Control of Work Product—Be Upfront With Clients

Recently an actuary contacted the Actuarial Board for Counseling and Discipline about a confidentiality issue.

The actuary’s year-end actuarial reports with reserve opinions contained language about who could see the report. The language said that the report contained work papers, trade secrets, and the principal’s confidential information. It was prepared for the use of management and was available for regulatory purposes. Due to the nature of the material, it was not intended to be subject to state Freedom of Information Acts. The principal could not release the report to anyone other than regulators without the actuarial firm’s permission.

The longtime client demanded that the language be removed because the client had paid for the report. The client believed that he could do anything he wanted with the report—it was bought and paid for, and he owned it.

What should the actuary do, and how does the Code of Professional Conduct help make sense of this situation? Precept 8 of the Code states:

PRECEPT 8. An Actuary who performs Actuarial Services shall take reasonable steps to ensure that such services are not used to mislead other parties.

ANNOTATION 8-1. An Actuarial Communication prepared by an Actuary may be used by another party in a way that may influence the actions of a third party. The Actuary should recognize the risks of misquotation, misinterpretation, or other misuse of the Actuarial Communication and should therefore take reasonable steps to present the Actuarial Communication clearly and fairly and to include, as appropriate, limitations on the distribution and utilization of the Actuarial Communication.

The actuary might tell the client (citing Precept 8):

“My Code of Professional Conduct makes me responsible for my reports and how they are used. I have to be concerned about who may read them and how they may use them. Our firm believes that the best way to do this is to limit distribution as we have requested. In that way, if you want to provide it to someone, we can understand the situation and decide whether we need to provide a summary or other discussion that would help your intended user. We value your business but are held to certain standards as actuaries.”

In the future, the actuary might consider using a fairly explicit written communication. This could include scope of work, information sources, intended audience, timing and expected cost, and restrictions that would be included in the report. This approach—which would probably be communicated in a fairly informal communication, such as email—is also useful inside a company; it does not only apply to consultants.

The key issue is whose court you play in. If you raise these topics at the beginning of the assignment, you confront any issues early in the project, before you have done significant work. This means it is easier to walk away—although we never like to walk away from contracted work—and makes the threat to walk away more credible. If the first time these topics come up is later in the process, possibly as late as your draft report, you have already done significant work and are on the back foot, as the English say.

There are other publications the actuary might cite to support his or her position.

Relevant Citations

The Academy in 2016 issued a practice note, Statements of Actuarial Opinion on Property and Casualty Loss Reserves, which included the following illustrative wording that is similar to what the actuary was using:

“This Actuarial Opinion Summary was prepared solely for the Company for filing with regulatory agencies and is not intended for any other purpose. Furthermore, it contains information that is a trade secret and therefore, if disclosed, would cause substantial injury to ABC Insurance Company’s competitive position. Therefore, I request that this Summary and information contained therein be maintained confidential and I request an exception from disclosure under the Freedom of Insurance Act/Laws of your state.”

That practice note also includes instructions from the NAIC on the preparation of the Actuarial Opinion Summary (AOS):

“The AOS contains significant proprietary information. It is expected that the AOS be held confidential and is not intended for public inspection. The AOS should not be filed with the NAIC and should be kept separate from any copy of the Statement of Actuarial Opinion in order to maintain confidentiality of the AOS. The AOS can contain a statement that refers to the Statement of Actuarial Opinion and the date of that opinion.”

The actuary needs to begin these discussion early in the process—because some clients will not agree with the actuary’s point of view. Then there will be time to see whether the actuary can reach an accommodation with the client. For example, a report might be allowed to be released, but the report is worded under the expectation that unsophisticated users may read it. Potential language in such a situation includes the report should be reviewed only in its entirety, the report is technical in nature, and the report requires certain types of expertise (e.g., life reserving techniques, casualty ratemaking processes, health Medicare Advantage bid process, etc.).

It is useful for the actuary to consider what types of expertise are needed to understand the report, even if the distribution is limited. For example, does the report properly discuss any issues about the data used or assumptions selected that are needed to properly understand the results?

Planning ahead is always useful.

Section 3.1.2 of ASOP No. 41, Actuarial Communications, reminds us: “The actuary should take appropriate steps to ensure that each actuarial communication is clear and uses language appropriate to the particular circumstances, taking into account the intended users.”

That advice is important for anyone who disseminates actuarial communications.

GODFREY PERROTT, MAAA, FSA, is a member of the Actuarial Board for Counseling and Discipline.