the actuary as expert witness chuck mcclenahan, fcas mmc enterprise risk cas seminar on ratemaking -...

The Actuary as Expert Witness

Chuck McClenahan, FCAS

MMC ENTERPRISE RISK

CAS Seminar on Ratemaking - March, 2002

CAS Seminar on RatemakingMarch, 2002 2

AGENDA

• What is an Expert Witness?

• Venues for the Actuarial Expert

• Issues for the Actuarial Expert

• Training for the Actuarial Expert

AGENDA (Continued)

• Professional Standards

• Working with Attorneys

• Practical Examples

• Some Advice

What is an Expert Witness?

• “An expert is a person who has made all the mistakes that can be made in a very narrow area.”

- Niels Bohr

• ASOP #17 - Expert Testimony by Actuaries

Expert - One who is qualified by knowledge,

skill, experience, training, or education to render

an opinion or otherwise testify concerning the

matter at hand

• Federal Rules of Evidence - Rule 702

Testimony by Experts - If scientific, technical,

or other specialized knowledge will assist the trier

of fact to understand the evidence or to determine

a fact in issue, [an expert witness] may testify

thereto in the form of an opinion or otherwise.

• Lay (non-expert) witnesses may not offer opinion testimony

• Expert witnesses may offer opinions based upon knowledge, skill, experience, training or education

Venues for the Actuarial Expert

• Rate or other administrative hearings

• Arbitration, ADR, or other extra-judicial proceedings

• Depositions, declarations and affidavits

• Testimony in court

Issues for the Actuarial Expert

• Actuarial present values - benefits, divorce

• Adequacy of rates, reserves

• Impact of financing alternatives

• Actuarial malpractice

• Relationship between risk and return

• Insurance company valuation

Training for the Actuarial Expert

• “An expert is a person who avoids small error as he sweeps on to the grand fallacy.”

- Benjamin Stolberg

• Federal Rules of Evidence - Rule 703The facts or data in the particular case upon which the expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence.

• Three Sources for Facts or Data– Firsthand observation by expert– Presentation at the trial– Presentation outside of court

Sources for Facts or Data

• Firsthand Observation by Expert– Example - testimony by treating physician

– Actuarial expert testimony generally not firsthand observation

• Presentation at the Trial– Hypothetical questions, or

– Expert attends trial, hears testimony

• Presentation outside of court– Extends beyond expert’s own perception

– Must be “of a type reasonably relied upon by experts in the particular field”

• Additional Skills Required– Ability to explain complex issues simply– Ability to construct logical sequence of questions– Ability to stand up under cross-examination– Ability to work quickly under pressure– Good memory -short/long term- for prior testimony

Professional Standards

• Qualification Standards

• ASP 17 - Expert Testimony by Actuaries

• ASP 9 - Documentation and Disclosure

• Qualification Standards

– Code of Professional Conduct - Precept 2

– Qualification Standards for Prescribed Statements of Actuarial Opinion

• ASP 17 - Expert Testimony by Actuaries

– Revision being considered by ASB

– Standard provides good guidance and useful advice

• ASP 9 - Documentation and Disclosure

– Requires documentation whether or not there is a legal requirement

– Must be sufficient for another actuary to evaluate work

Working With Attorneys

• “An expert knows all the answers - if you ask the right questions.”

- Unknown

• Q: Now doctor, isn't it true that when a person dies in his sleep, he doesn't know about it until the next morning?

• Lawyer: "Now, Mrs. Johnson, how was your first marriage terminated?"

• Witness: "By death."

• Lawyer: "And by whose death was it terminated?"

• Problems Presented by Actuaries

– Threatening Subject

– Personality (or Lack Thereof)

– Complex Issues

• Threatening Subject

– Jury hates, doesn’t understand math

– Actuary must make it interesting

– Actuary must make it simple

• Personality

– “I’m not weird, just unusual”

– “I understand this is difficult”

– “I’m here to help you understand”

• Complex Issues

– Actuary must simplify

– Visual aids where possible

– Do not condescend or patronize

• Problems Created by Attorneys

– Attempting to paraphrase

– Attempting to stretch or bend opinion

– Attempting to summarize

• Attempting to Paraphrase

– Language of actuarial science very precise

– Each word can be important

– Ask the question as written• Precise questions yield predictable answers

• Attempting to Stretch or Bend Opinion

– Expert has obligation to avoid misleading testimony

– Limitations and underlying assumptions must be disclosed

• Attempting to Summarize

– Lawyers like simple answers

– Rarely are the answers simple

– Expert has obligation to avoid misleading

• Jargon

– Actuaries Have Their Own Language• “Cohort” “Credibility” “Severity” “Convolution”

– Best to Avoid Jargon• “Group” “Weight” “Average Loss” “Possible

Event”

Practical Examples

• “When facts are few, experts are many.”

- Donald R. Gannon

Practical Examples

• Rate Hearing

• Civil Litigation

• Criminal Trial

Rate Hearing

• Generally One of Three Parties

– Filer

– Regulator

– Consumer Advocate

Rate Hearing

• Quasi-judicial

• Before Hearing Officer (Usually Regulator)

• Departures from Rules of Evidence

• Often Pre-Filed Testimony

• High Degree of Actuarial Advocacy

Rate Hearing

• Advantages

– General understanding of actuarial issues

– Low expectations

– Reliance on pre-filed testimony

Rate Hearing

• Disadvantages

– Advocacy often trumps expertise

– Rules, Regulations, Rulings

– Politics, Politics, Politics

Rate Hearing

• Recommendations

– Know the filing, the history, the environment– Understand the theoretical underpinnings– Don’t overstate precision or reliability– Advocacy should not define testimony

Rate Hearing

• Example: What is the proper profit provision and how should it be reflected in the rates?

Civil Litigation

• State or Federal Court

• Bench Trial or Jury Trial

• Relies Heavily on Depositions

• Generally Formal Expert Reports

• Some Actuarial Advocacy

Civil Litigation

• Advantages

– Adequate time, documents for preparation

– Much testimony through deposition

– Less advocacy than rate hearings

Civil Litigation

• Disadvantages

– Little understanding of actuarial issues

– Juries lack education, focus

– Cross-examination brutal

Civil Litigation

• Recommendations

– Thorough knowledge of subject matter– Triple-check all calculations– Mock cross-examination– Be consistent with prior testimony– Document everything

Civil Litigation

• Example: Should the reserving actuary have anticipated all or part of the adverse development?

Criminal Trial

• Advantages

– Interesting application of actuarial science

– Chance to meet a new group of people

Criminal Trial

• Disadvantages

– Pressure

– Threats - real or implied

Criminal Trial

• Recommendations

– Avoid advocacy at all costs

– Act as though you were the expert for both sides

– Keep it simple

Criminal Trial

• Example: What are the chances that four homes owned by a single individual over a nine year period would be substantially destroyed by fire through random occurrence?

Some Advice

• “If the world should blow itself up, the last audible voice would be that of an expert saying it can’t be done.” - Peter Ustinov

Some Advice

• Rate hearing experience before litigation

• Deposition before court testimony

• Mock cross-examination

• If you don’t love it, don’t do it

The Actuary as Expert Witness

• “If your mind is empty, it is always ready for anything; it is open to everything. In the beginner’s mind there are many possibilities; in the expert’s mind there are few.”

- Shunryu Suzuli

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