Professionalism and Precept 13: How Do I Comply In A Self ... · professionalism, including...

Copyright © 2012 by the American Academy of Actuaries

All Rights Reserved 1

Professionalism and Precept 13:

How Do I Comply In A Self-Regulating

Profession?

Southeastern Actuaries Conference

Fall 2012 – Annual Meeting – Baltimore, MD

Pre-Meeting Seminar – November 14, 2012



Panelists & Participants

Jeffrey C. Harper, MAAA, FSA, FCA, member of the

Committee on Professional Responsibility

Lloyd M. Spencer, Jr., MAAA, FSA, CERA, member of

the Committee on Professional Responsibility

You, our Esteemed Audience Members [MAAA, EA,

ACAS, FCAS, ACA, FCA, ASA, FSA, and/or CERA]



Disclaimers

Please note that the statements and opinions expressed

herein are solely those of the panelists and do not

constitute official statements or positions of the American

Academy of Actuaries (“the Academy”), any boards or

committees of the Academy or any other organization of

which the panelists are members.

The included hypothetical case studies are for

discussion purposes only and are not intended to

provide specific guidance for any particular situation.

Please contact the ABCD for specific guidance regarding

your particular situation.



Introduction to Professionalism

Overview of Professionalism Resources

[Partial] Index of Important References

An Overview of Precept 13

The Code, Discipline & Self-Regulating Professions

General Precept 13 Considerations

Issues Arising from the Practical Application of Precept 13

Hypothetical Case Studies

Questions

Agenda











Questions

Agenda



The American Society of Pension Professionals &

Actuaries (“ASPPA”)

The Casualty Actuarial Society (the “CAS”)

The Conference of Consulting Actuaries (the “CCA”)

The Society of Actuaries (the “SOA”)

The Southeastern Actuaries Conference (the “SEAC”)

Other actuarial organizations

Other insurance organizations

The American Academy of Actuaries (the “AAA” or “the

Academy”)

Role of The American

Academy of Actuaries



Activities of

The Academy



Vision and Mission of

the Academy



The American Academy of Actuaries’

mission is to serve the public

and the United States actuarial profession.

To accomplish this:

The Academy provides for the establishment, maintenance, and enforcement of high

professional standards of actuarial qualification, practice, and conduct;

The Academy advances actuarial practice by informing and educating its members on

public policy and professionalism issues and current and emerging practices;

[The Academy statement describes six other specific

activities – some also relevant to today’s topics]

Mission of

The Academy











Questions

Agenda



Resources within

The Academy



Council on Professionalism Committees

The Council on Professionalism oversees the Academy's work on

professionalism issues. The council manages the work of its committees, task

forces, and work groups, which are listed here.

The Academy's vice president for professionalism, Karen Terry, heads the

council and also serves on the Board of Directors and the Executive

Committee.

Resources within

The Academy



Resources within

The Academy



Code of Professional Conduct

The revised Code of Professional Conduct took effect Jan. 1, 2001. The code

identifies the professional and ethical standards required of actuaries who

belong to the Academy. It sets forth what it means for an actuary to act as a

professional. It identifies the responsibilities that actuaries have to the public,

to their clients and employers, and to the actuarial profession. Identical codes

have been adopted by the Society of Actuaries, the American Society of

Pension Professionals and Actuaries, the Casualty Actuarial Society, and the

Conference of Consulting Actuaries.

Resources within

The Academy



Preamble, Definitions, Precepts, and Annotations

Precepts – fourteen total

A command or principle intended as a general rule of action1

Identify the professional and ethical standards with which an

Actuary must comply in order to fulfill the Actuary’s

responsibilities to the public and to the actuarial profession2

Thirteen are “self-directed”; one is “other-directed”

Annotations – twenty-three total

A note added by way of comment or explanation1

Provide additional explanatory, educational, and advisory

material on how the Precepts are to be interpreted and applied2

1. From Webster 2. From The Code

Code of Professional

Conduct



Resources within

The Academy



Actuarial Standards of Practice

ASoPs provide guidance on the techniques, applications, procedures, and

methods that reflect appropriate actuarial practices in the United States.

[There are currently approximately 45 ASoPs

that have been adopted and remain in force]

Resources within

The Academy



Resources within

The Academy



Discussion Papers Discussion papers are primarily written and developed through the Academy’s

Committee on Professional Responsibility to promote actuarial

professionalism, including knowledge of standards of conduct, qualification,

and practice within the profession. These Discussion Papers suggest ways to

assist actuaries in improving their daily practice and increasing their

awareness of professionalism. Discussion papers are not promulgated by any

standard-setting body and are not binding upon any actuary.

[Nine papers have been written and accepted to date – and several

have been or are being revised. Soon there will be ten.]

Resources within

The Academy











Questions

Agenda



Council on Professionalism

Actuarial Board for Counseling and Discipline (“ABCD”)

Actuarial Standards Board (“ASB”)

Code of Professional Conduct (the “Code”)

Actuarial Standards of Practice (“ASoPs”)

Discussion Papers

[Partial] Index of Important

References











Questions

Agenda



PRECEPT 13

An Actuary with knowledge of an apparent, unresolved,

material violation of the Code [of Professional Conduct, or

“the Code”] by another Actuary should consider

discussing the situation with the other Actuary and

attempt to resolve the apparent violation.

If such discussion is not attempted or is not successful,

the Actuary shall disclose such violation to the

appropriate counseling and discipline body of the

profession, except where the disclosure would be

contrary to Law or would divulge Confidential Information.

Precept 13 Overview



PRECEPT 13 Annotations

ANNOTATION 13-1. A violation of the Code is deemed

to be material if it is important or affects the outcome of a

situation, as opposed to a violation that is trivial, does not

affect an outcome, or is one merely of form.

ANNOTATION 13-2. An Actuary is not expected to

discuss an apparent, unresolved material violation of the

Code with the other Actuary if either Actuary is prohibited

by Law from doing so or is acting in an adversarial

environment involving the other Actuary.

Precept 13 Overview











Questions

Agenda



Government-Regulated v. Self-Regulated Professions

Self-Regulatory Litmus Test: Consistent Delivery of Competent &

Ethical Services

Benefits of Professional Self-Regulation

Autonomy – Exercise of Professional & Personal Self-Determination

(within the bounds of the Litmus Test)

Imposition of Rational Requirements, Restrictions & Expectations

Risks of Professional Self-Regulation

Uneven Application of Discipline Perceived as Unfair?

Failure to Limit Unethical Behavior/Practice Invites a New Regulator

Recently, NAIC committees have been discussing adding regulation

to subject actuaries to discipline and control by state.

The Code, Discipline & Self-Regulating

Professions



Holding a Self-Regulated Profession to a High Ethical

Standard – Key Components of any code of professional

conduct

Training & Admission Requirements

Continuing Education

Conduct

Qualification

Practice

Professional Discipline – The Means for Enforcing the

Tenets of Professional Self-Regulation on a Membership


Professions



Challenges Surrounding Observed Code Violations

“Should Consider” Discussion with the Questioned Actuary

Tattling v. Whistle-Blowing v. Upholding Professional Integrity

Time Commitment

Perceived Damage to One’s Own Professional Reputation

Why is Reporting of Observed Code Violations Required?

Active Compliance Monitoring by Actuarial Organizations is

Impractical

Violations Often Not Obvious to those Outside the Profession

Alignment of Public, Professional, and Personal Interests


Professions











Questions

Agenda



PRECEPT 13

An Actuary with knowledge of an apparent, unresolved,

material violation of the Code [of Professional Conduct, or

“the Code”] by another Actuary should consider

discussing the situation with the other Actuary and

attempt to resolve the apparent violation (emphasis

added).

Precept 13 – General Considerations



“Apparent”

Clear, obvious, noticeable, or evident

“One can’t always judge a book by its cover”

Interpretation May Require Specialized Actuarial

Knowledge or the use of Actuarial Judgment

Operating with Incomplete Information

One need not be 100% certain that a violation has

occurred; the “issue” just needs to be apparent

Precept 13 - General Considerations



“Material”

Precept 13, Annotation 13-1: A Code Violation is

deemed material if it is “important or affects the outcome

of a situation”

Review the Professionalism Discussion Paper on

Materiality at http://actuary.org/discussion-papers




“Unresolved”

Attempting Resolution is Not Required

Violations Observed in Draft Work Product or Processes

Under Development are Often Resolved through:

Self-Directed Research & Subsequent Revision

Peer Review

Review of Preliminary Findings with Principal User

Discussion(s) with a Questioning Actuary




Compliance with Code Precepts versus Deviation from an

Actuarial Standards of Practice (“ASOP”)

Thirteen of Fourteen Code Precepts Address Self-

Regulation of Personal Professional Conduct

Precept 13 Addresses Situations Involving the Professional

Misconduct of Another




The Practical Application of Precept 13 – Familiarity with:

the Code

Relevant ASOPs

Qualification Standards

Reliance on Common Sense

Communication and/or Reporting versus Investigation

Requesting Guidance from the Actuarial Board for

Counseling & Discipline (“ABCD”)












Questions

Agenda



Addressing Apparent Violations

Goal: Resolution via Common Understanding

Relationship between the Involved Actuaries

Colleagues

Subordinate / Manager

Adversaries

Inquisitive v. Accusatory Style

Form of Communication

Issue: One-on-One Resolution of

a Violation of the Code



One-on-One Discussions May Preserve Confidentiality

while Achieving Resolution

Disclosure of a Violation is Not Required if doing so

Divulges Confidential Information

Precept 9 Permits Disclosure of Confidential Information if

Authorized by a Principal or Required by Law

Confidentiality May Be:

Required by Law or a court

Imposed by Contract or Agreement

Issue: Confidentiality



The Code Defines Law as “Statutes, regulations, judicial

decisions and other statements having legally binding

authority”

Law that Imposes Obligations on an Actuary that Conflict

with the Code or ASOPs Takes Precedence

Disclosure of a Violation is Not Required if doing so would

be Contrary to Law

ASOPs Permit Deviation from Specific Guidance to

Comply with Law

Issue: Impact of Law



Precept 2, Annotation 2-1 & Precept 3, Annotation 3-1

Preamble to the Code

Precedence of Foreign Law or Rules That Differ or Conflict

with the Code

Issue: Impact of Foreign Law

or Professional Code



ASOP 41, Section 4 Addresses Disclosure Requirements

Related to an Actuary’s Deviation from ASOP Guidance

A Failure to Properly Disclose Such Deviation may give

rise to a Violation of the Code

Issue: Violations when Deviation from

ASOPs is Permitted



Professional Judgment

Exercise of Professional Judgment

Reasonable Differences of Opinion

Presented such that it is recognizable when & where

Professional Judgment has been applied

Does Not Require Conformity of Conclusions

Issue: Impact of Professional Judgment



Consider the Purpose of the Code

Consider Meanings within their Context of Use

Apply Common Sense

Reasonable Differences in Interpretation are to be

Expected

Open Lines of Communication

Issue: Subjective Interpretations of

Precept Language



Undisclosed Knowledge of a Precept 13 Violation

The Questioned Actuary & Lack of Disclosure

Forum For Disclosure

Issue: Application of Precept 13

to Precept 13 Situations



No Prescribed Timeframe

ABCD Complaint Process Rules of Procedure Outlined at

http://www.abcdboard.org/complaints

Discuss Complaint with ABCD Prior to its Formal

Submission

Submit Signed Description of Facts in Writing with any

supporting materials

Alternative Procedure for Anonymous “Information

Submission”

Issue: When Disclosure Should Be

Made Under Precept 13











Questions

Agenda



You have been hired to direct the Actuarial and Valuation

functions of a medium-sized health insurer, replacing an

Actuary who recently retired & relocated out of the area

Following a detailed review of the Company’s financial and

valuation processes, you develop concerns regarding an

outdated statutory valuation approach used to determine

Long-Term Care Insurance Claim Reserves

Your back-of-the-envelope calculations suggest that LTC

Claim Reserves may be materially understated

Hypothetical Case Study A

Health Valuation - Procedural Concerns



You contact the prior Actuary and discuss the situation,

learning that the prior Actuary’s recollection of the rationale

supporting the current valuation approach is fuzzy

When you press the prior Actuary for written

documentation supporting the current valuation approach,

the prior Actuary quickly terminates the conversation,

indicating that his obligation to provide actuarial support to

your employer ended at retirement

How Should You Proceed?

Hypothetical Case Study A

Health Valuation - Procedural Concerns



Your actuarial consulting firm recently assumed the

actuarial duties for several small Defined Benefit pension

plans that previously relied upon an independent

Consulting Actuary for these same services

Your review of these plans uncovers several small errors in

the prior Consulting Actuary’s work, errors that were made

consistently in each plan valuation over several years

Individually, each error would be considered small &

immaterial to the valuation of any single plan

Hypothetical Case Study B

Small-Plan Defined Benefit Market - Cumulative Errors



With the consent of all the Principals involved, you meet

with the prior Consulting Actuary and share the preliminary

results of your review; the prior Consulting Actuary admits

that the errors occurred and volunteers that the valuation

processes in question will be remedied

In return, the prior Consulting Actuary presses for your

agreement that, due to the immateriality of the errors for

any single plan, providing notification of this issue to the

Principals in the final report is unnecessary

How Should You Proceed?

Hypothetical Case Study B

Small-Plan Defined Benefit Market - Cumulative Errors



You have prepared financial income statement projections

for your Division’s new life insurance product, based on the

pricing file developed under the direction of your Division’s

lead Product Development Actuary

While reviewing your projections with Division Senior

Management and the Product Development Actuary, the

Division head expresses concern that the pattern of gains

followed by losses illustrated in your projections will not be

favorably received by the Company’s Chief Financial

Officer, possibly derailing the new product’s launch

Hypothetical Case Study C

Product Development Projection



Subsequently, the Product Development Actuary provides

a new pricing file that yields a revised pattern of earnings

which eliminates losses nearly all years. Your review of

the assumptions underlying both pricing files reveals that

significant changes were made, certain of which cause you

to question the basis for elements of both assumption sets.

You express your concerns to the Product Development

Actuary, who provides you with a written rationale for the

assumptions underlying each version of the pricing file.

How should you proceed?

Hypothetical Case Study C

Product Development Projection



Your supervisor, a Principal of the actuarial consulting firm

that employs you both, is on vacation. A client calls with

questions regarding a report your supervisor recently

provided the client. During your review of the report and

supporting work file, it becomes apparent to you that your

supervisor violated the firm’s procedures and the Code.

In your supervisor’s absence, you prepare and provide

responses to the client’s immediate questions, but decide

against informing the client of your concerns without first

having discussed the matter with your supervisor.

Hypothetical Case Study D

Internal Reporting



Upon your supervisor’s return to the office, you meet to

discuss your concerns. Your supervisor thanks you for

handling the client’s immediate questions and agrees to

schedule a follow-up meeting once a review the work files

and relevant client communications is complete.

Several weeks pass. You remind your supervisor that a

follow-up meeting hasn’t yet occurred. Your supervisor

informs you that the situation has been resolved, the client

is pleased, and that further discussions are unnecessary.

How should you proceed?

Hypothetical Case Study D

Internal Reporting











Questions

Agenda



QUESTIONS?

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