Annotation 13-1 of Precept 13 has a
similar definition of materiality.
So what does Precept 13 really require us
to do? Some examples may help us decide
what is required. The following examples
are based on this case study:
The trustees of a health plan were consid-
ering an expansion of the benefits provided
under the plan. They engaged Kevin, a health
actuary, to determine the additional cost
of the changes. The trustees tell Kevin they
are willing to absorb a 5 percent increase.
Kevin’s reports to the trustees disclosed the
anticipated increase to be 4 percent. Based
on Kevin’s estimate, the trustees adopted the
changes. A year later, the trustees discover
the increase turned out to be 6 percent,
not 4 percent. The trustees engaged Helen,
a health actuary, to review Kevin’s work.
Scenario 1: After reviewing Kevin’s work,
Helen identifies disparities in the changes
in the plan design versus the changes that
were implemented. Kevin shows Helen the
specifications the trustees provided him.
The actual changes were different from the
ones the trustees communicated to Kevin.
Kevin did his job based on the information he was provided. It sounds like Helen
can place a note to file that the trustees did
not communicate well with the actuary and
that Kevin’s work was consistent with his
understanding of the engagement.
Did Kevin communicate well with the
trustees? Was he clear that the 4 percent was
only an estimate? ASOP No. 41, Actuarial
Communications, requires the actuary to
take steps to ensure that the actuarial communications are clear and use appropriate
language. Helen might review Kevin’s actuarial report to see whether it complied
with this requirement and the trustees were
given enough information to understand the
basis for Kevin’s estimate. If the report was
inadequate, Helen might consider discussing
the communications with the trustees as
well as with Kevin. If there were material
failures in complying with ASOP No. 41,
Helen might consider submitting a complaint
to the ABCD.
Scenario 2: Helen reviews Kevin’s work
and discovers errors. Helen confers with
Kevin and he agrees. Kevin should have
reported an increase of 6 percent, not 4
Kevin asks Helen how this can be resolved. If Helen felt the error was material,
then Helen might ask Kevin to submit revised
calculations. If Kevin revises his report, then
Helen may consider the issue is resolved.
Alternatively, Helen might consider the error
not to be material. She could submit her
report and explain the errors to the trustees.
No further action would be necessary.
Scenario 3: Helen reviews Kevin’s work
and questions his assumptions and methodologies. Kevin admits he selected assumptions and methods that guaranteed the cost
increases would be less than 5 percent.
Helen determines that if Kevin had followed the ASOPs, his work would have
shown an increase of 6 percent. The trustees’ decision might have been the same,
but we will never know this. Was this an
error? Likely, it is not an error; however,
did Kevin exercise professional integrity
in his work? By choosing assumptions and
methods based on the desired outcome and
not on what was required by the ASOPs,
Kevin might have a problem with Precepts
1 and 3. Helen now has to consider how to
proceed with this information. Can Helen
and Kevin resolve the issue? This situation
is quite different than the first scenario.
Our principals rely on actuaries to be unbiased. Kevin was not unbiased. Even if
Helen considers the difference between 4
percent and 6 percent not to be material,
then she should not let Kevin off the hook.
By reporting Kevin to the ABCD, he may
learn how to be a professional.
Scenario 4: Kevin refuses to cooperate
Kevin may be preventing Helen from
completing her assignment. Also, Kevin may
be in violation of Precept 10, which deals
with courtesy and cooperation with other
actuaries. By not responding, Kevin has precluded any resolution to the issues. Precept
13 now requires Helen to report Kevin to the
ABCD. Helen should not consider the issue
to be immaterial. Kevin’s results may be the
result of several material errors offsetting
one another. Helen should think about what
is best for the profession. As in Scenario 3,
Kevin may be violating several precepts.
Without any information, I would hope
Helen would feel the appropriate course of
action is to submit a complaint to the ABCD.
Scenario 5: Helen reviews Kevin’s work.
After discussing the disparity between 4 percent and 6 percent, Helen and Kevin agree the
4 percent estimate was based on reasonable
methods and assumptions. However, the
actual experience did not follow the models,
so the increase turned out to be 6 percent.
In this case, Helen can report to the
trustees that the estimate was correct but
unfortunately experience was significantly
different than the models. It is unfortunate
that the actual experience did not follow the
model; however, as long as Kevin followed
the ASOPs, Helen should not file a complaint
with the ABCD.
In the five scenarios, Helen is the one
who makes the decision on whether the
issues are material, whether there is resolution, and whether she should submit a
complaint to the ABCD. These are difficult
decisions—and rightly so.
May Helen ask the ABCD for help? Of
course! Helen may submit a request for
guidance (RFG) to the ABCD. RFGs are
a conversation between an actuary and a
member of the ABCD. The RFG is not an
official determination by the ABCD. These
conversations are kept confidential within
the ABCD. Helen may have a conversation
with an ABCD member. The member will
likely refer Helen to the Code and to the
ASOPs and discuss courses of action Helen
might consider. Ultimately, it will be Helen’s
decision on how to proceed.
RICK BLOCK, MAAA, FSPA, ASA, EA, is
the chairperson of the Actuarial Board
for Counseling and Discipline.