Why Working With Actuaries is Desirable, In My Humble Opinion

Actuaries often get a bad rap. In my thirtieth year in the profession, I feel like I have heard it all. We are nerds. We are numbers geeks. We can't think outside the proverbial box. We are literal. outgoing actuaries look at YOUR shoes when they talk to you.

Despite all that, there is much to be said that is positive about the profession. An employee (not an actuary) of the US Department of the Treasury once said to me that actuaries were the single most honest and ethical profession that he has dealt with.

Many of us majored in college in something like actuarial science, risk management, math, or economics. Probably, a large number of us thought about a career in academia. I have a number of friends who have remained in academia and that I can think of, every one of them to my knowledge is an honest and ethical person. But, generally, that is because of who they are, not what their professions require them to be. For much of academia, codes of conduct tend to relate to embarrassing the college or university that employs them. In my personal experience, those codes of conduct are not overly stringent, at least not if we compare to the actuarial Professional Code of Conduct.

Recently, much has been in the news, or at the very least, the conservative news of a particular Professor of Economics at MIT, Jonathan Gruber. Dr. Gruber is highly regarded by his peers as one of the preeminent health care economists that we could find. Dr. Gruber also developed many of the econometric models put forth with the Affordable Care Act (ACA, PPACA, ObamaCare). He has been engaged by either or both of the United States Congress or the current presidential administration for his expertise as well as by a number of the states to consult on the economics of the ACA. By his own admission, he helped to deceive the public about the ACA and its costs and sources of revenues. Paraphrasing Dr. Gruber, he justifies this as being for the greater good. That is, he has proclaimed that the ACA was a good and necessary law to pass and that the goodness of the law justifies any deception.

Dr. Gruber may be right about that. Or, he may not be. You may have an opinion on whether he is right. I'm not here to express mine on that particular issue.

There are many actuaries who are qualified, given the appropriate data and choices of assumptions and methods, to project health care costs or the costs of a health care plan or plans. Those who fit that bill have attained initial qualification through examination and maintained it through continuing education. While this process has a different rigor than does the process of attaining a Ph.D., it has created a relatively small community of individuals who work in the field.

Actuaries tend not to be political animals. Part of the reason for that may lie in our Code of Conduct. Quoting directly,

An actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession's responsibility to the public and to uphold the reputation of the actuarial profession. [Precept 1] 

An actuary shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on the actuarial profession. [Annotation 1-4]

Those are two strong statements. Actuaries who have failed to abide by the Code of Conduct have been counseled, censured, suspended, or even expelled from the profession. Many of those cases have been for violation of Precept 1 (and its annotations) among others.

So, while jokes have been told about actuaries regarding the variety of answers that we might provide, I suggest it is because ours is not an exact science. We use our experience to make sound professional judgments. But, we have a duty of honesty and of integrity. We have a duty to not misrepresent or deceive.

To me, this is laudable. It makes me proud to be a part of the profession. It's why there would not have been an attempt by actuaries to deceive the public had actuaries been used by the government to model the costs under the Affordable Care Act. It makes it desirable to work with actuaries.

 

Suppose the Actuarial Code of Conduct Applied to Congress

Suppose the Code of Conduct that applies to the actuarial profession in the US applied to Congress. Just suppose. What would happen?

Let's consider Precept 8. Quoting directly,

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

I guess that, in theory, anyway, Congress does provide services to its constituency.

Today, I am going back to an old target of mine, the rules under which the Congressional Budget Office (CBO) is required to operate. Now, understand, I don't hate the CBO. It's made up of some pretty smart people. And, as far as I know, they are also very honest people.

But, they don't set their own rules. You see, when the CBO "scores" a bill, that is when the CBO determines the cost of a bill that is introduced into a house of Congress, it is required by Congress to determine that cost over a 10-year period without regard to a dynamic economy. In other words, there is to be no inflation considered, no growth -- just whatever we have right now is what we are assumed to continue to have.

Quoting directly from President Lincoln in his famous Gettysburg Address:

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and dedicated, can long endure. We are met on a great battle-field of that war. 

Surely, it's not what the President intended, but the so-called fiscal cliff negotiations going on right now feel like some sort of great civil war. People are not perishing from it, but jobs may. And, leaders of both parties are acting like babies.

From what I have read in major print media and heard on major broadcast media, proposals include

• no increases in tax rates for anyone
• increases in tax rates only for the "wealthiest 2%"
• no spending cuts for the first 4 years of the 10-year period that the CBO would be considering (this is to be balanced by generally as yet undetermined spending cuts to occur beginning in 2017)
• continued reductions in FICA taxes

People, we have an 'official federal debt' of approximately $16.3 trillion. Through the magic of the way the CBO is required to do its calculations, the bulk of the savings from these proposals is not likely to ever come about. If a credentialed US actuary performed calculations in the manner that Congress requires, he or she would be required to also do the calculations on a reasonable basis or to at the very least estimate the difference in results if the calculations were done on a reasonable basis. Failure to do so might subject said actuary to any number of disciplinary options including expulsion from actuarial organizations.

What would it take to discipline most of Congress in such a manner.

FULL DISCLOSURE: If the actuary disclosed that calculations were being performed using assumptions chosen by the Principal (Congress in this case with respect to the CBO) and that the actuary did not agree with the assumptions and further disclosed that said calculations could only be used for the specific purpose for which they were intended, the actuary would likely be compliant. But in that case, at least the user would know that the actuary disavowed the results.

Be Careful With COLI

Most of you are familiar with it. If you've ever been in corporate HR or Finance, someone has undoubtedly tried to sell it to you. It can look like the greatest thing since sliced bread, and frankly, before 1986, it probably was, but corporate-owned life insurance, commonly referred to as COLI, is not the be all and end all.

It has its uses. I have recommended in favor of it and I have recommended against it. But, understand that I have never sold it. I am not licensed to sell insurance products. I never have been. That makes me relatively agnostic to COLI. I don't make money from its sale. The work that I have done and do with respect to COLI is either analysis of its merits or performance, or helping a client unwind it if they decide they don't like it.

So, why am I writing this? While I have no insurance credentials, I do have a bunch of actuarial credentials. As such, I am held to a whole set of professional standards. They start with the Code of Conduct and include adherence to a set of Actuarial Standards of Practice (ASOPs). While adherence to all of this can feel annoying at times, I fully support that my profession has adopted this framework. If only all of the other professions that we deal with had as stringent a framework, in my opinion, the benefits world would be a more honest and straightforward place.

Let's go back to COLI. I looked at a COLI illustration this morning. It was based on a Variable Universal Life (VUL) product. Note the variable part. That means that the product invests typically in a mixture of equity and fixed income instruments, usually chosen (all or in part) by the policyholder. So, like a defined benefit trust or defined contribution account, it has a return of return that is closely linked to the rates of return on those instruments (there are often charges and or loads).

What was alarming? The cash value seemed to be building up really quickly. I did some analysis. The agent who produced those illustrations chose to assume a 10% rate of return inside the policy. I checked. That is legal in his state. It is in many states. But, as an actuary who has to make similar assumptions for defined benefit trusts, I would tell you that it's not reasonable. In fact, if I put in writing today in a Statement of Actuarial Opinion that a 10% rate were reasonable, I would expect to be reported to my profession's disciplinary body.

You know what, if you can get tax-favored asset build-up that has a geometric mean 10% long-term rate of return guaranteed, you should put all the money that you can afford to into the underlying instrument. And, you had better tell me about it so that I can invest in it as well. It's just not feasible, it's not reality, but it was in an illustration presented by an agent to a prospect.

So, the message is this. COLI has its uses. It has its purposes. But, the guy who has the goal of selling you COLI is not going to be unbiased, no matter how hard he tries to convince you. If you can do the analysis yourself, do it. Find out if the COLI product is, in fact, good for your company. If you can't, then find an unbiased third party to do it. And, if either you or a third party find that the illustrator thinks he can get you a 10% annual rate of return, run away from it as fast as you can.