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Expert Testimony by Actuaries (Part 3 of 4)

Expert Testimony by Actuaries (part 3)



Appendix 1

Background and Current Practices

Note: The following appendix is provided for informational purposes, but is not part of the standard of practice.


The Actuarial Standards Board first adopted Actuarial Standard of Practice No. 17, Expert Testimony by Actuaries, in January of 1991. The standard addressed a type of practice, expert testimony, which had not been explicitly addressed in previously adopted standards. The standard also crossed traditional practice areas to apply whenever actuaries offered expert testimony concerning pensions or insurance. As such, the standard contained a significant amount of educational material.

Since the standard was first adopted, actuaries have become increasingly active as expert witnesses, appearing in a greater variety of venues and addressing an expanding range of topics. As actuaries have become more knowledgeable about providing expert testimony, the need for educational material has lessened to some degree. The Actuarial Standards Board has also adopted a new format for standards, and this standard reflects that format.

Current Practices

Actuaries may be called upon to give expert testimony concerning a broad range of issues, such as the following:

a. actuarial present values of retirement or other benefits;

b. actuarial values incident to a divorce;

c. adequacy or appropriateness of reserves, premium rates, pricing or underwriting

procedures, or provision for administrative costs;

d. cost impact of claims-made or claims-paid financing;

e. cost impact of risk classification systems, tort liability decisions, or legislative/regulatory proposals;

f. lost earnings of a decedent or injured person and the actuarial present value of such lost earnings;

g. malpractice alleged of an actuary;

h. relationships between risk and return on investments;

i. value of an insurance company or other entity; and

j. withdrawal liability assessments under multiemployer benefit plans.

Actuarial expert testimony may be given in many forums including, but not limited to, the following:

a. administrative hearings or other executive branch proceedings;

b. arbitration or other extra-judicial proceedings;

c. committee hearings or other legislative branch proceedings; and

d. courts of law or other judicial branch proceedings, including depositions, declarations, and affidavits.

Actuarial testimony may be oral or written, direct or responsive, formal or informal. Actuaries may also be called upon to provide expert analysis or other litigation support in settings where they are not expected to testify.

Although actuaries sometimes provide expert testimony and support directly to a legislator, regulator, arbitrator, or judge, more typically the actuary’s principal is a party to the proceedings at which testimony is to be given. Parties to such proceedings may be the shareholders of a corporation, the policyholders of an insurer, the electorate of a political jurisdiction, the employers who maintain a state fund, or another individual or group of persons. In most instances, the principal will have retained an attorney or other representative. Often, it is the attorney or representative who retains the actuary on the principal’s behalf.

Actuaries may find themselves testifying in opposition to the opinions of other actuaries or other experts in another field (for example, accountants, statisticians, or economists) who are on opposite sides of a proceeding. At times, the opinions, assumptions, and/or conclusions expressed in expert testimony by others will be in conflict with those of the actuary. These situations may generate doubt in the minds of the audience as to which expert to believe. In such a situation, if asked to comment on the differences in testimony, actuaries attempt to demonstrate factually that the other expert’s opinions, assumptions, and/or conclusions are based on flawed data or methods. Alternatively, depending on the circumstances, the actuary may seek to demonstrate that differences between the actuary’s conclusions and those of the other expert are not material.

One challenge faced by actuaries testifying as experts is that often the audience lacks the necessary background to readily understand an actuary’s testimony. Individuals who are unfamiliar with actuarial concepts may be unable to understand communications that presuppose basic actuarial knowledge, particularly if such communications are presented using terms or acronyms with which they are unfamiliar. When an actuary testifies, it is generally important to explain technical terms and concepts so that, to the extent practicable, the audience can understand them, particularly if the audience is not sufficiently familiar with actuarial methods and assumptions to distinguish testimony that is precisely accurate but ultimately misleading. It is usually beneficial for the actuary to provide expert testimony as clearly as practicable.

Actuarial projections have a degree of uncertainty because they are based on the probability of occurrence of future contingent events. An important challenge for the testifying actuary, and arguably a most difficult one, is to convey the inherent uncertainty of actuarial estimates. Because a projection necessarily has a degree of uncertainty associated with it, actuaries may be called upon to explain the concept of uncertainty and to convey to the audience whether the actuary’s own expectations for future results are within a range believed to be acceptable to most actuaries. Moreover, when providing expert testimony, actuaries generally defend against the characterization of actuarial science or specific actuarial opinions as “guesses,” “guesstimates,” or the like. Although there are uncertainties inherent in future projections and stochastic processes, that uncertainty does not make an actuarially sound analysis the equivalent of a “guess.”

Attorneys may seek on cross-examination to attack actuarial opinions and judgments incrementally, a tactic that may be harmful to the credibility of a testifying actuary who does not respond appropriately to it. For example, if an actuary has testified to an opinion that a reasonable range for a specific liability is between $5 and $6 million, when asked on cross-examination whether $4,999,999 would be a reasonable liability, an appropriate response would be along the lines of, “that number would fall outside of my range of reasonable estimates and would therefore be categorized as not being reasonable.” A response such as “that liability is only one dollar below my range of reasonable estimates and, therefore, could be reasonable,” is likely to generate further incremental attacks (for example, “what about $4,999,998?”) that weaken the credibility of the actuary’s testimony.

Disclosure of pertinent information (including, but not limited to, the name of the principal, the actuarial methods used, the assumptions selected and support therefor, and any potential conflicts of interest) strengthens the credibility of the actuary’s testimony. Such disclosure can be particularly important when testimony is subsequently discovered to be in error. The actuary testifying as an expert witness may not have access to all parties who have relied upon expert testimony subsequently discovered to be in error, but an actuary who discovers a material error in testimony is usually prudent to correct the error, particularly if the actuary is recalled to the stand, and to document in writing the corrective steps taken.

Ultimately, the actuary seeks to provide the forum with a valid actuarial opinion based upon truthful expression of the underlying facts. This serves not only the actuary’s principal, but others who may be directly or indirectly affected by the proceedings. These others may include the principal’s opponent in a lawsuit, the current and potential policyholders in a rate hearing, the plan participants and their dependents in an employee benefit plan action, the creditors in bankruptcy court, or others. Actuaries benefit the public when they apply their professional skills in a manner that promotes the general welfare, and they enhance relations with their professional peers when they represent their work fairly and give credit where appropriate.

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