A Legal Eye ForA Legal Eye ForThe Actuary GuyThe Actuary Guy

(and Gal)(and Gal)

R. Timothy MuthSandra Zunker Brown

Reinhart Boerner Van Deuren s.c.1000 North Water StreetMilwaukee, WI 53202

(414)-298-1000www.reinhartlaw.com

2004 Casualty Loss Reserve Seminar -- Sessions 2 & 5

First, The CaveatsFirst, The Caveats

This is general advice only—for This is general advice only—for specifics, consult your own attorney.specifics, consult your own attorney.

There are no guarantees: lawsuits There are no guarantees: lawsuits happen to good actuaries happen to good actuaries (settlements too).(settlements too).

The Problem: The Problem: Actuaries Are Too PopularActuaries Are Too Popular

““[A]ctuaries have become an [A]ctuaries have become an increasingly popular target for increasingly popular target for litigation over the last decade, with litigation over the last decade, with scores of suits by clients and third scores of suits by clients and third parties alleging injury from an parties alleging injury from an actuarial opinion or report.”actuarial opinion or report.”

Dailey & Selznick, “Recent Developments in Dailey & Selznick, “Recent Developments in Actuarial Malpractice Litigation,” Mealy’s Litigation Actuarial Malpractice Litigation,” Mealy’s Litigation Report, page 1, January 8, 2004.Report, page 1, January 8, 2004.

Litigation Against Litigation Against Actuaries is IncreasingActuaries is Increasing

50 lawsuits reported between 1971 and 200150 lawsuits reported between 1971 and 2001 14 lawsuits reported in 2003 alone14 lawsuits reported in 2003 alone Reported suits are the tip of the iceberg, as Reported suits are the tip of the iceberg, as

most lawsuits settle without a reported most lawsuits settle without a reported decisiondecision

Post-Enron world makes claims more likelyPost-Enron world makes claims more likely Consultants and company actuaries are Consultants and company actuaries are

targetstargets S&P report targets actuariesS&P report targets actuaries

S&P’s Complaint About S&P’s Complaint About Casualty ActuariesCasualty Actuaries

Casualty Actuaries have “an abysmal Casualty Actuaries have “an abysmal track record” of “signing off on track record” of “signing off on reserves that turn out to be wildly reserves that turn out to be wildly inaccurate.” inaccurate.”

Casualty Actuaries are guilty of Casualty Actuaries are guilty of either “naivete or knavery.”either “naivete or knavery.”

Our Conclusion?Our Conclusion?

ACTUARIES NEED A ACTUARIES NEED A MAJOR MAJOR MAKEOVERMAKEOVER

Hot Tips of the DayHot Tips of the Day

Know your mastersKnow your masters Resist pressureResist pressure Know who you are (and who you are Know who you are (and who you are

not)not) Understand the big pictureUnderstand the big picture Protect yourself Protect yourself Do the right thingDo the right thing Seek counselSeek counsel

Who Are Your Masters?Who Are Your Masters?

The Public? The Public? The litigation environment after Enron The litigation environment after Enron

and Worldcom contains an unrealistic and Worldcom contains an unrealistic expectation that professionals can expectation that professionals can safeguard “the public.” safeguard “the public.”

Insurance Commissioners?Insurance Commissioners? The “Last Professional In” problem for The “Last Professional In” problem for

insurance company insolvenciesinsurance company insolvencies Clients and management = mastersClients and management = masters

Why You Must Know Your Why You Must Know Your MastersMasters

Masters invoking the 5th amendment Masters invoking the 5th amendment privilege against self-incrimination privilege against self-incrimination because they are under indictment because they are under indictment can’t help youcan’t help you

Actuaries are ill-equipped to protect Actuaries are ill-equipped to protect the public from crooks and other the public from crooks and other persons who want to mislead or persons who want to mislead or deceive.deceive.

What Experience ShowsWhat Experience Shows

Some type of masters and some Some type of masters and some types of assignments are more likely types of assignments are more likely to generate disputes and litigationto generate disputes and litigation

A common factor: small A common factor: small jobs/budgets/clients generate a jobs/budgets/clients generate a disproportionate amount of claims.disproportionate amount of claims.

Masters Likely to Get Masters Likely to Get You SuedYou Sued

Masters in financial troubleMasters in financial trouble Unsophisticated MastersUnsophisticated Masters Masters who are changing actuariesMasters who are changing actuaries Masters who are changing auditing Masters who are changing auditing

firmsfirms Assignments with very short Assignments with very short

deadlinesdeadlines

Masters Likely to Get Masters Likely to Get You SuedYou Sued

Masters who have sued financial Masters who have sued financial professionalsprofessionals

Masters with significant adverse Masters with significant adverse development in past yeardevelopment in past year

Masters with significant jumps in Masters with significant jumps in written premiumwritten premium

Masters who pressure you Masters who pressure you

Screening Is for Screening Is for EveryoneEveryone

What we mean by screeningWhat we mean by screening Screening is a continual process. Screening is a continual process.

Each new assignment should include Each new assignment should include a reassessment of situationa reassessment of situation

In house actuaries need to be aware In house actuaries need to be aware of changes in management/situation of changes in management/situation that makes their job more riskythat makes their job more risky

You Must Deal With You Must Deal With The Reality of The Reality of

PressurePressure

What Pressure Can DoWhat Pressure Can Do

Create an adversarial relationship Create an adversarial relationship Sway you from a neutral evaluator of Sway you from a neutral evaluator of

facts and data to an advocatefacts and data to an advocate

Pressure From MastersPressure From Masters

Pressure in the context of business Pressure in the context of business imperativesimperatives

Pressure in the context of client-Pressure in the context of client-consultant imperativesconsultant imperatives

Pressure From the Pressure From the GovernmentGovernment

California Work Comp Form California Work Comp Form Including Savings from AB 227 and Including Savings from AB 227 and 228:228: ““I hereby certify that the rates shall be I hereby certify that the rates shall be

adequate to cover the insurer’s losses adequate to cover the insurer’s losses and expenses.”and expenses.”

““I understand that the Insurance I understand that the Insurance Department will rely on this certification Department will rely on this certification and it will be posted on the Department’s and it will be posted on the Department’s website.”website.”

Taking the Master’s Taking the Master’s Word:Word:

We’ve strengthened case reservesWe’ve strengthened case reserves We’ve sped up paying claimsWe’ve sped up paying claims We’ve taken steps which will lower We’ve taken steps which will lower

ALAEALAE We’ve re-underwritten our book; our We’ve re-underwritten our book; our

new business is betternew business is better Each of these may and should be Each of these may and should be

considered by an actuary in considered by an actuary in performing a reserve opinion.performing a reserve opinion.

Responding to PressureResponding to Pressure

Do consider all relevant information Do consider all relevant information Your best estimate is the best Your best estimate is the best

numbernumber Think long termThink long term Create a paper trail Create a paper trail Seek help from others Seek help from others Do not lose your professional Do not lose your professional

independenceindependence

ASOP 41ASOP 41

Requires disclosure if an actuary is Requires disclosure if an actuary is acting as an advocate.acting as an advocate.

If you are not a disclosed advocate, If you are not a disclosed advocate, you are presumed to be a neutral you are presumed to be a neutral evaluator.evaluator.

Difficult to serve as a neutral Difficult to serve as a neutral evaluator once you have acted as an evaluator once you have acted as an advocate.advocate.

Your independent professional Your independent professional judgment is not up for negotiation.judgment is not up for negotiation.

Avoid Letting Other Avoid Letting Other People Make You Over People Make You Over

Into Something You Into Something You Are NotAre Not

Actuaries Are Not Actuaries Are Not AuditorsAuditors

Plaintiff attorneys are deliberately Plaintiff attorneys are deliberately trying to blur the role of actuary and trying to blur the role of actuary and auditor.auditor.

Plaintiffs now bring claims alleging Plaintiffs now bring claims alleging that actuaries missed “red flags” about that actuaries missed “red flags” about the finances at an insurance company.the finances at an insurance company.

ASOP 23 on Data Quality states, “This ASOP 23 on Data Quality states, “This standard does not recommend that the standard does not recommend that the actuary audit data.”actuary audit data.”

Actuaries Are Not Actuaries Are Not AttorneysAttorneys

Plaintiffs’ attorneys are trying to blur the role Plaintiffs’ attorneys are trying to blur the role between actuaries and attorneys.between actuaries and attorneys.

Plaintiffs now bring claims alleging that Plaintiffs now bring claims alleging that actuaries failed to properly advise them on actuaries failed to properly advise them on legal issues/documents.legal issues/documents.

ASOP 34 (Plan Benefits in DR Actions) provides ASOP 34 (Plan Benefits in DR Actions) provides that actuaries “should avoid the unauthorized that actuaries “should avoid the unauthorized practice of law” and that “the question of practice of law” and that “the question of whether the proposed order meets the state’s whether the proposed order meets the state’s procedural requirements is a legal one and is procedural requirements is a legal one and is beyond the qualifications of actuaries who are beyond the qualifications of actuaries who are not also attorneys.” not also attorneys.”

Actuaries Are Not Actuaries Are Not ReinsurersReinsurers

Plaintiff’s attorneys and others want Plaintiff’s attorneys and others want to expand what the actuary’s opinion to expand what the actuary’s opinion implies about reinsurance – and to implies about reinsurance – and to make you into a reinsurer if there is a make you into a reinsurer if there is a shortfall.shortfall.

What should an actuary know about What should an actuary know about reinsurance?reinsurance?

What should the actuary know about What should the actuary know about other significant balance sheet items?other significant balance sheet items?

Reinsurance IssuesReinsurance Issues

KPMG being sued in Missouri for $1B--in KPMG being sued in Missouri for $1B--in part for failure to determine whether part for failure to determine whether treaties transferred risk and were treaties transferred risk and were collectible.collectible.

$17.5M verdict in Arizona against actuarial $17.5M verdict in Arizona against actuarial firm involved reinsurance collectibility.firm involved reinsurance collectibility.

Other current suits also include allegations Other current suits also include allegations about actuaries’ obligation to understand about actuaries’ obligation to understand legal terms of reinsurance contracts.legal terms of reinsurance contracts.

Guidance from the Guidance from the ASOPsASOPs

What is the meaning of ASOP 36 What is the meaning of ASOP 36 “consideration” of recoverability?“consideration” of recoverability?

Can you rely on summaries of Can you rely on summaries of reinsurance treaties?reinsurance treaties?

Protect YourselfProtect Yourself

Ask for all relevant informationAsk for all relevant information Do not agree to impossible thingsDo not agree to impossible things Don’t imply precision where none Don’t imply precision where none

existsexists Caveat and disclaimCaveat and disclaim

The Client Who Books The Client Who Books Reserves At the Low End of Reserves At the Low End of

Your RangeYour Range Display that rangeDisplay that range Consider explicit statement in SAO Consider explicit statement in SAO

that master is booking at low end or that master is booking at low end or that deviation is more likely to be that deviation is more likely to be unfavorable than favorableunfavorable than favorable

Thoughts About Thoughts About Additional Protective Additional Protective

StepsSteps Management Representation LettersManagement Representation Letters Explicit Language About Reliance on Explicit Language About Reliance on

OthersOthers Greater Discussions With AuditorsGreater Discussions With Auditors

2004 NAIC annual statement 2004 NAIC annual statement instruction changes with respect to instruction changes with respect to interactions between auditor and interactions between auditor and appointed actuary with respect to data.appointed actuary with respect to data.

Professional activities (ASOPs, etc)Professional activities (ASOPs, etc)

Peer ReviewPeer Review

More stringent peer review when More stringent peer review when situation turns risky or master situation turns risky or master applies pressureapplies pressure

Never ignore peer reviewers Never ignore peer reviewers comments and seek easier peer comments and seek easier peer reviewerreviewer

Doing the Right ThingDoing the Right Thing

Informing the Company’s Board or Informing the Company’s Board or Audit CommitteeAudit Committee

Informing the AuditorsInforming the Auditors Informing Insurance DepartmentsInforming Insurance Departments Balancing confidentiality concernsBalancing confidentiality concerns Retracting OpinionsRetracting Opinions

NAIC Annual Statement NAIC Annual Statement InstructionsInstructions

Appointed actuary must notify Board Appointed actuary must notify Board or Audit committee, in writing, or Audit committee, in writing, within 5 business days, and provide within 5 business days, and provide amended Opinion, if the actuary amended Opinion, if the actuary determines that her Opinion “was in determines that her Opinion “was in error as a result of reliance on data error as a result of reliance on data or other information (other than or other information (other than assumptions) that, as of the balance assumptions) that, as of the balance sheet date, was factually incorrect.”sheet date, was factually incorrect.”

An Opinion is “in An Opinion is “in error” if:error” if:

It “would not have been issued or would It “would not have been issued or would have been materially altered had the have been materially altered had the correct data or other information been correct data or other information been used.”used.”

An Opinion is An Opinion is NOTNOT “in error” based on “in error” based on “data or information concerning events “data or information concerning events subsequent to the balance sheet date or subsequent to the balance sheet date or because actual results differ from those because actual results differ from those projected.”projected.”

Notify DOINotify DOI

If insurer fails to forward amended If insurer fails to forward amended Opinion to Commissioner and notify Opinion to Commissioner and notify actuary within 5 business days.actuary within 5 business days.

That the submitted Opinion should That the submitted Opinion should no longer be relied upon.no longer be relied upon.

Firing your MastersFiring your Masters

When to resignWhen to resign Business issue, not just legal issueBusiness issue, not just legal issue

How to resignHow to resign Seek counselSeek counsel Consider getting fired insteadConsider getting fired instead

If you fear you’ve If you fear you’ve committed errors:committed errors:

Seek counsel on how to do the right Seek counsel on how to do the right thing thing

Do not write to the master pointing Do not write to the master pointing out and quantifying your errorsout and quantifying your errors

Do not write discoverable internal Do not write discoverable internal reports reports

Tell Your AttorneysTell Your Attorneys

Privilege attaches when attorneys Privilege attaches when attorneys investigateinvestigate

Your attorneys can help you evaluate Your attorneys can help you evaluate options options