Wednesday, May 6, 2015

No. 99: Actuarial Ethics—The American Academy of Actuaries Releases a Significant and Timely Report

On April 27, 2015, the American Academy of Actuaries announced release of a 31-page report entitled "Key Ethical Concerns Facing the Actuarial Profession" and subtitled "Perceptions of Members of the American Academy of Actuaries." The report is based on a 2012 survey of Academy members by the Academy's Council on Professionalism (COP). Among the 18 potential ethical issues identified in the report, by far the most significant issue perceived by Academy members is "responding to pressure from principals and/or management to select inappropriate assumptions used in pricing or reserving."

The 2012 Survey
The 2012 survey was prepared by members of the COP, Professors Rahul Parsa and Garry L. Frank of Drake University, and the Academy. The cover letter on the survey was from Karen Fulton Terry, MAAA, FCAS, who at the time of the survey was vice president of the Academy and chairperson of the COP. She is listed in the current directory of the Society of Actuaries as assistant vice president and actuary in the home office of State Farm Mutual Automobile Insurance Company.

The key finding about pressure from principals and/or management with regard to assumptions used in pricing or reserving is timely in view of the ongoing controversy over reserve adequacy, shadow insurance, accounting practices permitted by individual states, and so-called principles based reserves. The other four of the top five ethical concerns are: (2) "false or misleading representation of products or services in marketing, advertising, or sales efforts," (3) "failure to take appropriate action when another actuary misrepresents information," (4) "conflicts of interest between opportunities for personal financial gain (or other personal benefits) and proper performance of one's responsibilities," and (5) "misrepresenting or concealing limitations in one's abilities to provide services."

More than 3,300 Academy members responded to the survey. The members were asked to rate each of 18 potential ethical concerns on a scale of 1 to 5, where 1 means it is not an ethical concern and 5 means it is a major ethical concern.

Availability of the Report
The Academy announced release of the report in a news item dated April 27, 2015, and provided a link to a PDF containing the full report. The following notice is at the bottom of every page except the cover page: "©2015 American Academy of Actuaries. All rights reserved. May not be reproduced without express permission."

I immediately sent an e-mail request to the Academy for permission to offer a complimentary PDF of the full report to my readers. In my request, I mentioned the need for an immediate response.

Mary E. Downs, executive director of the Academy, responded promptly. She denied my request, but she also said:
We have, as you know, made the full report freely available on the Academy website, and you can refer your readers to our website for the complete report. We will also be having a webinar on the topic, and will be discussing it thoroughly in that venue on May 22. We will be continuing to have discussions about the report in Academy meetings and events.
A link to the report is on the home page of the Academy's website at I urge interested readers to read the report, and would welcome comments from those who read it.