Skit on Ratemaking
Committee on Professionalism
Education
Skit Background
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John is an FCAS and is the chief pricing actuary
for Small Insurance Company (SIC).
SIC predominately writes Personal Auto, but
they also have a growing Homeowners program.
John is asked by senior management to review
SIC's Homeowners rates, which haven't been
updated in several years.
Skit Background
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John was recently promoted to his position after Mary,
the former chief pricing actuary and an FCAS, was
promoted to Executive Vice President. Throughout
John's entire career at SIC, Mary has been his boss.
John is aware of the fact that SIC has had poor
customer retention recently. The results have been so
bad that the CEO recently warned the senior managers
that, if the trend continues, there may be a serious
shakeup at the top.
Skit Background
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John has just completed the Homeowners review and
has sent the results to Mary. The review indicates
significant rate increases, on the order of 25% to 30%,
for many territories.
Legal Disclosure
The views expressed by the panelists are their own and
may not necessarily reflect those of their respective
employers.
Lights, Camera, Action!
General Questions
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Given that John suspects that Mary’s motives are
dishonest, what are his professional obligations?
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What are Mary’s obligations?
Professional Guidance
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Precept 1 of the Code of Conduct: “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.”
Professional Guidance
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Precept 10 of the Code of Conduct: “An
Actuary shall perform Actuarial Services with
courtesy and professional respect and shall
cooperate with others in the Principal's interest.”
Professional Guidance
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CAS Statement of Principles Regarding Property
and Casualty Insurance Ratemaking
Principle 1: A rate is an estimate of the expected
value of future costs.
 Principle 2: A rate provides for all costs associated
with the transfer of risk.
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Professional Guidance
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CAS Statement of Principles Regarding Property
and Casualty Insurance Ratemaking
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Principle 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.
Professional Guidance
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CAS Statement of Principles Regarding Property
and Casualty Insurance Ratemaking, Section III:
Ratemaking Considerations
Credibility
 Trends
 Catastrophes
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Professional Guidance
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ASOP 39: Treatment of Catastrophe Losses in
Property/Casualty Insurance Ratemaking
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Section 3.3 – The Use of Data in Determining a
Provision for Catastrophe Losses: The actuary may
use historical insurance data and noninsurance data.
Professional Guidance
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ASOP 13: Trending Procedures in
Property/Casualty Insurance
Section 3.1 – Purpose or Use of Trending
Procedures: The actuary should apply trending
procedures that are appropriate for the applicable
purpose or use
 Section 3.3 – Economic and Social Influences: The
actuary should consider economic and social
influences that can have a significant impact on
trends.
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Professional Guidance
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ASOP 25: Credibility Procedures Applicable to
Accident and Health, Group Term Life, and
Property/Casualty Coverages
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Section 3.1 – Purpose and Use of Credibility
Procedures: The purpose of credibility procedures is
to blend information from subject experience with
information from one or more sets of related
experience when the subject experience does not
have full credibility in order to improve the estimate
of expected values.
Professional Guidance
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ASOP 25: Credibility Procedures Applicable to
Accident and Health, Group Term Life, and
Property/Casualty Coverages
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Section 3.2 – Selection of Credibility Procedures:
The actuary should select the credibility procedures
that do not tend to bias the results in any material
way.
Professional Guidance
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ASOP 25: Credibility Procedures Applicable to
Accident and Health, Group Term Life, and
Property/Casualty Coverages
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Section 3.3 – Choice of Related Experience: Such
related experience should have frequency, severity,
or other determinable characteristics that may
reasonably be expected to be similar to the subject
experience.
Audience Discussion on Courses
of Action
Possible Courses of Action
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Alternative 1 – John should accept Mary’s
decision. She is his boss and has more years of
experience.
Alternative 2 – John should try to negotiate with
Mary.
Alternative 3 – Since John distrusts Mary’s
motives, he should not capitulate to her
requests.
Alternate Ending -Lights, Camera, Action!
General Questions
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What are John’s and Mary’s obligations to their
professions, to SIC, and to themselves and their
families?
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Is Mary's decision to make sub-optimal actuarial
decisions due to fear of losing her job in violation of
any actuarial standards?
Possible Courses of Action
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Alternative 1 – John should take Mary's advice
and change some of his assumptions in order to
temper the rate increases.
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Alternative 2 – John cannot in good conscience
go along with Mary's request.
Key Takeaways
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Work-related predicaments, particularly when
there is fear of losing one’s job, can cause an
actuary to blur ethical lines
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Know the Standards that apply to the work you
are doing