Professionalism: A Legal Perspective

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Professionalism A Legal Perspective

• Lauren M. Bloom
• General Counsel
• American Academy of Actuaries

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Litigation against actuaries is increasing for
several reasons

• Actuaries are doing more
• The weak economy has highlighted reserve
  shortfalls
• American society is increasingly litigious
• The plaintiffs bar has found the actuarial
  profession.

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Claims against actuaries are usually for
malpractice

• Failing to follow generally accepted practice
  thereby
• Injuring a plaintiff to whom the actuary has a
  legally-recognized duty
• Causing the injury in fact and law and
• Generating compensable damages.

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Various defenses are available (e.g., plaintiffs
contributory negligence), but do not eliminate
liability if the elements of malpractice are
present.
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The more professional assignments an actuary
undertakes, the greater his or her malpractice
risk.
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Professional standards (the Code, ASOPs and
Qualification Standards) are strong evidence of
generally accepted practice.
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Failure to comply with the Code, Qualification
Standards and ASOPs may be considered malpractice.
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To comply

• Identify and read all applicable professional
  standards
• Conform work to the standards or deviate and be
  prepared to explain and
• Document, document, document.

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Which standards apply?

• The Code and Qualification Standards apply to all
  professional services rendered in U.S.
• The Code can also apply to practice abroad -- see
  draft white paper on international practice.

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Which ASOPs apply?

• The ASBs ASOPs apply to U.S.-based practice.
• Not all ASOPs apply to each assignment.
• Use the Academys Applicability Guidelines as a
  starting point.

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Applicable ASOPs include

• ASOP No. 21 (recently revised)
• ASOP No. 23 (recently revised)
• ASOP No. 41
• ASOPs relevant to the task at hand (e.g., ASOP 9,
  36)

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Communications can be particularly important in
mitigating litigation risk poor communications
can be seriously misconstrued.
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Keep the ASOPs close at hand when working, and
follow recommended processes.
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If you deviate

• Describe the nature, rationale and effect of the
  deviation in an appropriate actuarial
  communication and
• Be prepared to defend it.
• Deviations can cause special problems in
  litigation.

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Documentation can be critical to successful
malpractice defense.
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Documentation should (usually) include

• A description of what was done and why
• Sufficiently detailed work papers for another
  qualified actuary to review the work for
  reasonableness
• A record of what the principal was told and when
• Proof that open questions were asked and answered.

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Documentation should (usually) not include

• Rough drafts of finished documents
• Back of the envelope calculations
• Evidence that outstanding questions were never
  asked or answered.

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Documentation

• Can be maintained as part of an ongoing document
  retention policy - do not destroy evidence!
• Will be reviewed with the benefit of hindsight.
• Helps you if it shows you complied with
  applicable law and standards.

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In litigation, standards help defendants who
complied, but can hurt defendants who didnt.
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The absence of published standards does not
prevent litigation.
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The profession can mitigate its litigation risk
through active participation in the
standard-setting process.
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Actuaries can mitigate their risk of liability
through

• EO Insurance
• Establishment of appropriate business
  relationships
• Recognition and adjustment for high-risk
  assignments
• Quality assurance

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Establishing appropriate business relationships

• Use of engagement letters and contracts
• Arbitration clauses/waiver of jury trial
• Third party indemnification
• Limitation on use/ distribution of work product
• Limitations on liability
• Ownership of intellectual capital
• Billing and payment terms
• What happens when the relationship ends?
• Principal signoff on key assumptions, methods and
  conclusions
• Maintaining records of communications

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Recognition and adjustment for high-risk
assignments

• Identify high-risk circumstances
• Consider how to address
• Additional review
• Reliance on other professionals
• Appropriate disclosures in work product
• Intended audience and use(s)
• Limitations on distribution
• Caveat emptor

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Quality Assurance

• Confirm scope of assignment
• client approval of assumptions
• documentation of client instructions and
  decisions regarding work.
• Checking requirements
• work gets checked after it is done.
• Peer Review requirements
• work and/or processes are reviewed by another
  practitioner with appropriate skill
• Academy white paper on Peer Review.

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Government Oversight

• U.S. government has several ongoing
  investigations
• U.K. government is separately investigating the
  U.K. profession
• The international financial community is watching
  with particular interest.

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Morris Review

• Began with single companys failure to pay as
  promised on annuities
• Expanded to review of entire profession, in U.K.
  and worldwide
• Has shifted focus to U.K. problems with
  retirement savings not dissimilar to U.S.
  situation.

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The U.K. is likely to see

• Increased outside oversight of profession
• New standards prepared with lay involvement
• A lay-lead discipline process.
• Is this what would serve the U.S. profession best?

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U.S. leadership is considering

• Stricter continuing education requirements
• Enhanced independence for ASB and ABCD, with
  possible lay involvement
• Encouraging, or even lobbying for regulatory
  requirement of, peer review

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The profession can help by avoiding the conduct
that set off the Morris Review in the U.K. and
the Arthur Anderson inquiry here.
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Enron and related cases have triggered

• Adverse media attention for the accounting
  profession
• Shareholder anxiety
• Immediate and strong Congressional action
• Lessened respect for professions

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Actuaries can expect

• More questions from auditors and management
• Ethical requirements in addition to the Code
• Additional documentation requirements
• (Maybe) more pressure to keep reserves low

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Actuaries will need to

• Comply with applicable ASOPs
• Document work products and retain the
  documentation as required by law
• Be prepared to respond to questions
• Anticipate uncertainty until the new rules are
  sorted out

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Sources of Support

• Your corporate counsel and standards compliance
  officer
• ABCD
• Academy
• Committee on Qualifications
• Practice Notes and Applicability Guidelines
• Discussion papers
• Legal Department
• Seminars.

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Questions?