Skit on Ratemaking

Committee on Professionalism Education

Skit Background John is an FCAS and is the chief

pricing actuary for Small Insurance Company (SIC).

SIC predominately writes Personal Auto, but they also have a growing Homeowners program.

John is asked by senior management to review SIC's Homeowners rates, which haven't been updated in several years.

Skit Background John was recently promoted to his

position after Mary, the former chief pricing actuary and an FCAS, was promoted to Executive Vice President. Throughout John's entire career at SIC, Mary has been his boss.

John is aware of the fact that SIC has had poor customer retention recently. The results have been so bad that the CEO recently warned the senior managers that, if the trend continues, there may be a serious shakeup at the top.

Skit Background John has just completed the Homeowners

review and has sent the results to Mary. The review indicates significant rate increases, on the order of 25% to 30%, for many territories.

Legal Disclosure

The views expressed by the panelists are their own and may not necessarily reflect those of their respective employers.

Lights, Camera, Action!

General Questions

Given that John suspects that Mary’s motives are dishonest, what are his professional obligations?

What are Mary’s obligations?

Professional Guidance

Precept 1 of the Code of Conduct: “An Actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession's responsibility to the public and to uphold the reputation of the actuarial profession.”

Professional Guidance

Precept 10 of the Code of Conduct: “An Actuary shall perform Actuarial Services with courtesy and professional respect and shall cooperate with others in the Principal's interest.”

Professional Guidance

CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking Principle 1: A rate is an estimate of the

expected value of future costs. Principle 2: A rate provides for all costs

associated with the transfer of risk.

Professional Guidance

CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking Principle 4: A rate is reasonable and not

excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer.

Professional Guidance

CAS Statement of Principles Regarding Property and Casualty Insurance Ratemaking, Section III: Ratemaking Considerations Credibility Trends Catastrophes

Professional Guidance

ASOP 39: Treatment of Catastrophe Losses in Property/Casualty Insurance Ratemaking Section 3.3 – The Use of Data in

Determining a Provision for Catastrophe Losses: The actuary may use historical insurance data and noninsurance data.

Professional Guidance

ASOP 13: Trending Procedures in Property/Casualty Insurance Section 3.1 – Purpose or Use of

Trending Procedures: The actuary should apply trending procedures that are appropriate for the applicable purpose or use

Section 3.3 – Economic and Social Influences: The actuary should consider economic and social influences that can have a significant impact on trends.

Professional Guidance

ASOP 25: Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages Section 3.1 – Purpose and Use of

Credibility Procedures: The purpose of credibility procedures is to blend information from subject experience with information from one or more sets of related experience when the subject experience does not have full credibility in order to improve the estimate of expected values.

Professional Guidance

ASOP 25: Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages Section 3.2 – Selection of Credibility

Procedures: The actuary should select the credibility procedures that do not tend to bias the results in any material way.

Professional Guidance

ASOP 25: Credibility Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty Coverages Section 3.3 – Choice of Related

Experience: Such related experience should have frequency, severity, or other determinable characteristics that may reasonably be expected to be similar to the subject experience.

Audience Discussion on Courses of Action

Possible Courses of Action

Alternative 1 – John should accept Mary’s decision. She is his boss and has more years of experience.

Alternative 2 – John should try to negotiate with Mary.

Alternative 3 – Since John distrusts Mary’s motives, he should not capitulate to her requests.

Alternate Ending -- Lights, Camera, Action!

General Questions

What are John’s and Mary’s obligations to their professions, to SIC, and to themselves and their families?

Is Mary's decision to make sub-optimal actuarial decisions due to fear of losing her job in violation of any actuarial standards?

Possible Courses of Action

Alternative 1 – John should take Mary's advice and change some of his assumptions in order to temper the rate increases.

Alternative 2 – John cannot in good conscience go along with Mary's request.

Key Takeaways Work-related predicaments,

particularly when there is fear of losing one’s job, can cause an actuary to blur ethical lines

Know the Standards that apply to the work you are doing