A Legal Eye For The Actuary Guy (and Gal)

1. 2004 Casualty Loss Reserve Seminar -- Sessions 2 & 5 A Legal Eye ForThe 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

2. First, The Caveats • This is general advice only—for specifics, consult your own attorney. • There are no guarantees: lawsuits happen to good actuaries (settlements too).

3. The Problem: Actuaries Are Too Popular • “[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.” • Dailey & Selznick, “Recent Developments in Actuarial Malpractice Litigation,” Mealy’s Litigation Report, page 1, January 8, 2004.

4. Litigation Against Actuaries is Increasing • 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

5. S&P’s Complaint About Casualty Actuaries • 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.”

6. Our Conclusion? ACTUARIES NEED A MAJOR MAKEOVER

7. 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

8. Who Are Your Masters? • The Public? • The litigation environment after Enron and Worldcom contains an unrealistic expectation that professionals can safeguard “the public.” • Insurance Commissioners? • The “Last Professional In” problem for insurance company insolvencies • Clients and management = masters

9. Why You Must Know Your Masters • 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.

10. What Experience Shows • 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.

11. Masters Likely to Get You Sued • Masters in financial trouble • Unsophisticated Masters • Masters who are changing actuaries • Masters who are changing auditing firms • Assignments with very short deadlines

12. Masters Likely to Get You Sued • 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

13. Screening Is for Everyone • 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

14. You Must Deal With The Reality of Pressure

15. What Pressure Can Do • Create an adversarial relationship • Sway you from a neutral evaluator of facts and data to an advocate

16. Pressure From Masters • Pressure in the context of business imperatives • Pressure in the context of client-consultant imperatives

17. Pressure From the Government • 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.”

18. Taking the Master’s Word: • 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.

19. Responding to Pressure • 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

20. ASOP 41 • 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.

21. Avoid Letting Other People Make You Over Into Something You Are Not

22. Actuaries Are Not Auditors • 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.”

23. Actuaries Are Not Attorneys • 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.”

24. Actuaries Are Not Reinsurers • 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?

25. Reinsurance Issues • 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.

26. Guidance from the ASOPs • What is the meaning of ASOP 36 “consideration” of recoverability? • Can you rely on summaries of reinsurance treaties?

27. Protect Yourself • Ask for all relevant information • Do not agree to impossible things • Don’t imply precision where none exists • Caveat and disclaim

28. The Client Who Books Reserves At the Low End of Your Range • 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

29. Thoughts About Additional Protective Steps • Management Representation Letters • Explicit Language About Reliance on Others • Greater Discussions With Auditors • 2004 NAIC annual statement instruction changes with respect to interactions between auditor and appointed actuary with respect to data. • Professional activities (ASOPs, etc)

30. Peer Review • More stringent peer review when situation turns risky or master applies pressure • Never ignore peer reviewers comments and seek easier peer reviewer

31. Doing the Right Thing • Informing the Company’s Board or Audit Committee • Informing the Auditors • Informing Insurance Departments • Balancing confidentiality concerns • Retracting Opinions

32. 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.”

33. An Opinion is “in error” if: • 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.”

34. Notify DOI • 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.

35. Firing your Masters • When to resign • Business issue, not just legal issue • How to resign • Seek counsel • Consider getting fired instead

36. If you fear you’ve committed errors: • 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

37. Tell Your Attorneys • Privilege attaches when attorneys investigate • Your attorneys can help you evaluate options