Professionalism Counts is a column in Actuarial Update, the Academy's monthly newsletter.
CONFLICTS OF INTEREST: TRANSPARENCY IS KEY
Conflict of interest. We've all heard the term, but what exactly does it mean? And why is it important for actuaries to avoid a conflict of interest?
It all goes back to the Code of Professional Conduct. Precept 1 requires actuaries to "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." Of course, that's very general. But each Precept of the Code elaborates on specific situations where the qualities and actions required in Precept 1 come into play.
Precept 7 addresses conflict of interest:
An Actuary shall not knowingly perform Actuarial Services involving an actual or potential conflict of interest unless:
1. the Actuary’s ability to act fairly is unimpaired;
2. there has been disclosure of the conflict to all present and known prospective Principals whose interests would be affected by the conflict; and
3. all such Principals have expressly agreed to the performance of the Actuarial Services by the Actuary.
From this we can gather that a conflict of interest is a situation in which the actuary’s ability to act fairly, objectively, and impartially may be impaired. The Academy’s paper Conflicts of Interest When Doing Volunteer Work describes a conflict of interest as follows:
A classic commercial conflict of interest is caused by the existence of some circumstance outside the business relationship (such as a financial or personal relationship) that could affect the professional's judgment. An example is a consulting actuary who has prepared an appraisal of an insurance company (the actuary's client) looking to sell itself where the actuary will benefit financially if the sale occurs. The interest might be caused by ownership of stock in the company, a contingent fee agreement, or some other circumstance that would create a conflict.
The first step in preventing yourself from becoming embroiled in an actual or potential conflict of interest is to examine whether a conflict of interest might exist before you take an assignment. If you are not sure whether a conflict exists, you may want to discuss the situation with someone else or call the Actuarial Board for Counseling and Discipline (ABCD) with a request for guidance, which will allow you to discuss the situation confidentially with an actuary in your area of practice. In recent years, the ABCD has responded to questions about conflicts of interest, including:
• What constitutes a conflict of interest?
• How do I determine whether there is a conflict of interest? A Disclosing and resolving potential conflicts of interest.
• Conflict of interest between personal financial gain and proper performance of one's responsibilities.
• Considerations when conducting a pension analysis for both parties in a divorce proceeding.
• Is it a conflict of interest to provide a technical review of a competitor's reserve model?
• Potential conflict of interest relating to stock ownership.
• Is it a conflict of interest when the Appointed Actuary and the CEO are the same person?
• Is it a conflict of interest to acquire a small equity interest in client's company?
• Is it improper for an actuary to have a life and health license to sell health insurance products?
• Does a consulting actuary have a conflict of interest when advising a plan sponsor to de-risk?
If you determine that a conflict of interest might exist, your next step is to examine whether you can perform the work fairly and objectively. This step relies on the "look in the mirror test" – it is on your conscience to determine whether you can truly provide actuarial services in a fair and impartial manner.
If you believe you can do so, the next step is to inform all principals whose interests could be affected by the conflict that the conflict exists. If all such principals agree-preferably in writing – to you performing the actuarial service in question for them, you may accept the assignment and perform the work. If you are not sure you can perform the work fairly, you should decline the assignment.
Although Precept 7 does not mention apparent conflicts of interest (i.e., situations or relationships that reasonably could appear to other parties to involve a conflict of interest), you may want to consider whether an informed person might reasonably believe that an actual or potential conflict of interest exists before taking on an assignment. Because "perception is reality" for many, if an apparent conflict exists, you may want to think about disclosing it to prospective principals and explaining why the apparent conflict is not an actual or potential conflict.
Being transparent and honest about conflicts of interest helps you to fulfill the requirements of Precept 1 – and maintain the public's trust in the profession.
1 Conflicts of Interest When Doing Volunteer Work, p. 1
2 From ABCD reports, 2016-19.
A Wealth of Professionalism Resources