PROFESSIONALISM in PRACTICE

Transcription

1 PROFESSIONALISM in PRACTICE Southwest Actuarial Forum San Antonio, Texas 10 December 2010 Disclaimer: The opinions expressed are solely those of the presenter and are not approved positions of the American Academy of Actuaries or the Actuarial Board for Counseling and Discipline. How to Manage Risks Curtis E. Huntington FSA, MAAA, FCA, COPA Vice Chairperson, Actuarial Board for Counseling and Discipline (U.S.) 2 Introduction - Overview Overview of the Code of Professional Conduct Ethics and Liability Ethics and Negligence/Malpractice Ethics and Actuaries as Fiduciaries 3

2 4 The Actuary s Ethical Obligations An actuary has many ethical obligations: Many are set forth in the, Actuarial Standards of Practice (ASOPs), and the Qualifications Standards. Law may also impose obligations upon an actuary as it does upon other professionals. You are responsible for complying with all of these requirements. The Code requires you to be familiar with legal and ethical obligations in the jurisdictions in which you practice. Failure to meet legal and ethical requirements may subject you to legal liability and/or discipline by your actuarial organization. Code of Professional Conduct The Code of Professional Conduct: An Overview Professional and Ethical Standards for Academy Members. Adopted by the Academy, SOA, ASPPA, CAS, and the CCA. Code sets forth mandatory standards: Precepts are standards; annotations assist with interpretation; ASOPs relate to and inform standards in the Code. Follow applicable standards wherever you practice (even abroad!). When Code and law conflict follow the law. 6

3 7 Professional Integrity Precept 1: Act honestly, with integrity and competence, and in a manner that fulfills the actuarial profession s responsibility to the public and upholds the profession s reputation. Qualification Standards Precept 2: Perform professional services only when qualified to do so and in compliance with Qualification Standards. 8 Standards of Practice Precept 3: Make sure that actuarial services performed by you or under your direction satisfy applicable standards of practice. 9

4 10 Communications and Disclosure Precept 4: Take reasonable steps to make sure that your actuarial communications are clearly appropriate to the circumstances and their intended audience and satisfy applicable standards of practice. Precept 5: If appropriate, identify the principal for whom the findings are made and make clear the scope of the assignment, including any limitations or constraints. Conflicts of Interest Precept 6: Make appropriate and timely disclosure to principal of the sources of all direct and indirect compensation that you/your firm receives from another party that relates to any assignment from that principal. Precept 7: Do not knowingly provide professional services involving a real or potential conflict of interest unless: 11 Control of Work Product Precept 8: Take reasonable steps to ensure that your services will not be used to mislead other parties. 12

5 13 Confidentiality Precept 9: Do not disclose confidential information to another party unless such disclosure has been authorized by the Principal or is required by law. Courtesy and Cooperation Precept 10: Perform services with courtesy and professional respect; cooperate with others in the Principal s interest. 14 Advertising Precept 11: Do not engage in advertising or business solicitation, in any medium, that is false or misleading. 15

6 16 Titles and Designations Precept 12: Use membership titles and designations only as authorized by your organizations. Violations of the Code Precept 13: Actuary who knows of apparent, unresolved, material breach by another actuary should consider discussing the matter to obtain a resolution. If there is no discussion or the discussion is unsuccessful, the concerned actuary should disclose the violation to the ABCD, unless disclosure is prohibited by law or would reveal confidential information. 17 Cooperation in Investigations Precept 14: Respond promptly, truthfully, and fully in writing to ABCD requests for information. Cooperate fully with ABCD investigations, subject to applicable restrictions on confidential information or other restrictions imposed by law. 18

7 Ethics and Legal Liability Ethics and Legal Liability: An Overview Actuaries must consider Professional standards of conduct, qualification, and practice. Actuaries should consider Common law standards of due care. Claims against actuaries are typically for malpractice. Applicable laws and regulations govern some areas in which actuaries provide advice. Specific laws provide specific duties and liabilities for service providers. 20 Actuarial Malpractice and Negligence

8 22 Malpractice and Negligence What is Actuarial Malpractice? There is no explicit law of actuarial malpractice. Instead, malpractice claims against actuaries typically allege negligence typically a state tort law claim. You may be liable for negligence if you fail to exercise due care and thereby cause injury to the organization for whom you are working. When an actuary advises his employer or principal, a duty to exercise due care arises the actuary must use reasonable care and competence. You need not guarantee correct judgment or analysis, but you must exercise reasonable skill and competence in good faith, without fraud, for the benefit of your employer/principal. Malpractice and Negligence Always think about what a reasonable actuary would do in your shoes the standard for analyzing potentially negligent conduct is reasonableness. An act may be negligent if it is done without the competence which a reasonable person in the position of the actor would recognize as necessary to prevent the creation of an unreasonable risk of harm. Translation: an actuary must perform his or her duties with the competence and care which a reasonable actuary would use in that particular situation. 23 Malpractice and Negligence Your ethical obligations as an actuary directly relate to how negligence may be found and to your legal liability. Professional standards the Code of Professional Conduct, ASOPs, and Qualification Standards are strong evidence of appropriate practice and can be used to show what a reasonable actuary should and would do. Failure to comply materially with the Code, ASOPs, and Qualification Standards can result in a disciplinary proceeding before the ABCD, or leave you open to a lawsuit for negligence/actuarial malpractice. 24

9 25 Malpractice and Negligence What can you do? Be aware of all Code precepts and ASOPs Ensure your work conforms to these standards. If you deviate or work in absence of an ASOP, be prepared to explain your deviation and judgment. Document! Professional Integrity Ethics + Legal Liability: Many of the requirements of Precept 1, dealing with professional integrity, correspond to situations in which legal liability could arise for an actuary. 26 Qualification Standards Ethics + Legal Liability: Precept 2 instructs actuaries to perform services only when qualified to do so and when qualification standards have been met. This relates directly to an Actuary s competence to provide services providing services when you are not competent to do so may leave you liable for negligence and malpractice as an actuary. 27

10 28 Standards of Practice Ethics + Legal Liability: Precept 3 is important guidance for acting ethically under the Code and avoiding legal liability as an actuary. Communications and Disclosure Ethics + Legal Liability: Precepts 6 and 7 are important in guiding the actuary and precluding legal liability for negligence, based on conflicts of interest. 29 Control of Work Product Ethics + Legal Liability: Precept 8 cautions you to consider possible misuse and take steps to prevent it. Staying true to Precept 8 helps protect the actuary and others. 30

11 31 Improper Disclosure Ethics + Legal Liability Precept 9 cautions you to prevent improper disclosure of confidential information. Such improper disclosure could result in liability for negligence. Actuarial Malpractice and Negligence Other Ethical Concerns? The Code provides general guidance; the ASOPs provide standards of practice in given fields or situations. But the Code and the ASOPs cannot provide all guidance necessary for an actuary in every situation, faced with tough questions and tricky situations. What should you do if faced with a hard situation or question which the Code and ASOPs do not address sufficiently? Always think about what a reasonable actuary would do in your shoes the standard for analyzing potentially negligent conduct is reasonableness. Ask for Guidance 32 Fiduciary Liability for Actuaries

12 34 Fiduciary Liability - Overview Actuaries are typically advisors for their clients, providing services that produce information upon which principals rely. In this capacity, as we have seen, Actuaries, owe a duty of care to their principals they must act as would a reasonable actuary in the same position. This is not a fiduciary relationship. However, actuaries can cross the line from advisory to something more than an advisor a fiduciary. Fiduciary Liability - Overview What is a Fiduciary? A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. Am I a Fiduciary? It s possible.... It all depends on the nature of the relationship in question. Whether an actuary has become a fiduciary is a factual, case-by-case determination. 35 Actuaries as Fiduciaries How does this affect actuaries? Fiduciaries have a much, much higher standard of care. Where a fiduciary relationship exists under Common Law, certain standards are imposed: Duty of loyalty putting the principal s interests ahead of one s own. Duty to act honestly and prudently. Duty to not delegate decision-making power. Duty to not profit. Fiduciaries may also be subject to other obligations by law. These are typically more demanding obligations than under Common Law, with more encompassing standards, and greater liability. 36

13 Case Studies in Actuarial Ethics Case Study #1 Actuarial Firm (AF) has a long-term relationship with M, a management company. AF had many duties at M: completing schedules to be submitted to government entities; calculating pension expenses; drafting correspondence related to the plan; and advising M regarding compliance issues. M wanted to offer its employees an Early Retirement Plan (ERP). AF prepared estimates of the cost of establishing an ERP (including 8 different ERP designs) and prepared the final draft resolution adopted by the Board to amend the retirement plan to include the ERP. 38 Case Study #1 The Board adopted the amended retirement plan to include the ERP. The ERP provided alternative methods of payment through a single life annuity or a social security leveling option, at the discretion of the employee. AF prepared benefit plan information for each eligible employee, including calculation of benefits under the regular plan and the ERP, with both options. 39

14 40 Case Study #1 Four employees retired pursuant to the ERP and began to receive their benefits pursuant to the social security leveling option. AF discovered, a year later, that it had miscalculated the social security leveling payment option for the ERP. AF informed M and instructed it to correct its overpayment. M notified the retired employees by phone and through a letter drafted under AF s supervision. AF agreed to pay the retirement fund for the payments made in excess, caused by its miscalculations. Retirees were not required to return the overpayments. And affected retirees were allow to again choose between the two payment options. Case Study #1 Is AF liable for the mistakes it made regarding the social security leveling option payouts? Is AF a fiduciary? What roles, duties, or actions point to a fiduciary status? 41 Case Study #2 Equity Corporation (EC) was a small financial services institution. Over the course of an eight year period, it grew into a powerful corporation managing over a billion dollars in assets. Yet the growth was based on all fraudulent activities and EC was actually insolvent, filing for bankruptcy soon after litigation regarding the fraud began. 42

15 43 Case Study #2 Actuarial Firm (AF) did work for a subsidiary of EC, EC Life Insurance Corporation. AF calculated reserves and premiums for the life insurance policies. AF issues reports and opinions indicating that the subsidiaries premiums and reserves were in order. In reality, more than ½ of the subsidiary s recorded life insurance policies were fictitious. Case Study #2 Should AF and its employees working on the plan have known the policies were fictitious? What if AF employees discovered one fictitious policy? Should they have investigated the rest? What if AF employees discovered fictitious policies after submitting a report referenced in a prospectus? What if AF genuinely had no knowledge of the fictitious policies? Were there ethical violations? Is there potential legal liability? 44 Case Study #3 Actuary provides services to an insurer which is being sold. Actuary established the reserves recorded on the balance sheet at effective date of sale. Subsequent to the effective date of sale, Actuary becomes aware of three large claims: one reported just before the effective date of sale; one which occurred before the effective date but was reported afterward; and one which occurred just after the affective date. The claims were unusual and could not be foreseen when Actuary calculated reserves for effective date of sale. These three claims would have a material impact on Actuary s reserve estimate. Sales agreement calls for a true-up of the balance sheet within 90 days after the effective date of sale. 45

16 46 Case Study #3: How should Actuary set the reserves? He obviously feels a duty to both seller (his former employer) and buyer (his new employer). What precepts are implicated here? And what do they counsel Actuary to do? Case Study #4 Actuary is employed by X, which is seeking to sell itself to Buyer. Actuary estimates X s year end reserves. Buyer reviews Actuary s estimates and computes its own reserve estimate during due diligence phase of the acquisition. Buyer signs a binding contract to purchase X. The deal closes six months later. During the six months between signing and closing, X asks Actuary to update its reserve estimate. Data issues complicate Actuary s timely calculation, but Actuary completes the estimate shortly before closing. Actuary informs X that reserves have developed adversely. X does not inform Buyer; Buyer does not request the new estimate (because it remains unaware of its existence). Deal closes. Reserves continue to deteriorate to the point that Buyer becomes insolvent. Buyer sues Actuary, alleging that Actuary aided and abetted fraud by violating the duty to prevent misuse. 47 Case Study #4 What would you have done? What should Actuary have done? Which Precepts are applicable? Could Actuary have done anything to help prevent misuse of information? 48

17 49 Case Study #5 You are attending a 100 minute session at the Southwest Actuarial Forum. 20 minutes into the session, your seat neighbour leaves the room. You notice that she completes an attendance ticket, including ratings for speakers who have yet to present and leaves it in the basket. Case Study #5 PRECEPT 13: An Actuary with knowledge of an apparent, unresolved, material violation of the Code by another Actuary should consider discussing the situation with the other Actuary and attempt to resolve the apparent violation. 50 Case Study #5 PRECEPT 13 (Cont d): If such discussion is not attempted or is not successful, the Actuary shall disclose such violation to the appropriate counseling and disciplinary body of the profession, except where disclosure would be contrary to Law or would divulge Confidential Information. 51

18 52 Case Study #5 1. Should you do anything about this occurrence? 2. Under what circumstances would this definitely create a possible Code violation? 3. Under what circumstances would it appear not to have constituted a Code violation? Actuarial Board for Counseling and Discipline 1850 M Street NW, Suite 300 Washington, DC guidance@abcdboard.org 53 Thank you! 54