By Richard Kutikoff
Actuaries love to measure risk. Risk is directly involved in our calculations: Mortality/longevity risk. Morbidity risk. Turnover risk. Investment return risk. Asset/liability mismatch risk. Risk of underprovision for expenses. Risk of bad data. Risk that our models are incorrect.
These are the technical areas that actuaries are trained to analyze. We love this stuff! Sometimes these can be quantified in great detail; other times, merely the direction and orders of magnitude are the best we can do.
Unfortunately, the real world is never as simple as plugging perfect data into perfect software, which produces a nice, neat set of numbers that the actuary publishes and goes on their merry way.
The following are some of the risks to the actuary:
1. Are you uncomfortable with
- a rushed project, with no time for peer review, so you just send the numbers out?
- a client who wants a lower required contribution or liability, so you select aggressive assumptions or methodology?
- a client who wants a larger deductible contribution, so you select conservative assumptions or methodology?
- having suspect data, so you make broad assumptions because you don’t have the time or budget for adequate research?
- having a technical issue that nobody else can or will figure out, so you ignore it?
- having a conflict of interest?
- having a client misinterpret or misuse your results?
2. Are you worried about defending inadequately prepared (or erroneous) results
- to your boss?
- to your client (who might be audited by the IRS)?
- to another actuary (especially one who would like to take this client away from you)?
- to an adversarial attorney (maybe hired by the firm who purchased your client, and your report materially understated pension liabilities)?
- to the state insurance department, the IRS, or another regulator?
- to the Actuarial Board for Counseling and Discipline (ABCD)?
- Do you simply look bad to another actuary? Maybe you lose the client. Maybe you believe you can convince the regulators that you’re right; you’re smarter than they are, anyway. Maybe you can say, “I used my actuarial judgment, so back off.”
3. When you go home, how do you really feel about these situations?
- If you’re not having sleepless nights, you should worry.
- If there isn’t a knot in your stomach, you should worry.
- If these don’t seem too bad to you, you should worry.
- Are you worried about being sued or having your professionalism challenged?
4. Finally, lest you think that it’s only an issue
- for other practice areas (“I’m a life actuary, this is a problem only in the pension area”),
- only for smaller firms (“I work for a large company with research actuaries, outstanding training, and peer review. I’m not an independent actuary without these resources”), or
- for “the other guy”—
Hogwash. I’ve seen mistakes made by both national firms and by small independent firms. I’ve seen mistakes made in all practice areas. I’ve seen mistakes made by senior actuaries with 30 years’ experience, as well as by young actuaries with minimal credentials.
These are some of the risks to the actuary.
I know that I’m painting a particularly grim picture. OK, it’s my paintbrush. In reality, the vast majority of work performed by actuaries is good, quality work. Our profession has a strong reputation for providing reliable, professional results; relatively few situations rise to the level of formal complaints or litigation. That’s important because we are relied upon to quantify some very arcane and often large liabilities.
But things do go wrong. And when they do, it can be harmful to the actuary. Harmful to the actuary’s employer. Harmful to the reputation of the profession.
So, what can you do about it?
1. Read the Code of Professional Conduct. It’s concise, but it’s important. And then follow it.
Here is a list of the items included in the Code of Professional Conduct:
- Precept 1: Perform your work with skill
and care; don’t help a client evade the law.
- Precept 2: Don’t do work you’re not fully qualified to do.
- Precept 3: Follow the actuarial standards of practice (ASOPs). These are the technical details; read them.
- Precept 4: Make sure your communications are clear.
- Precept 5: Identify your client in your reports.
- Precept 6: Disclose to your principal all compensation received from other sources.
- Precept 7: Be very careful about conflicts of interest.
- Precept 8: Ensure that your work is not used to mislead other parties.
- Precept 9: Respect confidentiality.
- Precept 10: Cooperate with other actuaries and regulators.
- Precept 11: Do not engage in false or misleading advertising.
- Precept 12: Use titles in a proper manner.
- Precept 13: Report actuaries in violation of the Code of Professional Conduct.
- Precept 14: Respond promptly, truthfully, and fully to any information request from a disciplinary body of the profession.
Read the definitions in the Code of Professional Conduct. Know what conduct is covered and what is not covered. Know who your client is. Understand what materiality is—the focus is not on minutiae.
Sounds simple, right? Yet violations are often quite obvious after the fact. The challenge is to prevent them before they happen.
- Sloppy work? How sloppy does it have to be to become a violation of skill and care?
- The client wants to play it “fast and loose.” Would it be evading the law?
- You’re assigned a project that you’re not qualified to do. Should you decline it?
- A client fired you and you’re really upset, so you won’t give anything to the new actuary. Or your boss tells you to ignore their requests. Is this a lack of cooperation?
Ask yourself, “Am I doing this? How would I defend myself?” Look in the mirror.
2. Ask yourself, “Am I getting complacent? Am I as rigorous the tenth time around as the first time?”
- Don’t take shortcuts. Use checklists. Insist on peer review.
- Take the time to think about the results. Are they reasonable? Don’t fall into the “It must be right, it came from the computer” trap.
- Document your work. It will force you to identify your work process and can show your rationale if your work is challenged.
- Worry about the consequences of getting it wrong.
3. Ask yourself, “Am I keeping up with current rules?”
- Go to training sessions.
- Join study groups.
- Go to webinars or conferences.
At a minimum, this can enable you to satisfy the continuing education requirements.
When I attend conferences, I often wonder about the amount of new information that I get. If it’s a lot of new information, I’m not happy—how long have I been missing this information, and what mistakes have I made in the meantime? If it’s very little new information, am I listening hard enough?
4. Learn from the mistakes of others. You might be aware of errors made by other actuaries. Maybe by someone in your firm. Maybe on a takeover case. Maybe just by talking with other actuaries.
- Learn the facts of the case and look in the mirror. Ask yourself—if you were in that situation, would you have made the same mistakes without the benefit of hindsight?
- Airplane accidents are very uncommon, but they get highly scrutinized to find likely causes. The results are used to update pilot training—to learn from the mistakes of others.
- Hospitals review medical treatment when patients die. These reviews are designed to determine whether proper medical care was provided and how they can improve.
I’m not trying to equate loss of lives with the consequences of our errors—just the concept of learning from past mistakes to prevent future mistakes.
5. When in doubt, ask.
- Ask your boss, or another actuary in your firm.
- Ask an outside actuary who you’ve worked with in the past or met at a conference.
- Use the ABCD as a resource. There is a Request for Guidance (RFG) process that enables actuaries to ask confidential questions about how to handle difficult situations. The ABCD handles many more RFGs than complaints, so many actuaries are being proactive.
6. Refuse the assignment.
Sometimes the prudent course of action is not to do the work. It may be difficult if your boss insists on the work being done; perhaps there is a workable middle-ground. It may be difficult if it’s your company and you want the revenue. But you are a professional. If another actuary decides to handle this work, that would make it the other actuary’s problem, not your problem.
Most clients and bosses want to do the right thing. Sometimes, they need to be pushed a bit, and our professionalism obligates us to do so. Then, there are the clients or bosses who say “I don’t care about your professionalism. This is what I want.” Do you want to work for them?
* * * * *
All of this is training ourselves to think of the risk of improper work. To look in the mirror. To make it part of our work practice. To worry how would we defend ourselves. Not paranoia, but a healthy skepticism. Will it guarantee perfect results? No, but it should minimize the likelihood or severity of adverse results—to mitigate the risk to the actuary.
RICHARD KUTIKOFF, MAAA, FSA, MSEA, EA, is a member of the Actuarial Board for Counseling and Discipline.