsuits happen to
good actuaries (settlements too).
The Problem:
Actuaries Are Too Popular
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“[A]ctuaries have become an increasingly
popular target for litigation over the last decade,
with scores of suits by clients and third parties
alleging injury from an actuarial opinion or
report.”
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Dailey & Selznick, “Recent Developments in Actuarial Malpractice
Litigation,” Mealy’s Litigation Report, page 1, January 8, 2004.
Litigation Against Actuaries is
Increasing
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50 lawsuits reported between 1971 and 2001
14 lawsuits reported in 2003 alone
Reported suits are the tip of the iceberg, as most
lawsuits settle without a reported decision
Post-Enron world makes claims more likely
Consultants and company actuaries are targets
S&P report targets actuaries
S&P’s Complaint About
Casualty Actuaries
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Casualty Actuaries have “an abysmal track
record” of “signing off on reserves that turn
out to be wildly inaccurate.”
Casualty Actuaries are guilty of either “naivete
or knavery.”
Our Conclusion?
ACTUARIES NEED A MAJOR
MAKEOVER
Hot Tips of the Day
Know your masters
 Resist pressure
 Know who you are (and who you are not)
 Understand the big picture
 Protect yourself
 Do the right thing
 Seek counsel
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Who Are Your Masters?
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The Public?
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Insurance Commissioners?
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The litigation environment after Enron and
Worldcom contains an unrealistic expectation
that professionals can safeguard “the public.”
The “Last Professional In” problem for
insurance company insolvencies
Clients and management = masters
Why You Must Know Your Masters
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Masters invoking the 5th amendment
privilege against self-incrimination because
they are under indictment can’t help you
Actuaries are ill-equipped to protect the
public from crooks and other persons who
want to mislead or deceive.
What Experience Shows
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Some type of masters and some types of
assignments are more likely to generate disputes
and litigation
A common factor: small jobs/budgets/clients
generate a disproportionate amount of claims.
Masters Likely to Get You Sued
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Masters in financial trouble
Unsophisticated Masters
Masters who are changing actuaries
Masters who are changing auditing firms
Assignments with very short deadlines
Masters Likely to Get You Sued
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Masters who have sued financial professionals
Masters with significant adverse development in
past year
Masters with significant jumps in written
premium
Masters who pressure you
Screening Is for Everyone
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What we mean by screening
Screening is a continual process. Each new
assignment should include a reassessment of
situation
In house actuaries need to be aware of changes
in management/situation that makes their job
more risky
You Must Deal With The
Reality of Pressure
What Pressure Can Do
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Create an adversarial relationship
Sway you from a neutral evaluator of facts and
data to an advocate
Pressure From Masters
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Pressure in the context of business imperatives
Pressure in the context of client-consultant
imperatives
Pressure From the Government
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California Work Comp Form Including Savings
from AB 227 and 228:
“I hereby certify that the rates shall be adequate to
cover the insurer’s losses and expenses.”
 “I understand that the Insurance Department will
rely on this certification and it will be posted on the
Department’s website.”
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Taking the Master’s Word:
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We’ve strengthened case reserves
We’ve sped up paying claims
We’ve taken steps which will lower ALAE
We’ve re-underwritten our book; our new
business is better
Each of these may and should be considered by
an actuary in performing a reserve opinion.
Responding to Pressure
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Do consider all relevant information
Your best estimate is the best number
Think long term
Create a paper trail
Seek help from others
Do not lose your professional independence
ASOP 41
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Requires disclosure if an actuary is acting as
an advocate.
If you are not a disclosed advocate, you are
presumed to be a neutral evaluator.
Difficult to serve as a neutral evaluator once
you have acted as an advocate.
Your independent professional judgment is
not up for negotiation.
Avoid Letting Other People
Make You Over Into
Something You Are Not
Actuaries Are Not Auditors
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Plaintiff attorneys are deliberately trying to
blur the role of actuary and auditor.
Plaintiffs now bring claims alleging that
actuaries missed “red flags” about the
finances at an insurance company.
ASOP 23 on Data Quality states, “This
standard does not recommend that the
actuary audit data.”
Actuaries Are Not Attorneys
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Plaintiffs’ attorneys are trying to blur the role between
actuaries and attorneys.
Plaintiffs now bring claims alleging that actuaries failed
to properly advise them on legal issues/documents.
ASOP 34 (Plan Benefits in DR Actions) provides that
actuaries “should avoid the unauthorized practice of
law” and that “the question of whether the proposed
order meets the state’s procedural requirements is a
legal one and is beyond the qualifications of actuaries
who are not also attorneys.”
Actuaries Are Not Reinsurers
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Plaintiff ’s attorneys and others want to expand
what the actuary’s opinion implies about
reinsurance – and to make you into a reinsurer if
there is a shortfall.
What should an actuary know about
reinsurance?
What should the actuary know about other
significant balance sheet items?
Reinsurance Issues
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KPMG being sued in Missouri for $1B--in part
for failure to determine whether treaties
transferred risk and were collectible.
$17.5M verdict in Arizona against actuarial firm
involved reinsurance collectibility.
Other current suits also include allegations
about actuaries’ obligation to understand legal
terms of reinsurance contracts.
Guidance from the ASOPs
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What is the meaning of ASOP 36
“consideration” of recoverability?
Can you rely on summaries of reinsurance
treaties?
Protect Yourself
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Ask for all relevant information
Do not agree to impossible things
Don’t imply precision where none exists
Caveat and disclaim
The Client Who Books Reserves At
the Low End of Your Range
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Display that range
Consider explicit statement in SAO that master is
booking at low end or that deviation is more
likely to be unfavorable than favorable
Thoughts About Additional
Protective Steps
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Management Representation Letters
Explicit Language About Reliance on Others
Greater Discussions With Auditors
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2004 NAIC annual statement instruction changes
with respect to interactions between auditor and
appointed actuary with respect to data.
Professional activities (ASOPs, etc)
Peer Review
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More stringent peer review when situation
turns risky or master applies pressure
Never ignore peer reviewers comments and
seek easier peer reviewer
Doing the Right Thing
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Informing the Company’s Board or Audit
Committee
Informing the Auditors
Informing Insurance Departments
Balancing confidentiality concerns
Retracting Opinions
NAIC Annual Statement
Instructions
Appointed actuary must notify Board or
Audit committee, in writing, within 5
business days, and provide amended
Opinion, if the actuary determines that her
Opinion “was in error as a result of reliance
on data or other information (other than
assumptions) that, as of the balance sheet
date, was factually incorrect.”
An Opinion is “in error” if:
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It “would not have been issued or would
have been materially altered had the correct
data or other information been used.”
An Opinion is NOT “in error” based on
“data or information concerning events
subsequent to the balance sheet date or
because actual results differ from those
projected.”
Notify DOI
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If insurer fails to forward amended Opinion to
Commissioner and notify actuary within 5
business days.
That the submitted Opinion should no longer
be relied upon.
Firing your Masters
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When to resign
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Business issue, not just legal issue
How to resign
Seek counsel
 Consider getting fired instead
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If you fear you’ve committed
errors:
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Seek counsel on how to do the right thing
Do not write to the master pointing out and
quantifying your errors
Do not write discoverable internal reports
Tell Your Attorneys
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Privilege attaches when attorneys investigate
Your attorneys can help you evaluate options