By William Hines
I work for a U.S.-based office of an international consulting firm. I joined the firm more than 20 years ago when many of our clients were based in the areas local to my office. But consolidation in the insurance industry has reduced the number of local insurers and increased the international presence of many of the remaining companies.
The evolution of regulatory systems and innovation in the funding of insurance reserve and capital requirements have made it more common for insurers to move business from one jurisdiction to another to minimize the cost of providing insurance products. As a result, my current client base is from jurisdictions all over the world, with a large part of my practice focused on insurers based in Bermuda and the Cayman Islands. The parent companies of these insurers are often based in other countries. If I am a U.S.-based actuary providing services to an entity in another country and might also be providing services to its parent in a third country, what code of conduct and standards of practice do I follow?
The Code of Professional Conduct (“Code”) in the United States applies to any member of the five U.S.-based organizations, all of which have adopted it, and to all of such actuary’s conduct (whether or not the actuary is performing actuarial work), regardless of the jurisdiction in which the conduct occurs. The Code as we know it today was promulgated by the U.S.-based actuarial organizations, effective January 1, 2001. It was adopted by all U.S.-based actuarial organizations without variation. The Code is the glue that ties all other U.S. professionalism elements together—namely, the U.S. Qualification Standards, the Actuarial Standards Board, and the Actuarial Board for Counseling and Discipline. When practicing internationally, the Code provides the framework for understanding your responsibilities and managing professional risk.
Precept 2 of the Code requires actuaries to perform professional services only when they are qualified to do so on the basis of basic and continuing education and experience. Precept 2 also requires actuaries to satisfy applicable qualification standards for the jurisdiction in which they provide Actuarial Services.
Annotation 2-1. It is the professional responsibility of an Actuary to observe applicable qualification standards that have been promulgated by a Recognized Actuarial Organization for the jurisdictions in which the Actuary renders Actuarial Services and to keep current regarding changes in these standards.
Annotation 2-2. The absence of applicable qualification standards for a particular type of assignment or for the jurisdictions in which an Actuary renders Actuarial Services does not relieve the Actuary of the responsibility to perform such Actuarial Services only when qualified to do so in accordance with this Precept.
Annotation 2-1 of the Code refers to observing qualification standards in jurisdictions where the actuary renders actuarial services (emphasis added). At first glance, where an actuary renders services appears to be a simple factual matter, but the globalization of financial services has made it more complicated. For example, consider a multinational company or insurance group headquartered in a European country, with its U.S.-qualified and U.S.-based actuaries performing valuation work on insurance products reinsured from Latin American markets. Their work may even include multiple valuations using various sets of actuarial or accounting rules to satisfy different financial reporting requirements. Likewise, the results may be available to a variety of users in different areas of the company. Clearly, the work is international and several jurisdictions are involved. Under the Code, Actuarial Services are considered to be rendered in the jurisdictions in which the Actuary intends them to be used. For example, the intended use of an actuarial report may be for a clearly defined, specific, and localized matter, despite the fact that its subject matter, or the Principal’s corporate structure, may point to a broader scope. Also, the geographic location of the Principal may not be where the Principal intends to use the work product. In such cases, explicit disclosure of the work product’s intended purpose and of the jurisdiction where it is intended to be used could be helpful. Such a disclosure could help users select which valuation, among multiple valuations that might be available, is appropriate. It might also be helpful in identifying the professional standards with which the actuary should comply.
Qualification standards may be defined by local regulation. For example, to serve as an approved actuary for signing reserve opinions in Bermuda, an actuary must satisfy the “fit and proper” criteria of the Bermuda Monetary Authority (BMA). According to the BMA’s guidance note on issuing reserve opinions for its Economic Balance Sheet (EBS)—Actuary’s Opinion on EBS Technical Provisions [abbreviated “TPs” below]—“A person will generally be considered fit and proper to serve as an Actuary if the person:
a) Is a qualified member in good standing of the Institute and Faculty of Actuaries (in the UK), the Canadian Institute of Actuaries, the Casualty Actuarial Society (in the US), the Society of Actuaries (in the US), the Institute of Actuaries of Australia or a Full Member Association of the Actuarial Association of Europe (in the EU);
b) Meets the education, examination and experience requirements to be considered qualified to sign statutory statements of actuarial reserve opinions by their credentialing actuarial body(s) as listed in 23a [preceding paragraph];
c) Meets the continuing professional development requirements promulgated by their credentialing actuarial body(s);
d) Has experience in evaluating TPs for the business as written by the insurer, including being appropriately conversant with the Authority’s established EBS valuation requirements; and
e) Is not subject to any actual, potential or perceived conflicts that may prevent the Actuary from objectively fulfilling their role.”
These requirements are similar to but different from those imposed on actuaries providing reserve opinions in the U.S.
Actuarial Standards of Practice
Precept 3 states, “An Actuary shall ensure that Actuarial Services performed by or under the direction of the Actuary satisfy applicable standards of practice.” Annotation 3-1 states, “It is the professional responsibility of an Actuary to observe applicable standards of practice that have been promulgated by a Recognized Actuarial Organization for the jurisdictions in which the Actuary renders Actuarial Services, and to keep current regarding changes in these standards.” Annotation 3-2 states, “Where a question arises with regards to the applicability of a standard of practice, or where no applicable standard exists, an Actuary shall utilize professional judgement, taking into account generally accepted actuarial principles and practices.”
The Code defines “Recognized Actuarial Organization” as an “organization that has been accepted for full membership in the International Actuarial Association [IAA] or a standards-setting, counseling, or discipline body to which authority has been delegated by such an organization.”
In other words, any qualification and practice requirements of a jurisdiction where the services are being rendered apply to the actuary rendering them.
While the U.S. Code is relevant to members of the U.S.-based actuarial organizations, lack of membership in a local actuarial organization does not excuse a U.S. actuary practicing in that jurisdiction from becoming familiar with the local code of conduct if the local code of conduct has been promulgated by a “Recognized Actuarial Organization.” For example, some of my Bermuda clients have parent companies domiciled in Japan. The Institute of Actuaries of Japan has a code of professional conduct that would be relevant if my work products were intended for use by Japanese affiliates of my Bermuda client.
Precept 8 requires actuaries to take reasonable steps to ensure that their services are not used to mislead other parties, which includes an obligation to recognize the risk of misinterpretation of Actuarial Communications. Annotation 8-1 of Precept 8 requires the actuary to take “reasonable steps” to include, as appropriate, limitations on the distribution and use of Actuarial Communications. This is particularly relevant in international practice, as actuarial work products may be distributed to those unfamiliar with the methodologies or terminology, or less comfortable with the language of the communication. In that sense, Precept 8 is closely related to Precept 4, which requires all communications to be clear and appropriate to the circumstances and the intended audience, in addition to satisfying applicable standards of practice.
It is useful for an actuary to disclose explicitly in the actuarial work product which actuarial standard(s) of practice was used and how it was applied. Especially in more complex cases, when more than one standard is considered, disclosing the rationale behind the choice and the reasons for any necessary adjustments can serve to highlight the importance of this decision.
The work of actuaries, like the business of insurance, is increasingly global in nature. Actuaries working from the U.S. are often providing actuarial services to clients, affiliates, or management domiciled in other jurisdictions. Actuaries need to be aware of and comply with any requirements of the jurisdictions in which they render their services. The Code of Professional Conduct that we all must follow requires as much. The Academy’s Committee on Professional Responsibility has issued a paper, Considerations of Professional Standards in International Practice, which I recommend if you are interested in reading more about this topic.
WILLIAM HINES, MAAA, FSA, is a member of the Actuarial Board for Counseling and Discipline.