Skit on Reserving

1. Skit on Reserving Committee on Professionalism Education

2. Skit Background • Linda, an FCAS, is the Chief Actuary for a mid-size company writing only Workers’ Compensation insurance in a large state. • Linda has the responsibility of signing the Statement of Actuarial Opinion for the company. • In the past two years, this state has passed several reforms which limit the amounts of compensation to be paid out in a variety of circumstances. • There have been and continue to be attempts to have these reforms repealed but as of yet these have been unsuccessful.

3. Skit Background • Mike, also an FCAS, is the internal actuary who leads the reserving unit for the company. Using reasonable assumptions, he has developed a best estimate of the loss and loss adjustment expense reserves that he believes the company should book for the December 31, 2011 evaluation. • Fred, an FCAS as well, is the actuary from the company’s auditing firm. Using reasonable assumptions, he has calculated a range in which he believes the best estimate should fall. Mike’s best estimate is above the high end of Fred’s range.

4. Skit Background Fred and Mike have discussed the situation and it is due to different opinions with respect to both the actual effectiveness of the reforms and the possibility of those opposing them being successful in repealing any one or even all of the reforms. All three actuaries are meeting to discuss the findings.

5. Legal Disclosure The views expressed by the panelists are their own and may not necessarily reflect those of their respective employers.

6. Lights, Camera, Action!

7. Considerations in Making Selection • From the standpoint of choosing between the two recommendations, what are the key considerations for Linda? • Does Linda have the relevant information to make a decision?

8. Professional Guidance From ASOP 43 – definition of “Actuarial Central Estimate” Estimate that represents an expected value over the range of reasonably possible (but not all possible) outcomes Typical actuarial methods do not produce true “expected values” and exclude doomsday and/or systematic shocks in the tail of the distribution Estimate that in the actuary’s professional judgment, is neither optimistic nor pessimistic Definition intended to clarify the concept rather than assign a precise statistical measure, as commonly used actuarial methods typically do not result in a statistical mean

9. Professional Guidance From ASOP 43 – required disclosures • Intended Purpose or Use • Constraints/Limitations • Scope of the Unpaid Claim Estimate • Dates • Significant events, assumptions, or reliances • Type of range (if applicable) • Changes in assumptions, procedures, methods, or models if material • Reliance on Single Method • Deviation from Standard

10. Professional Guidance • CAS Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves • Principle 3: The uncertainty inherent in the estimation of required provisions for unpaid losses or loss adjustment expenses implies that a range of reserves can be actuarially sound. • Principle 4: The most appropriate reserve within a range of actuarially sound estimates depends on both the relative likelihood of estimates within the range and the financial reporting context in which the reserve will be presented.

11. Professional Guidance CAS Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves – Considerations Settlement Patterns Development Patterns External Influences

12. Audience Discussion on Considerations for Making Selection

13. Additional Considerations in Making Selection What are Linda's obligations to her employer? What, if any, are Linda's obligations to Mike? To what extent can and should Linda allow Mike's personal appeal to affect her decision?

14. Professional Guidance • 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.”

15. Professional Guidance Precept 3 of the Code of Conduct: “An Actuary shall ensure that Actuarial Services performed by or under the direction of the Actuary satisfy applicable standards of practice”

16. Professional Guidance • 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.”

17. Audience Discussion on Other Considerations

18. Possible Courses of Action • Alternative 1 – Linda is on the fence between the two recommendations; she takes Mike’s appeal to heart and it is a key factor in choosing his recommendation • Alternative 2 – Linda is on the fence between the two recommendations; she is troubled by Mike’s behavior (both as reported by Fred and as she observed herself in their subsequent meeting) and starts to question his judgment as a result; this is a key factor in choosing Fred’s recommendation

19. Possible Courses of Action Alternative 3 – Linda, in her decision-making process, disregards her interactions with Mike and Fred subsequent to the meeting; she is ultimately swayed by Mike’s analysis and goes forward with his recommendation Alternative 4 – Linda, in her decision-making process, disregards her interactions with Mike and Fred subsequent to the meeting; she is ultimately swayed by Fred’s analysis and goes forward with his recommendation

20. Key Takeaways • The politics of workplace interactions can cause an actuary to blur ethical lines • Know the Standards relevant to the work you are doing and apply them appropriately