UP TO CODE

This is a regular column in Contingencies. Written mainly by members of the Actuarial Board for Counseling and Discipline, "Up to Code" articles reflect the wide variety of issues that are brought to the ABCD’s attention during the request for guidance and complaint processes. 

July/August 2021

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THE CODE OF PROFESSIONAL CONDUCT AND ETHICS

Ken Kent 

Ever since a minimum continuing education requirement in ethics became part of the requirements for Enrolled Actuaries, I have been interested in the interplay between the Code of Professional Conduct (“the Code”) and ethics.

Ethical Practice

For me, the most simplistic answer of what constitutes the practice of ethical behavior is in the determination of what is right and wrong.

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If that were all there is to the topic, I doubt it would be part of the mandatory curriculum for Enrolled Actuaries and we would not be raising the topic in webinars and conference sessions or articles. However, what is right or wrong is shaded by our own personal experiences and, in our profession, right and wrong is not always clear. This may in part be why most of our rules of professional practice are principle-based. Actuaries are called to make assumptions about the future and, in doing so, we all have opinions.

So, I have been fascinated by how ethics plays into our roles as professionals and the implications in following the Code. In the Code, the actuarial standards of practice, (ASOPs) and the U.S. Qualification Standards, the word “ethics” is not part of the formal text.

However, in the Code preamble, it says

The Precepts of the Code identify the professional and ethical standards with which an Actuary must comply in order to fulfill the Actuary’s responsibility to the public and to the actuarial profession.

But the Code does not provide a definition of what those ethical standards are.

The Decisions We Make

A couple of years ago, the Academy put on a webinar on ethics and invited Anita Cava, professor of business law at the Miami Herbert Business School, to speak on the subject as she conducts an entire course on ethics. The first time I had an opportunity to talk with Ms. Cava, I grasped that ethics is about how we make decisions and measure right and wrong in that process.

Cava pointed out it is inescapable that we each bring our own biases and/or experiences into our decisions. In her latest presentation for the Academy, Cava introduced the concept of the “rational person” and that there is no such thing. What I got from her description is that none of us can totally remove ourselves from outside influences and our prior life experiences in making decisions.

So how does this tie into the profession? As a member of the Actuarial Board for Counseling and Discipline (ABCD), when we consider a complaint, we try to look at it from both sides—that of the complainant and that of the subject of the complaint. We recognize that we are potentially dealing with two parties that have different perspectives of right and wrong related to their practice, work product or responsibility to the profession.

Sometimes there is a reasonable difference of opinion, but sometimes, someone’s ethical compass has gotten too influenced by other forces.

So, ethics to me is about the decisions we make and how we rationalize those decisions to be right, correct, safe enough, or close enough to being able to live with them. Each of us has to decide where we draw the line and sometimes that line is not always under our control. Our work products can be defined by or misrepresented by others. Or, in our efforts to meet the needs of our clients or employers or the public, we find ourselves bending toward the result or opinion that they are hoping for.

Anonymous Illustrations From my ABCD Experience

The ABCD often receives requests for guidance (RFGs) where an actuary has questions regarding the U.S. Qualification Standards and meeting the requirements to issue a statement of actuarial opinion (SAO). They basically are not sure whether they meet the standards. Sometimes they are addressing a request from their employer and they are unsure how they should deal with the pressures from an employer to make actuarial statements regarding new lines of business. Discussing the issue is a better approach rather than not questioning whether they meet the qualification standards and rationalizing—“Hey, I can do that. The work is not that different from my experience, and I can decide for myself that I am sufficiently qualified to issue an SAO in a new area of practice.”

So let’s look at what the standard requires to discuss where there can be an ethical issue.

The U.S. Qualification Standards currently requires:

2.1 Basic Education and Experience Requirement

To satisfy the General Qualification Standard, before issuing a Statement of Actuarial Opinion, an actuary must meet the following criteria:

  • Be a Member of the Academy, a Fellow or Associate of the SOA or the CAS, a Fellow of the CCA, a Member or Fellow of ASPPA, or a fully qualified member of another IAA-member organization; and

  • Have three years of responsible actuarial experience, which is defined as work that requires knowledge and skill in solving actuarial problems; and

  • Be knowledgeable, through examination or documented professional development, of the Law applicable to the Statement of Actuarial Opinion. “Law” is defined in the Code of Professional Conduct.

 

In addition, in order for an actuary to issue Statements of Actuarial Opinion in an area covered by a specialty track offered by the Society of Actuaries, or in an area of practice covered by the exams of the Casualty Actuarial Society or the American Society of Pension Professionals and Actuaries, one of the following must be met:

  • Attain the highest possible actuarial designation in an IAA full-member organization (other than the Academy) and complete a specialty track in the area of actuarial practice relevant to the subject of the SAO; or

  • Attain the highest possible actuarial designation in an IAA full-member organization (other than the Academy) and have a minimum of one year of responsible actuarial experience in the area of actuarial practice relevant to the subject of the SAO under the review of an actuary who was qualified to issue the SAO at the time the review took place under standards in effect at that time; or

  • Have a minimum of three years of responsible actuarial experience in the area of actuarial practice relevant to the subject of the SAO under the review of an actuary who was qualified to issue the SAO at the time the review took place under standards in effect at that time.

When we look at these requirements, the questions usually are around the issue of three years of responsible actuarial experience in the specific area that will be covered by the SAO.

For example, an associate was hired and accepted a job that includes signing SAOs with a relatively small insurance company. The associate meets the highlighted experience requirement based on years of appropriate experience with another employer. Now the new employer wants to expand into a new line of business. The actuary looks at the new line and sees a lot of similarities in the process of determining the appropriate reserves and is confident of becoming familiar with any laws, regulations, and state insurance departments’ requirements to issue the appropriate reporting and SAO.

But they don’t have direct experience with the actual behavior of the insureds in this new line. They believe they can research national trends and appropriate studies, and they meet the three years of responsible actuarial experience. Besides, how do they deal with their relationship with their new employer if they decide they can’t sign an SAO because they don’t meet the U.S. Qualification Standards?

Do they rationalize that they can, on their own, meet the qualification standards because of their prior experience and the similarities in the line of business to what they have done for many years with their prior employer?

Or do they inform the company that they are not qualified to sign a statement of actuarial opinion on this new line so they will have to engage an actuary with the appropriate experience to oversee and train them for the three years needed to meet the standards’ requirements?

Where do they draw the line—what is the ethical bar they have to consider? Their ethical decision is shaped by their perceived responsibility to the profession, their perception of the problem, their abilities to address them, the external pressures of their employer, and their duty to those who will rely on their SAO.

When we address these kinds of issues, we point to Precept 1, Honesty; Annotation 1.1, Skill and Care; and Precept 2, Qualification Standard.

As another example of how ethics interplays with our work decisions, ethical decisions often come up when we discover an error in a work product. Most of us have experienced work product errors. They can occur no matter how many levels of checks and peer reviews are applied. From the moment of discovery, we are faced with ethical decisions and our obligations under Precept 1 of the Code.

If there is an error in the work product already released to a client, is it material—and according to whom? What level of mistake is big enough to require disclosure, and what pressures can influence your decision regarding an obligation for disclosure of the mistake?

The following factors may bear on disclosing the error:

  • The implications to your employer

  • Decisions may have been made by the user based on the error

  • Your reputation may be at risk

  • The amount of time that has passed between the release of your opinion and discovery of the erroneous result.

 

Or will the results be corrected in the next year, and by that process become immaterial and not worth the aggravation for you or your employer/client? And is that an appropriate rationale … or do you owe an explanation of the error to conform to Precept 1?

After the Code had been published for a couple of years, I recognized that the very first phrase of Precept 1 was incredibly liberating and provided guidance that could help avoid the incredible anxiety that can occur when you first learn you are not infallible, and a mistake has been delivered as part of a work product.

That phrase is “An Actuary shall act honestly.” To me this leaves no room for questioning whether I should share my findings. At the least, I need to disclose the error internally, and if I believe it is immaterial, explain why.

We have a professional obligation to tell the truth. In a practical sense, I believe the best approach is to tell someone of the mistake or issue—share it. I have an obligation to take sufficient actions to conform to the Code. I need to bring others into the solution of addressing the mistake and get their advice. When a culture of disclosure and honesty is in place then you, your co-workers, and your employer can work to resolve the issue. This has the additional benefit of relieving me of carrying the problem and having the accompanying anxiety alone.

Maybe it is immaterial but get concurrence—maybe it gets fixed next year but does it need to be addressed now?

In Summary

While the Code of Professional Conduct does not define ethical standards, it includes the standards of practice for ethical behavior. If ethical practice is the foundation of the decisions we make, the Precepts of the Code can guide those decisions to be in the interest of the public and in upholding the reputation of the actuarial ­profession.    

KEN KENT, MAAA, FSA, FCA, EA, is a member of the Actuarial Board for Counseling and Discipline.

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