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Self-Regulation Requires Hard Choices
By David R. Kass
In the Eye of the Beholder,” Lauren Bloom and Michael Lamonica’s article in the March/April issue of Contingencies, defends the approach that the Actuarial Standards Board (ASB) has always used to develop Actuarial Standards of Practice (ASOPs). In December 2004, the ASB formalized this approach—which amounts to following the consensus of practitioners in the field—by adopting the Introduction to the Standards of Practice (the Introduction). Bloom and Lamonica accurately note that the ASB’s bottom-up approach to setting standards is controversial. The strong standards our profession needs today can’t be developed by mere consensus. Rather, they must be the result of informed judgment and forwardlooking leadership.
We understand that most ASOPs are written to reflect generally accepted practice. But this approach, which amounts merely to cataloguing existing practice, assumes that qualified actuaries will evolve the practice. How might such evolution occur? Do we wait for developments in actuarial science to inform the practitioners, who will then modify their practice accordingly?
This practice-filtering process won’t suffice. The rule-making ASB must connect directly with advances in actuarial science. We’re concerned that many such advances won’t even enter into the practice, because:
• Advances in actuarial science may be unattractive to those who consume our services. For example, better appreciation of underlying risks may require recognizing higher liability values. Under these circumstances, competition from less well informed or more permissive actuaries will prevent such recognition. This may be seen as a form of Gresham’s Law; inferior but popular practice may bar better practice from entry into the marketplace.
• Advances in actuarial science may occasionally call for better practices that lie outside the range of today’s generally accepted practice. We recognize that the existing ASOPs incorporate a procedure for using and defending such an outlier. But when the outlier is more rigorous and less favorable to clients, it’s highly unlikely that practice will embrace the outlier without leadership from the ASB.
A broad review of the Introduction confirms its consistency with some of the finest actuarial traditions—individual responsibility and judgment applied within a flexible environment. Unfortunately, recent difficulties experienced by actuaries and some sister professions suggest that even our most honored traditions may conflict with our role in the modern world.
As currently written, the Introduction rejects narrow prescriptions in favor of actuarial science informed by education, experience, and judgment. This misstates the choices the profession faces today. We operate in an intensely prescriptive environment. We, however, have not been doing the prescribing. Others have prescribed for us, filling public needs that our standards have not met. The ASB need not choose between principles of actuarial science and prescriptive rules. Rather, it must choose between traditional principles and new principles that challenge today’s practice.
We created the ASB, in part, to make our self-regulation more credible. The public may question the profession’s commitment to self-regulation if it perceives that the ASB is reluctant to grapple with modern challenges to historic principles. Although we value broad principles highly and find detailed rules (particularly those imposed on us by others) irksome, the profession’s case for self-regulation will be enhanced by an ASB that makes judgments, sorting out good from bad actuarial principles regardless of popular practice.
Swords or Shields
Practicing actuaries who diligently follow the ASOPs may be shielded from increasing malpractice exposure while those who are less diligent may meet the sword. Some suggest that stronger standards (which bolster our self-regulation case) might increase the practicing actuary’s exposure to the ASOPs as swords. Others suggest that if the ASOPs get too far ahead of existing practice, many actuaries won’t follow.
The second of these observations is answered by the first; fear of exposure means that actuaries will follow stronger ASOPs.
As the plaintiff ’s bar sharpens its swords, we need to strengthen our shields. Section 3.1.6 of the Introduction (“The ASOPs intentionally leave significant room for the actuary ...”) may appear to shield many actuaries in the short term— because it’s loose enough to cover a wide range of practice—but it won’t protect us against our collective failure to advance our science and our practice. We must choose between calling actuaries to stricter standards—a smaller but stronger shield for those who comply—and the danger of being discredited en masse, as suggested by the recent experience of actuaries in the United Kingdom.
Our volunteers must be committed to independent decision-making informed by in-depth study of the actuarial science issues at hand.
Some are concerned that strengthened actuarial standards may be cited in litigation challenging earlier practice. Every profession faces this issue and must treat it with care. The ASB will want to emphasize that such changes reflect all actuarial advances that are known at the time the ASOP is approved and that the new ASOP will become effective only on and after a specified date.
It has been argued that the Introduction, as currently written, allows the ASB to recognize and adopt new principles that flow from advances in actuarial science. More accurately, the ASB may occasionally choose to prune particularly unacceptable practices (or to fill a new-area vacuum). Nothing in the Introduction suggests that the ASB will choose between popular existing practice and more rigorous innovations in the underlying science.
Section 3.1.7 of the Introduction reminds us that much of the discipline that chafes us (“where an actuary is prevented from applying professional judgment”) has been imposed by others. Might we conclude that others believe that the ASB’s laissez-faire approach is insufficient?
Even though there are various sources for innovation in actuarial science, the ASB needs to study, judge, and choose among alternative claims for actuarial advancement. The profession needs a focal point where innovation meets learned judgment. We cannot be assured that innovations will filter upward. Like it or not, judgment must be exercised by our leaders, who must rise to the occasion with knowledge, commitment, and attentiveness.
These comments should not be taken as proposals for specific restrictions on practice. Rather, we are asking the ASB to accept the responsibility that must inure to the leaders of our profession.
The Introduction codifies the ASB’s traditional flexibility-preserving approach that relies on the informed judgment of practicing actuaries. Standards are generally promulgated only after practice has evolved. There are exceptions for new areas, for rare pruning of unacceptable practices, and for individual actuaries to defend variant practices.
The Introduction articulates a handsoff philosophy that must be reconsidered in light of the challenges actuaries face today and will face in years to come. The core of our profession is actuarial science. It’s subject to analysis, argument, innovation, and evolution. Our practice derives from the science, and, although there is room for the practice to inform the science, judgments must be made by learned leaders embracing the best principles of actuarial science lest inferior principles lead a “race to the bottom.”
We believe that the ASB and its practice committees are the proper location for the exercise of professional analysis and judgment. Even if our profession lacks the resources to fund a full-time leadership institution à la the Financial Accounting Standards Board (FASB), our volunteers must be committed to independent decision-making informed by in-depth study of the actuarial science issues at hand. They must advance our tried and tested science in front of our practice. Following, rather than leading, the practice is a prescription for stagnation and an invitation for outsiders to impose their rules upon us. We must lead, or we will be led.
We encourage other actuaries to join this ongoing debate on the role of the ASB and the ASOPs and move us all toward leading rather than being led. In light of significant challenges to our profession around the world, it’s imperative that we establish a more rigorous and vigorous approach to rule-making by actuaries.
David R. Kass is president of David R. Kass & Co. in Shaker H eights, Ohio. The positions taken in this article have been endorsed by the following actuaries who are drawn from diverse actuarial specialties: Lawrence N. Bader, Bryan E. Boudreau, H. J. Brownlee, Bruce Cadenhead, Daniel P. Cassidy, Richard Daskais, Michael F. Davlin, Robert P. Eramo, Edward W. Ford, Paul A. Gewirtz, Luke N. Girard, Jeremy Gold, Arshil Jamal, Eugene M. Kalwarski, Gordon J. Latter, Christopher Levell, Robert C. North, Jr., Michael W. Peskin, Mark T. Ruloff, William J. Schreiner, Mitchell I. Serota, Bruce D. Schobel, Sven Sinclair, Frank Todisco, and Trent R. Vaughn.
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