Re Slee and Australian Prudential Regulation Authority
[2006] AATA 206
•6 March 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 206
ADMINISTRATIVE APPEALS TRIBUNAL )
) No V2004/1216
GENERAL ADMINISTRATIVE DIVISION ) Re MR DAVID SLEE Applicant
And
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
DECISION
Tribunal The Hon RNJ Purvis AM QC, Deputy President Ms G Ettinger, Senior Member
Date 6 March 2006
PlaceSydney
Decision The Tribunal affirms the decision under review and releases the decision in full without suppressing the names of any parties. …………………………………
Presiding: The Hon RNJ Purvis AM QC
Deputy President
INDEX OF DECISION
The Application 3
Hearing 8
Terminology 12
Role of an actuary in relation to OCL and OCP 13
Retainer of the Applicant by the company 17
Relevance of PS300 to the Applicant’s work 20
The Company, Its Collapse and The Royal Commission 23
Relevance and Applicability of GPS220 22
The June 2000 Report 24
Conduct of the Applicant under Code of Conduct and PS300 25
PART 1A - Applicant supported figure that was not a central estimate of OCL 28
PART 1B - Inappropriate use of actuarial techniques & inadequate data 34
PART 1C - Errors and Omissions 41PART 2 - Extent of compliance / non - compliance with PS300 42
PART 3 - Omission of prescribed material from reports 43
PART 4 - Reports relating to the accuracy of data 44
PART 5 - Reports not stating clearly the assumptions and methods used 45
PART 6 - Aspects of PS300 and the implications of divergence from PS300 45
PART 7 - Advising on the OCL not conforming with the steps provided in PS300 46
Disqualification Power and Decision 47
CATCHWORDS
INSURANCE – whether Applicant should be disqualified from holding appointment as an actuary of a general insurer – disqualification by reason of the actuarial work carried out and based on a number of findings and factors – primary contention by Respondent that Applicant has not demonstrated competence in the conduct of business duties and has not demonstrated professional standards – consideration of the Code of Conduct for Actuaries and Professional Standard 300 – application concerned with the conduct of the Applicant in the June 1999, December 1999 and June 2000 financial periods – application of relevant legislation, being the Insurance Act 1973 – consideration of the disqualification power as a protective measure to safeguard the public – Tribunal affirms the decision under review and releases the decision in full without suppressing the names of any parties.
Insurance Act 1973 – sections 44 and 63
Administrative Appeals Tribunal Act 1975 – section 35
Australian Prudential Authority Act 1998The Code of Conduct for Actuaries
Professional Standard 300National Companies and Securities Commission v Bankers Trust Australia Ltd (1989) 24 FCR 217
Brown v Federal Commissioner of Taxation [2001] FCA 276
Kamha v Australian Prudential Regulation Authority [2005] FCA 480REASONS FOR DECISION
6 March 2006 The Hon RNJ Purvis AM QC, Deputy President Ms G Ettinger, Senior Member the application
1. On 8 September 2004 a delegate of the Australian Prudential Regulation Authority (“APRA”) pursuant to section 44(1)(b) of the Insurance Act 1973 (Cth) (“the Act”) decided that Mr David Slee (“the Applicant”) should be disqualified from holding any appointment as an actuary of a general insurer. The decision was confirmed by a delegate of APRA on 30 September 2004.
2. At the times relevant to this decision, 1 January 1997 to March 2001 (“the Relevant Period”) the Applicant was the consulting actuary for HIH Insurance Limited (“the Company”) as principal of DS Consulting Pty Limited. The Company was an authorised insurer for the purposes of the Act. It was the subject of a provisional liquidation order on 15 March 2001.
3. The disqualification of the Applicant was by reason of the actuarial work carried out by him during the Relevant Period. The delegate in the schedule to his decision confirming the disqualification set forth the findings upon which he relied as that the Applicant:
(a)failed to give adequate consideration to the validity or accuracy of certain assumptions, data and techniques underlying your actuarial reports to HIH and in failing to do so breached paragraphs 24 and 25 of the Actuaries Code of Conduct and paragraphs 52 to 54 and 56 of PS300;
(b)adopted optimistic assumptions on a number of occasions that you knew or should have known were not reasonably open in all the circumstances and in doing so breached paragraphs 24 and 25 of the Actuaries Code of Conduct and paragraphs 52 and 56 of PS300;
(c)failed to consider and discuss in your reports whether certain assumptions were consistent with relevant professional standards and failed to discuss in your reports the implications of divergence from those standards contrary to paragraph 23 of the Actuaries Code of Conduct and paragraphs 51, 54 and 56 of PS300;
(d)made calculation errors in your actuarial assessments that should not have been made if you had been giving the matters sufficient consideration;
(e)supported provisions that you should have known were materially less than the central estimate, by reason of the cumulative effect of errors and optimistic or invalid assumptions, contrary to paragraph 47 of PS300, at least for the years ended 30 June 1999 and 30 June 2000; and
(f)failed to adequately document certain analysis, assumptions and methods underlying your reports in breach of paragraph 52 of PS300.
4. The matter now comes before the Tribunal for review of the confirmatory decision. Whilst the Tribunal will pay heed to such decision and the reasons for it, the application requires that the issue of disqualification or not is to be considered anew. The Tribunal is not to examine the original decision and discern if a mistake was made in the findings of fact or the reasoning. The task before it is to consider the material tendered in evidence and the submissions made in relation to it and then reach its own decision in accord with the Act.
5. Much of the evidence before the Tribunal was not available to the original decision-makers. In addition, we have had the benefit of the Applicant giving evidence in chief and being subject to cross examination. It is also apparent that contentions made on behalf of APRA are in a number of respects different from those considered by the delegate responsible for the decision under review. The primary contention of APRA is that within the meaning of General Prudential Standard 220 issued by APRA pursuant to section 32 of the Act, the Applicant has not demonstrated competence in the conduct of business duties. APRA maintains in this context that the Applicant has not complied “with relevant professional standards” and “the more general standard of professional care and diligence expected of a reasonable and competent actuary in the performance of the work in question”.
6. It is said on behalf of APRA that the “professional standards” relevant to “the provision of actuarial advice to general insurers” are those contained in the Code of Conduct for Actuaries and Professional Standard 300 each issued by the Australian Institute of Actuaries, the professional body of which the Applicant was required to be, and was, a member in order to practise as an actuary in Australia.
7. The Applicant had been appointed Consulting Actuary to the Company some years prior to the Relevant Period. He had a close acquaintance with the directors and some other officers of the Company. He took some instructions from the directors and officers and gave actuarial advice to them.
8. This application is primarily concerned with the conduct of the Applicant relevant to the June 1999, December 1999 and June 2000 financial periods and reports and an unsigned report that he prepared. It is said as to his said conduct that the same evidenced incompetence to such a degree as to warrant disqualification.
9. During the preparation and finalisation of the Reasons for Decision, the Tribunal considered whether the decision should be released in full with all parties identified. This is our usual practice. We were mindful that pursuant to section 63(14) of the Insurance Act 1973 (“the Act”) the hearing of this matter was conducted in private. Accordingly submissions regarding the publication were sought from both parties. Section 63(14) provides:
“The hearing of a proceeding relating to a reviewable decision of the Treasurer or APRA shall take place in private and the Administrative Appeals Tribunal may, by order:
(a) give directions as to the persons who may be present; and
(b)give directions of a kind referred to in paragraph 35(2)(b) or (c) of the Administrative Appeals Tribunal Act 1975”
10. Mr Slee argued that his name should be suppressed as the hearing had been in private. He cited personal reasons which we can fully appreciate, and indicated that having reached the age of 70, he would not be considering further practice as an actuary regardless of the outcome of the case.
11. The Respondent submitted a comprehensive argument in writing, with supporting authorities and offered to provide further oral submissions if they were required. The Respondent contended that the Act did not require that the Tribunal’s decision be confidential and further that neither the Administrative Appeals Tribunal Act 1975 (“the AAT Act”), nor the Australian Prudential Authority Act 1998 limited the publication of the Tribunal’s decision. The distinction between the privacy of the hearing itself and publication of the material after the conclusion of the hearing was discussed in the reasons for judgement in National Companies and Securities Commission v Bankers Trust Australia Ltd (1989) 24 FCR 217 at 233:
“It is one thing to secure the secrecy of the hearing by prohibiting disclosure during the currency of the hearing, or perhaps, within a reasonable time after it has concluded…It is a very different thing…to seek prohibit disclosure definitely, or at least unless and until an order for discharge, if any, is made.”
12. The Respondent submitted that if section 63(14) of the Act were construed to include the mandatory non-identification of a party, then it would lead to an absurd result. That is, even if the parties consented to open publication of APRA’s decisions and reasons for decision, the Tribunal would be restricted in its ability to publish its reasons and therein identify the Applicant. This it was said would be contrary to public policy, of open justice, as well as the policy of the Insurance Act itself in enabling disqualification. We agree with this submission. We are not constrained by section 63(14) of the Act from publishing our reasons with the Applicant being identified. (See National Companies and Securities Commission v Bankers Trust Australia Ltd (supra) and Brown v Federal Commissioner of Taxation [2001] FCA 276).
13. As to public policy, the Tribunal notes sub-sections 35(2) and (3) of the AAT Act, which provide as follows:
“(2)Where the Tribunal is satisfied that it is desirable to do so by reason of the confidential nature of any evidence or matter or for any other reasons, the Tribunal may, by order:
(a)direct that a hearing or part of a hearing shall take place in private and give directions as to the persons who may be present; and
(aa)give directions prohibiting or restricting the publication of the names and addresses of witnesses appearing before the Tribunal; and
(b)give directions prohibiting or restricting the publication of evidence given before the Tribunal, whether in public or in private, or of matters contained in documents lodged with the Tribunal or received in evidence by the Tribunal; and
(c)give directions prohibiting or restricting the disclosure to some or all of the parties to a proceeding of evidence given before the Tribunal, or of the contents of a document lodged with the Tribunal or received in evidence by the Tribunal, in relation to the proceeding:
(3) In considering:
(a) whether the hearing of a proceeding should be held in private; or
(b)whether publication, or disclosure to some or all of the parties, of evidence given before the Tribunal, or of a matter contained in a document lodged with the Tribunal or received in evidence by the Tribunal, should be prohibited or restricted;
the Tribunal shall take as the basis of its consideration the principle that it is desirable that hearings of proceedings before the Tribunal should be held in public and that evidence given before the Tribunal and the contents of documents lodged with the Tribunal or received in evidence by the Tribunal should be made available to the public and to all the parties, but shall pay due regard to any reasons given to the Tribunal why the hearing should be held in private or why publication or disclosure of the evidence or the matter contained in the document should be prohibited or restricted.”
14. We agree that it is desirable that both hearings and decisions be as open and available to the public as possible. Given the protective nature of a disqualification, it is important for the insurance industry and other interested parties to be informed regarding the status of members. It is for that reason, as well as the deterrent effect, that APRA maintains and publishes a Disqualification Register.
15. We consider that it is appropriate in the circumstances of this matter, prime amongst which is the importance to be attached to the role of an actuary in the insurance industry, and the protection of those having an interest in that industry as well as the public generally, that publication of the Applicant’s name should not be suppressed.
the hearing
16. At the hearing of the application, the Applicant was represented by Mr P Cosgrave and Mr C Bozzi of counsel and APRA by Mr P Hanks of QC and Ms K Walker of counsel.
17. The documents lodged with the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were admitted into evidence and marked T1 to T198. Written material tendered by the parties and received as exhibits was marked accordingly as follows:
Exhibit A Letter of the Applicant (+ attachments) dated 24 June 2005
Exhibit B Supplementary Report / Appendix to Directors HIH Insurance
Exhibit C Partial Transcript of HIH Royal Commission p18585-18654
Exhibit R1 Letter of E. Pearson to S. Daley dated 19 March 2002
Exhibit R2 Affidavit of Catherine Baldwin dated 30 June 2005
Exhibit R3 Outline of Evidence of E. Pearson
18. Oral evidence was given by the Applicant and Ms Estelle Pearson upon which they were each cross examined.
relevant legislation, code and standards
19. The Act as relevant provides:
44.Disqualification of a person as an auditor or actuary
(1)APRA may determine (in writing) that:
(a) a person is disqualified from holding any appointment as an auditor of a general insurer; or
(b) a person is disqualified from holding any appointment as an actuary of a general insurer.
(2)APRA may only do so if the person:
(a) has failed to perform adequately and properly the functions and duties of such an appointment under this Act or the prudential standards; or
(b) otherwise does not meet one or more of the criteria for fitness and propriety set out in the prudential standards; or
(c) does not meet the eligibility criteria for such an appointment as set out in the prudential standards.
professional standards
20. Professional Standard 300 (PS300) provides:
16.The steps which an actuary should take when advising on outstanding claims liabilities are similar to those for other actuarial investigations.
…
(3)analyse the experience.
…
24.It is the actuary’s responsibility to ensure that the data utilised is appropriate and sufficient for the valuation. The actuary should where possible take reasonable steps to verify the overall consistency of the valuation data with the insurer’s financial records.
…
30.Selection of the most appropriate valuation model to estimate the liabilities is the responsibility of the actuary. The actuary may investigate more than one model before arriving at an estimate. The model or models should take into account the available data, the nature of the portfolio, and the results of the analysis of experience.
…
39.The actuary has a responsibility to consider the reasonableness of the estimates produced by the valuation procedures employed and to quantify the effects of any changes in the valuation basis since the previous actuarial valuation. Explanation should be sought where possible for any major departures from past results.
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F.PROVISIONS
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47.The actuary should not recommend or support a provision which is excessive.
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G.REPORTING
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51.The actuary should prepare, date and sign a written report. The report should state:
-who has commissioned the report and, if different, the addressee(s) of the report
-the name of the actuary and the capacity in which the actuary is acting
-the purpose of the report or the terms of reference given
-the extent, if any, to which the report falls short of, or goes beyond, its stated purpose
-the extent of compliance with this standard and the reasons for not complying fully with this standard
-any restrictions on the actuary.
52.The report should deal with:
-the nature, accuracy and interpretation of the data
-the analysis of experience
-the valuation model and key assumptions
-any changes in the method and key assumptions since the last similar report
-comparisons of actual experience with that expected under the assumptions in the last similar report
-the results of the valuation
-uncertainty of the valuation result.
53.The report should describe the steps taken by the actuary to verify the accuracy of the data, any limitations on the extent or quality of the data and the extent to which the actuary has relied upon the insurer or the insurer’s auditor for checking.
54.The assumptions and methods should be stated clearly and their derivation explained. Any qualifications should also be clearly stated.
55.…
56.Where the principal requires the actuary to use specific assumptions or the actuary is relying upon an interpretation of legislation, accounting standards or other rulings supplied by the principal or its advisers, the actuary must clearly state the circumstances, discuss whether or not the assumptions are reasonable and consistent with this standard, and discuss the implications of divergence from this standard.
57.…
58.…
END OF PROFESSIONAL STANDARD 300
general prudential standard (GPS220)
Prudential Standard
1.This Prudential Standard, made under section 323 of the Insurance Act 1973 (the Act), applies to all general insurers authorised under the Act.
Governance
Fitness and Propriety
2.Insurers must ensure that persons occupying key positions within the insurer have the degree of probity and competence commensurate with their responsibilities.
3.…
4.For locally-incorporated insurers, persons occupying key positions means:
(a)…
(b)...
(c)…
(d)the insurer’s actuary appointed under the Act and approved by APRA (Approved Actuary), where relevant.
5.…
6.The criteria for fitness and propriety are as follows:
(a)…
(b)…
(c)…
(d)…
(e)the person has adequate experience and demonstrated competence and integrity in the conduct of business duties;
(f)…
…
the actuary’s code of conduct
CONTENTS OF REPORTS
23.When providing actuarial advice in an area which is the subject of a Professional Standard, Guidance Note, or Mandatory Guidance Note published by the Institute, any report which is the responsibility of an actuary must state that the report has complied with the particular standard. In the event of departures from Professional Standards and Guidance Notes (other than Mandatory Guidance Notes), the report must state the extent to which the report does not comply and provide a justification for the departures.
24.An actuary is expected to include in any report a statement indicating to whom the report is addressed, a statement describing or clearly identifying the data and the actuarial methods and assumptions employed, and a statement drawing attention to any important implications of those methods.
…
relevant terminology
21. The following acronyms or phrases have the meaning ascribed to them in these reasons as indicated:
OCL: (outstanding claims liabilities figure) – An estimate of the sum needed to settle all losses that have been sustained but which , for whatever reason, have not yet been paid;
OCP: (outstanding claims provision) – An estimate of the sum needed to settle all losses that have been sustained but which, for whatever reason, have not yet been paid;
IBNR: (incurred but not reported losses) – Claims which have occurred but which have not been notified to the company as at the reporting date.
IBNER: (incurred but not enough reported losses) – Addresses the phenomenon of adverse development of case estimates on reported claims, that is, the existing case estimates at the reporting date need in aggregate to be increased over time.
Chain ladder method:
Ratios (called chain ladder factors) of cumulative payments or incurred costs (payments plus case estimates) in successive years after the accident year are derived and utilised to project future payments or incurred costs.
Superimposed Inflation:
Inflation over and above normal inflation viz CPI or AWE;
FCHC: (future claims handling costs) – Refers to the insurer’s costs of handling claims that are not allocated to individual claims, such as internal claims department salaries, property and operating costs and a proportion of human resources, central management, finance and information technology costs relating to claims handling;
Central Estimate:
An estimate of the insurer’s outstanding claims liabilities which is intended to contain no deliberate or unconscious over- or under-estimation and is one that has a 50 per cent probability of being adequate.
role of an actuary in relation to ocl and ocp
22. Ms Estelle Pearson, a fellow of the Institute of Actuaries of Australia, in her outline of “the general principals followed by insurers in establishing outstanding claims provisions”, which the Tribunal accepts as being a fair representation of the position, discusses the role of an actuary in advising an insurer relevantly as:
…
The Institute of Actuaries of Australia Professional Standard 300 (PSS300)
·The standard applies to actuaries making an estimate of the outstanding claims liabilities of a general insurer and providing advice on the balance sheet or tax provision to be set aside to meet this liability (it was first issued in May 1994).
·The standard makes the following definitions:
-Outstanding claims include claims which have been reported but have not yet been finalised, IBNR claims and claims which have been finalised but may be reopened.
-Claim payments include payments made to or on behalf of a claimant plus any third party costs associated with each claim.
·The standard describes in general terms the process the actuary must follow in carrying out the valuation and the items that the liability estimate must include, i.e. inflation, discounting and claims administration expenses, but is not prescriptive in terms of the valuation model to be adopted or the specific assumptions to be adopted.
·The actuary is required where possible to make a central estimate of the outstanding claims liability; a central estimate is an estimate that is intended to contain no deliberate or conscious over or under estimation. In statistical terms it is the mean of the distribution of the possible outcomes. For a symmetrical statistical distribution the mean will be at the 50th percentile, called the median or the mid-point of the distribution. …
…
·The standard differentiates between the actuary’s central estimate of the outstanding claims liability and the provision set aside in an insurer’s accounts to meet this liability.
·In recognition of the uncertainty inherent in making an estimate of the outstanding claim liability the standard recognises the desire to establish a provision which exceeds the central estimate; the difference being the prudential margin.
·The standard is clear that it is the directors of the entity who have the ultimate responsibility for the size of the provision not the actuary.
·The standard does however require the actuary to address the uncertainty in the central estimate as part of the valuation advice and if asked to provide advice on a provision does not allow the actuary to recommend or support a provision that is les than the central estimate or is excessive.
Actuarial Methods
·In contrast to case estimates which are established on individual claims taking into account the specific circumstances and information of the claim an actuary is seeking to estimate the total outstanding claims liability (including IBNER and IBNR) on a portfolio wide basis.
·A number of different actuarial methods exist. The choice of a method or methods by the actuary will depend on the type of portfolio, the size of the portfolio and the quality and availability of data. All have in common the fact that aggregate data is employed rather than information on individual claims.
·Actuarial methods have in common the following characteristics in that they:
1.attempt to find a consistent claims runoff pattern that has applied in the past; and
2.apply that pattern – with adjustments for anticipated future changes – to estimate the runoff of claims that have been incurred by are outstanding.
·Actuarial methods do not guarantee a correct estimate of the outstanding claims liability. The results are dependent on the interpretation by the actuary of trends evident in past experience and assumptions made about future experience.
·Past consistency in claims trends may be abruptly disturbed and the actual outcome of the outstanding claims liability will reflect any changes in trends.
·Actuarial methods do guarantee however that explicit assumptions are made about certain aspects of the claims experience, e.g. number of IBNR claims reported, level of claim payments made, level of future inflation which are based on examination of past claims experience. This enables the appropriateness of these assumptions to be checked each year and adjustments made as necessary.
·…
Actuarial Techniques
·There is no standard method of estimation.
·There are a number of methods of estimation commonly used by actuaries to estimated outstanding claims liabilities which include the following:
-Chain ladder method (applied to payments or incurred claims, i.e. payments plus case estimates);
-Payments per claim incurred method;
-Payments per claim finalised (speed of finalisation) method;
-Projected case estimates method;
-Bornhuetter-Ferguson method.
·The appropriateness of a given method will depend upon many factors, including the type of business, the size and maturity of past claims experience, and the circumstances of a particular portfolio. The actuary may apply more than one method to assist in making an estimate of the outstanding liability.
·…
…
Superimposed inflation
·Superimposed inflation is an important contributor to ultimate claims costs for long tail classes of business – particularly those involving personal injury. The main caused of superimposed inflation (SI) include:
-Court awards becoming more generous
-Medical costs increasing faster than the rate of general inflation.
·A typical actuarial approach to SI is to:
-Estimate the level of SI experienced in a portfolio in the past by analysing statistics such as changes in the average cost of claims in real terms over time.
-Consider whether it is reasonable to assume that past rates of SI will continue to be experienced in future.
-Allow for the assumed level of future SI in calculating the actuarial estimate of the outstanding claims liability. Note that in some actuarial methods allowance for superimposed inflation is implicitly built in to the other assumptions adopted (for example chain ladder factors) rather than being an explicit assumption used in the projections.
23. The OCP is significant for the balance sheet of an insurer and in the determination of periodic profit. As Ms Pearson explains:
Significance of the OCP
·The OCP represents approximately 50% of the liabilities of general insurers (more for a long tail insurer) and is therefore a crucial item in an insurer’s balance sheet. The principal influences of OCP are on:
-Financial performance and strength;
-Premium setting.
·Apart from the balance sheet numbers the OCP must be substantially correct and consistent over time for the purposes of periodic profit measurement. Accounting profit equals revenue (earned premium) less expenses (incurred claims).
·Incurred claims (in an accounting sense) are equal to paid claims, less OCP brought forward, plus OCP carried forward. In any accounting period the profit will be influenced very directly by movements in the OCP:
-If the outgoing provision is understated, profit will be overstated;
-If the outgoing provision is overstated, profit will be understated.
·…
·For a long established insurer, a change of just a few percent in the OCP can double annual profit or wipe out annual profit.
·Under-reserving also serves to overstate shareholders funds (and hence solvency) in the balance sheet. If the OCP is understated this can give a misleading value of shareholders funds.
Influence on Premium Setting
·Claims constitute the largest cost item for an insurer and therefore are the principal constituent in setting premium. …
…
·If claims are understated due to under-reserving for O/S claims, the premium will be insufficient; the surplus (ie. Profit) may become negative.
·If claims are overstated due to over-reserving of O/S claims, the premium maybe excessive, resulting in erosion of a company’s competitive position.
·…
24. As was submitted on behalf of APRA and a position accepted by the Tribunal:
15.The significance of a general insurer’s OCP for the solvency of the insurer and for the protection of shareholders, policy holders and others whose interests are likely to be protected by the insurer indicates that a high standard of professional care and diligence is expected of a reasonable and competent actuary when that actuary is providing advice on the amount to be set aside by the general insurer as an OCP.
16.The actuary’s role in advising an insurer on its OCP is to estimate the total OCL on a portfolio-wide basis. The actuary will often utilise the insurer’s case estimates (that is the estimates of outstanding claims made by claims managers based on their technical knowledge and experience on legal advice). The actuary will also take into account claims incurred but not reported (IBNR), claims incurred but not enough reported (IBNER), claims inflation, discounting and future claims handling costs (FCHC).
17.Various actuarial methods and techniques are available to an actuary in determining the OCL. The choice of the appropriate method or technique involves an exercise of judgement and will depend on the type and size of the portfolio and the quality and availability of the data. Actuarial methods attempt to find a consistent claims run-off pattern that has applied in the past, and apply that pattern, with adjustments for future anticipated changes, to estimate the run-off of claims that have been incurred but remain outstanding.
the retainer of the applicant by the company
25. The Applicant maintains that his retainer by the Company as an actuary was to advise on the probability of adequacy of the Company’s global discounted reserves; that is, the amount which the Company assessed was necessary to meet its liability to claims. He was not retained, he says, as APRA contends, to advise on what the provision should be for OCL or any prudential or solvency margin. He performed his responsibilities, he says, consistent with his retainer. He maintains that he was not necessarily required to comply with PS300.
26. The evidence is otherwise. There is no written document evidencing any contract or retainer between the Applicant and the Company. However, in his report at PT28/1039-1041, 1046 he states as follows:
Risk
Actuarial standards require me to point out the uncertainty in all these calculations. The following risks are an inherent feature of this valuation and give rise to considerable uncertainty when taken in the aggregate:
…
Introduction
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The report does not exceed, nor falls short of its stated purpose and complies with actuarial standards in accordance with the terms of reference.
The terms of reference clearly require me to consider solvency as a separate exercise from adequacy for balance sheet purposes.
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Terms of Reference
The object of my investigation has been to test the book value of the provision for outstanding insurance claims including IBNR and FCHC as at 30th June 1999.
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Risk
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Actuarial standards require that I point out the existence of uncertainty in the claims reserve and that no specific provision has been made for adverse deviation in the balance sheet.
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Conclusion
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For the purpose of assessing the solvency of the company it is deemed prudent to include a prudential margin over and above the central estimate of the liability for claims incurred. The extent of any prudential margin is a matter for judgement, and I point out that each Australian Company is assessed individually by A.P.R.A. according to its regulations; they may make adjustments to the valuations as they see fit.
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27. Similar terms of reference appear in the December 1997 report (T100), December 1998 report (T107), December 1999 (T29) and the June 2000 unsigned report (T30).
28. It is noted that the Applicant in his reports advised the directors of the Company as to whether the OCP proposed was a central estimate viz:
·In the December 1997 report the Applicant stated:
“The actuarial calculations are not biased and as such the reserved quoted has a 50% chance of inadequacy”;
·In the December 1998 report the Applicant stated:
“The booked amount … is a fair central estimate”;
·In the June 1999 report the Applicant stated:
“I understand that this figure is to be booked in the balance sheet and it represents liability which has 50% probability of being adequate” and “the company determines its own value for balance sheet purposes … and the actuarial central estimate is regarded as a test of the company’s results”;
·In the December 1999 report the Applicant stated:
“It has generally been the habit of the company to reserve a figure not less than the actuarial value based on a 50% probability of adequacy and the result should represent an unbiased view of the central estimate of the liability”; and
·In the June 2000 report the Applicant stated:
“It has generally been the habit of the company to reserve a figure not less than the actuarial value based on a 50% probability of accuracy and I consider this to be a fair and reasonable estimate of the liability with a 50% chance of adequacy in the aggregate.”
29. Further, the Applicant tendered advice to directors of the Company as well as to the Company’s auditors before finalisation of his reports and the Company’s accounts. This is seen in the following documents:
·Letter dated 24 August 1999 from the Applicant to the Company (T125);
·Letter dated 2 September 1999 from the accountants to the Applicant;
·Letter dated 17 February 2000 from the Applicant to the Company (T140);
·“Copy of the executive summary for Ray Williams and Dominic Fodera” copy of the executive summary of the Applicant’s December 1999 report dated 18 February 2000 (T142);
·Memo dated 14 August 2000 from the Applicant to Mr Fodera entitled “Claim Liabilities as at 30 June 2000 (T158); and
·Letter dated 5 September 2000 from the accountants to the Applicant entitled “HIH Outstanding Insurance Reserves” (T161).
30. On the basis of the above evidence we are satisfied that the Applicant was retained by HIH as APRA contends.
relevance of PS300 to the applicant’s work
31. The Applicant maintained that the Code of Conduct and PS300 did not apply to the 1999 reports or the 2000 unsigned report. In the alternative it was said on his behalf that if they did apply to him, that he complied with their requirements as to the work carried out by him. If he should have complied more accurately with the requirements then his omissions were not such as to lead to disqualification. He acknowledges that if PS300 applied to his work that it did not strictly comply with it.
32. There is little issue as to the Code applying to his work. (refer paragraph 13) He conceded this to be so when asked about the application of “PS300” and the Code of Conduct”; he replied “Code of Conduct is obligatory. I don’t question the application of the Code of Conduct” (P84).
33. We have already found that the nature of the Applicant’s retainer extended to advising on what the provision should be for outstanding claims and for any prudential and solvency margin. The Applicant did so advise on estimates of the liabilities for outstanding claims of the Company; a general insurance company. He did provide advice as to the provisions to be set aside to meet such liabilities in the balance sheet of the Company.
34. As has been seen above when discussing the nature of the Applicant’s retainer, he did determine and advise the Company as to whether the figure as to OCL provided by the Company, was a central estimate of its OCL. The management of the Company and the Applicant worked together in estimating the appropriate figure (P79.5 to P80.4).
35. The Applicant provided advice to the management on the central estimate before the board made its decision on the amount to be entered for OCL and consequently, the OCP (P94.6, 115.7, 116.4).
36. In order to arrive at the OCP, the Company was provided with the Applicant’s advice as to whether their figure as to OCL was a central estimate. This was in order to ensure that an appropriate amount be set aside to meet outstanding claims.
37. A question put to the Applicant:
One of your jobs was to prepare estimates, wasn’t it?
Answer:
An estimate, yes.
And a central estimate?
Yes.
And your job was also to advise?
Yes.
…
[The Applicant referred to PS300]
So this standard applies to actuaries preparing estimates?
Yes.
The liabilities for outstanding claims of general insurance companies?
Yes.
Reinsurers, self-insurers and so on. People involved in general insurance activities?
Yes.
And providing advice on the provisions to be set aside to meet those liabilities?
Yes.
In the balance sheet and for tax purposes?
Yes.
[Refers to P290.5 to 291.2]
38. But more. Whilst the Applicant was loathe to admit in his oral evidence that the actuarial standards applied to him, it was abundantly clear that he recognised and accepted that they did so apply. In his June 1999 report, he stated that the report:
“…complies with actuarial standards in accordance with the terms of reference” and “actuarial standards require that I point out…”
·In his December 1999 report:
“I consider this to be a fair and reasonable estimate of having 50% chance of adequacy in the aggregate in accordance with actuarial standards.”
·And in the unsigned June 2000 report:
“…actuarial standards require that I point out … Australian actuarial standards prohibit any actuary from supporting a reserve which on the valuation bases has less than a 50% probability of accuracy.”
39. In written communications with officers of the Company, the Applicant again referred to the standards as being relevant to his work.
40. In a memo dated 31 March 1998, he wrote:
“I would now like to refer to actuarial standards on this subject. The standard quite clearly states that …”
41. In a letter dated 13 February 1999, the Applicant stated, [a particular figure]
“…does not however pass actuarial standards which require a minimum of 50% probability of adequacy.”
42. In a letter dated 14 August 2000, the Applicant stated:
“There are three actuarial standards to which I draw your attention…”
43. The standards to which the Applicant was referring were the only applicable standards viz the Code and PS300. Indeed, he acknowledged this in his evidence before the Tribunal when conceding that when referring to “actuarial standards” or “the standard”, he had in mind PS300, and that he was “preparing estimates” and “giving advice” to the Company (P290.5 -291.7).
44. The Applicant clearly recognised that the standards applied to the work he was doing on outstanding claims.
45. The Tribunal is satisfied on the basis of the above evidence that at the relevant times, the Applicant was preparing estimates and providing advice within the meaning of paragraph 1 of PS300 and regarded himself as “constrained by the standard”. He was accordingly required to carry out his work in a manner consistent with the Code and the standard. It is our opinion that if he did not do so, that such non-compliance might well evidence a lack of competence on his part as an actuary.
46. APRA contends that the Applicant acted in a manner that was inconsistent with his obligations under the Code and PS300 and that the cumulative effect of such conduct is tantamount to a lack of competence on his part.
the company, its collapse and the royal commission
47. The Company was one of Australia’s larger insurers, indemnifying liabilities that might arise in the areas of professional indemnity, general liability, workers compensation, third party motor vehicle, income protection, short tail marine, run off treaty, medical defence and reinsurance. The Company was placed into provisional liquidation on 15 March 2001 under the Act. Under the Act, an inspector was appointed by APRA.
48. On 29 August 2001, a Royal Commission was established to investigate the reasons for the Company’s collapse and the party or parties responsible. In due course, the Royal Commissioner reported his conclusion that the deficiency in the Company’s assets amounted to between $3.6b and $5.3b and that the manner in which the Company estimated and accounted for its OCL and under-provisioning for OCP were primary reasons for its collapse.
49. Whilst not underestimating the importance of the task of the actuary in advising on an insurer’s OCL, APRA submits that it is not necessary in the present application for there to be a finding of a causal connection between the Applicant’s underestimation of OCL and the Company’s collapse. It is sufficient it is said to demonstrate a lack of competence regardless of the “financial state of the Company” that was the subject of the advice. And that is what APRA has sought to do.
50. The finding by the Royal Commission as to the possible extent of the loss and other findings as to the matters that are said to have led to the Company’s collapse, are factors not relevant to this application. The Tribunal is to look to the conduct of the Applicant in respect of his work for the Company whether or not the collapse was consequential upon any lapse in his professional responsibilities. It is however the lapse or lapses that are relevant and these may be at least as to some identified in the evidence tendered before the Commission. Likewise, the evidence given by the Applicant and Ms Pearson before the Commission is relevant.
relevance and applicability of GPS220
51. If APRA or as in this instance the Tribunal, finds that an actuary fails to satisfy the criterion in paragraph 6(e) of GPS220; that is, he has demonstrated incompetence, or, not demonstrated competence, in the conduct of business duties, the criterion of “fitness and propriety” has not been satisfied. The prerequisites are to be looked at when a decision is being made. Inevitably, with a disqualification issue, they will be as to events that have occurred in the past. There is “adequate experience” and “demonstrated competence and integrity”. The happenings and events will be historical. It is not, as the Applicant contended, giving the 2002 GPS220 retrospective effect. It is a matter of looking to events that have occurred in the past and making a decision as to whether they satisfy or do not satisfy a present requirement. It is not a standard that is given retrospective effect, but a current standard satisfaction of which depends upon events that have occurred in the past.
the june 2000 report
52. The Applicant contends that the contents of the unsigned June 2000 report are not relevant to the present enquiry. He says he “did not treat the report as a final report”. He had been told by the Company’s then managing director in late 2000 “not to bother trying to finalise the report”.
53. The document was however drafted by the Applicant and those under his control. As to matters and representations in it, they were in place as a consequence of the drafting and thought process of the Applicant. As to omissions from it, a consistency with earlier reports demonstrates the then intent of the Applicant.
54. The document contains summaries of relevant conclusions that were to be provided to the Company’s directors and particularly, the non-executive directors. The Applicant said he thought that all directors would see the report. It contained advice as to the June 2000 accounts. Advice was given based on the draft to the directors before the report of 14 August 2000 and the accounts of 15 October 2000.
55. It is relevant to the present Applicant to consider the matters contained in the June 2000 report, even be it unsigned, as a document prepared by the Applicant or under his supervision.
conduct of the applicant in the context of his obligations under the Code of Conduct and PS300
56. APRA contends the following:
·That the Applicant did not comply with and contravened the requirements of PS300;
·That he failed to perform the functions of an independent actuary in accord with the relevant standards and the Code of Conduct;
·That he failed to display care and diligence consistent with that required of a consultant actuary;
·That the ways in which he undertook his work did not conform with the requirements of PS300 and demonstrates a lack of competence on his part.
57. On the other hand, the Applicant maintains that the material complaints raised by APRA do not go to the skill and competence of the actuary, rather to competence in a narrow sense; that is simply non-compliance with PS300. The Applicant acknowledges that if PS300 applies to him, which we find it does, that he did not “strictly” comply with it. Competence, he alleges, is different to compliance with PS300. In some instances, he says, he did the requisite work, even be it, he did not evidence this in writing.
58. APRA contends that the Applicant acted in breach of the Code and PS300 in a number of respects. It is convenient if we consider the contentions seriatim. They are, as submitted on behalf of APRA:
A.Contrary to paragraph 47 of PS300, the Applicant supported a figure that was not a central estimate of the OCL in that:
(a)He adopted assumptions that were either optimistic; that is below the lowest reasonable level, or at the lowest reasonable level, the cumulative effect of which was to result in an OCL that was not a central estimate;
(b)In support of this submission, reliance is placed on the fact that the Applicant allegedly:
(i)Used a percentage figure of gross liabilities for FCHC less than a central estimate of the Company’s FCHC; and
(ii)In respect of several portfolios, failed to make any or adequate allowance for superimposed inflation.
(c)He used inappropriate actuarial techniques and inadequate data; and
(d)There were errors and omissions made by the Applicant or those for whom he was responsible.
B.Contrary to paragraph 23 of the Code and paragraph 51 of PS300, the Applicant failed in his reports to state the extent of compliance with PS300 and the reasons for not complying with it.
C.Contrary to paragraph 52 of PS300, certain of the reports did not deal with:
(a)The nature, accuracy and interpretation of the data;
(b)The analysis of experience;
(c)The valuation model and key assumptions;
(d)Any changes in the method and key assumptions since the last report; and
(e)Comparisons of actual experience with that expected under the assumptions in the preceding report.
D.Contrary to paragraph 53 of the PS300, certain of the reports did not describe the steps taken by the actuary to verify the accuracy of the data and did not state any limitations on the extent or quality of the data;
E.Contrary to paragraph 24 of the Code and paragraph 54 of PS300, the reports did not state clearly the assumptions and methods used;
F.Contrary to paragraph 57 of PS300, the Applicant did not discuss whether or not the assumptions he was required by the Company to make were reasonable and consistent with PS300, nor did the reports discuss the implications of divergence from PS300; and
G.Steps taken by the Applicant in advising on the Company’s OCL did not conform to the steps prescribed by paragraph 16 of PS300.
PART 1A - Applicant supported a figure that was not a central estimate of OCL
A.as to assumptions – fchc
(a)Paragraph 37 of PS300 provides that an appropriate allowance for future costs of administering and settling claims should be made.
(b)In January 1998, the Company instructed the Applicant to use a figure of 2% of gross liabilities for the December 1997 report. This instruction was supported by a report dated 22 January 1998 of a Mr Ray Walker (the Walker report), which provided an indication of the dollar amount required for FCHC from nominated portfolios in the event of the handling of claims being put out to tender and the portfolios run off.
(c)APRA maintains that the Walker report did not justify the use of the 2% figure and that a figure for FCHC in the range of 4% to 8% would reflect industry practice. In support of this contention, it relies upon the following:
(i)The report did not concern the Company’s overseas business;
(ii)There was no justification for adopting a 2% figure for such business. The Applicant acknowledged this in evidence to the Royal Commission;
(iii)The report indicated the cost of FCHC if claims management were put out to tender. No indication had been given by the Company that it intended to put its claims management out to tender. Whilst the report assumed that “nominated portfolios” were in run off, the Company’s business was not in run off in the Relevant Period;
(iv)The report provided a hypothetical basis for assessing FCHC contrary to PS300, which requires that the figure for FCHC be based on the Company’s actual expenses, structure and future administrative developments;
(v)There was no evidence that the Applicant had undertaken any analysis of the Company’s experience of claims handling costs to assess whether the 2% figure was reasonable. The Applicant stated that he relied upon “discussions with the claims directors, outside consultants’ views and his own experience”. Ms Pearson stated that she “would regard a range of 4% to 6% of expected future gross claim payments as being a benchmark level” for an allowance for “FCHC” in an actuarial valuation;
(vi)A report to the Company’s board dated 4 December 2000 by Ernst & Young stated that the Company’s “imposed assumptions for … claims handling expenses are more aggressive than average market practise …”;
(vii)The report dated September 2001 of Deloitte Touche Tohmatsu into the affairs of the Company, expressed the view that a 2% allowance for FCHC was “inadequate” and that 5% was more consistent with industry standards;
(viii)A report provided by KPMG stated that “expense loadings usually fall within a range of 4% to 8% of gross claims”;
(ix)The Applicant did not enquire about how the 2% figure had been reached, he did not ask if any analysis had been done to support it nor did he ask for an independent assessment of the Company’s actual claims handling costs. He simply accepted management views at face value;
(x)The Applicant expressed concerns about the adoption of the 2% figure in his reports and in correspondence with the Company. In a letter dated 13 February 1999, the Applicant stated that the proposed figure for FCHC was “hard to justify”;
(xi)In the unsigned June 2000 report, the Applicant stated that “the allowance for FCHC must also be derived from historical data and could possibly exceed the 2% factor specified above”; and
(xii)The figure of 2% was less than a central estimate of the Company’s FCHC. The underestimation of FCHC contributed to the OCL, supported by the Applicant, being less than a central estimate.
(d)The Applicant maintains that there are no industry standards for FCHC and the figure would vary from one insurer to another. It could vary from one portfolio to another (as with the Company in the December 1996 report). The Applicant says he consulted with claims directors and consultants. He also says he relied upon his experience since 1954. He says the 2% figure was reasonable even be it he stated in his 1999 report that adverse consequences would follow if the costs exceeded this figure. This is apparent in that a variation of just 2% to the FCHC would result in an adjustment to the Company’s profit and loss account of approximately $47m and a corresponding alteration to the OCL and OCP.
(e)The Applicant was required to comply with PS300 paragraph 37. The standard requires that the FCHC allowance have regard for the insurer’s “level of expenses, organisational structure and future administrative developments”. The approach to be used is to be commensurate with the materiality of the allowance. There is not any evidence that the Applicant was mindful of, nor compliant with these requirements in arriving at the 2% figure.
B.as to assumptions – superimposed inflation
(a)Paragraph 33 of PS300 provides for claim escalation in estimating the OCL, that is, the estimated effect of inflation on the cost of settling claims.
(b)APRA maintains that although the Applicant made allowance for normal inflation in his assessment of the OCL of the Company, in respect of several portfolios he failed to make any or adequate allowance for superimposed inflation. He adopted optimistic assumptions about inflation in several portfolios and assumptions and the lowest reasonable level in others. There was then an understated OCL that was not a central estimate. He acted in breach of paragraph 47 of PS300 and did not exercise due professional care and diligence in the performance of his work.
(c)APRA relies on the situation existing in four specific portfolios. Casualty and General Insurance Limited, General Liability Portfolio (CGI), FAI Corporate Liability (FAI) and Australian Workers Compensation (AWC) portfolio for the 1999 and 2000 reports and the Californian Workers Compensation portfolio (CWC) for the 2000 report.
(d)As to the CGI portfolio, the Applicant in each year used a claim inflation rate of 4%. Ms Pearson gave evidence to the effect that this was an optimistic assumption that did not take into account superimposed inflation and was not supported by a sound actuarial analysis. A figure of 8% would have been the minimum reasonable allowance for claims inflation for this portfolio given, according to her, industry trends in the general liability area. Whilst the Applicant claims that he used the Reserve Bank of Australia’s (RBA) inflation targets of 2-3% for normal inflation, Ms Pearson was of the opinion that rather than using RBA targets it was more appropriate to use inflation forecasts produced by economic forecasters such as Access Economics. The latter-mentioned forecasts produced a four-year projected figure of around 4-4.5% for AWE and 3-3.5% for CPI. In his evidence to the Royal Commission, the Applicant acknowledged having considered the matter of superimposed inflation was of the opinion that no additional allowance for it need be made. To the Tribunal, the Applicant maintained that the 4% figure included an allowance for superimposed inflation.
(e)With regard to FAI, an inflation rate of 4% was again used, this, according to Ms Pearson, being an optimistic assumption and not allowing for superimposed inflation. Again as with CGI, there is no evidence of the Applicant estimating economic or environmental causes that may lead to future claims payments being greater.
(f)The claim inflation rate of 8% in the 1999 report and 7.5% in the 2000 report were seen as “minimal reasonable level” for future claims inflation for the AWC portfolio. The portfolio had experienced high rates of inflation in most of its business.
(g)The CWC portfolio seemingly attracted an inflation rate of 6% in the 2000 report, which stated:
… Directors are no doubt aware of the past inflationary pressures in West Australia, California, and the General Liability Book. I have not factored into the calculations a continuation of those inflation rates as there are either legislative proposals, social pressures or claim mitigation efforts within HIH all of which ought to combine to reduce the inflationary pressures.
(h)According to Ms Pearson, based on the figures the Applicant had available at the time of his valuation, the inflation rate for this portfolio had been at 17% in 1999 and 16% in 1998. Ms Pearson’s discussions with US based actuaries confirmed her opinion that there had been an industry-wide trend of high inflation in California and there were no “imminent legislative changes aimed at reducing claim inflation”. Ms Pearson viewed the Applicant’s figure as optimistic.
(i)The Applicant was well aware of the position in California. In an undated report on his visit to the Company’s San Francisco office in March 2000, the Applicant observed that the total cost of claims had been “consistently increasing since 1994” and that the “general average cost of claims in the industry as a whole is regularly increasing” (T135/3301). In a letter dated 11 July 2000 to the Company, the Applicant stated inter alia that he “would want to see quite a reasonable inflation rate factored into the reserve”. In a memo dated 28 September 2000 to the Company, the Applicant stated inter alia “that superimposed inflation [in California] is still rife and if anything, has got worse in recent months” and in a memo dated 4 October 2000 to the Company, he stated that “it is very difficult to make forecasts when we have superimposed inflation running at 15% per annum” and that “the reality is that the statistics are not there to prove that the claim creep is over”.
93. Ms Pearson stated that in her opinion the reports do not comply with PS300 in terms of paragraph 52. Particular omissions in the Applicant’s reports as identified by her were:
·little or no documentation or description of the analysis of experience
·inadequate documentation of valuation methods and key assumptions, which results in the valuation process being a “black box” to a reader of the report
·no indication of changes made to the valuation basis at each valuation and the impact of these changes on results
·no comparisons of actual and expected experience to enable the adequacy of the previous valuation basis to be observed, and only general comments about the claims experience.
Because of these omissions, it is extremely difficult for a reader of the reports to understand to what extent [the Applicant] responded to emerging experience in preparing his figures and, therefore, to make any judgement about the appropriateness or adequacy of this response.
94. In her oral evidence before the Tribunal Ms Pearson said:
… one of the very serious omissions in the report is any documentation of comparing what has happened in the year with what was expected to happen given the previous year’s valuation. ... (P342) … So you had a previous outstanding claims valuation basis that gives you some expectations about what is going to happen in the year. You have those expectations; the year passes, you have the actual experience. There is no documentation in the reports of that process. What the actuary does, they go through that process, see what – how – what that actually happened compared with what they expected and then they adjust their previous valuation basis, or their previous valuation model, even where the experience is different to what is expected and no longer supports their previous model. …
…
… So there is no documentation of that process to enable a reader to understand, for example: here was what was expected to happen for the professional indemnity portfolio, in terms of payments; here is what actually happened; here is the PP – the payments per open claim assumptions that I adopted for the last valuation; here is what they actually were in the 12 months, and here is what I have altered those two to reflect the experience that has emerged. So there is no – none of that, sort of, information in which gives the reader the ability to understand how [the Applicant] has reacted to the emerging experience and how it has impacted the valuation result.
And your view is that that is required by PS300?
That is required by PS300. It is required both under paragraph 52, and it is also actually required under paragraph 16, which as part of that – in the steps in doing the outstanding claims valuation … (P343)
…
… they don’t document the payments per open claim assumptions that were adopted for each portfolio … but they do not include any consideration or discussion about how those changes have impacted the results of the valuation. …
95. When asked “does any part of the report demonstrate that [the Applicant], for example, subjected case estimates provided by underwriters to the form of analysis that you say was appropriate”, Ms Pearson replied in the negative (P344).
PART 4 – reports not describing the steps taken by the Applicant to verify the accuracy of data and not stating any limitation on the extent or quality of the data
96. APRA contends that the reports failed to describe the steps taken to verify data, and failed to disclose limitations on the extent and quality of the data, and that the Applicant having significant concerns about the extent and quality of the data he received, did not disclose these concerns in the reports.
97. In support of its contention, APRA instances occasions where the Applicant admitted not providing adequate documentation in the reports. In the course of his cross examination, he was asked “Can I suggest to you that this is another instance in which you did not describe the steps which you had taken to verify the accuracy of the data that you were using? You did not include a description of those steps?” and the Applicant replied “I didn’t need to include a description of those steps because the Reserve Bank information is public property. You have a board of directors who would presumably know that sort of thing.” (P189/190).
98. The Applicant agreed when it was put to him that the 1999 and 2000 draft report did not conform to paragraph 53 by describing the steps that he had taken to verify the accuracy of data. He further agreed that he did not set down in the report the steps which he had taken to verify the accuracy of the data. (P214). And further, that there were areas in which the data was in a “mess” and that he did not write in his report material identifying the inadequacy. (P233)
99. In his evidence before the Royal Commission, the Applicant was asked “Why didn’t you say in your report that you did not have data to support information upon which you had relied, which was that there were reinsurance recoveries available which reduced FAI’s liabilities to zero for these classes of business?” and he replied “Well, I know I have clearly explained to the management that this had been done and perhaps with the benefit of hindsight I should have had a paragraph in that saying there is certain business which has been valued at zero”.
PART 5 – reports not stating clearly the assumptions and methods used
100. As has been discussed above, there was difficulty experienced by Ms Pearson in ascertaining from the reports what methods and assumptions the Applicant’s had used. The assumptions made and methods used by the Applicant were not clearly stated.
PART 6 – not discussing in his reports whether or not the assumptions he was required by the Company to make were reasonable and consistent with PS300 nor discuss in the reports the implications of divergence from PS300
101. The Applicant stated in the June 1999 and December 1999 reports and in the June 2000 unsigned report the assumptions on which the Company required the Applicant to base his report specifically with reference to the FCHC. In the June 1999 report he stated:
Future claims handling costs
Future claims handling costs are included in the figures, and have been taken at 2% of the claim costs, on the grounds that a third party would bid no more than this amount in a competitive tendering process. Whilst this is an acceptable proposition, I add that if the company does not contain its costs to 2%, then the company runs an expense over-run risk. (PT28/1038)
102. The Applicant did not discuss in the report the basis or reasons for his acceptance of the 2% figure or whether the assumption was consistent with PS300.
103. In the December 1999 report, he stated:
The general cost of running off an entire book of outstanding claims over and above the costs of the individual claim (which are part of the actual claim costs) are allowed for at the rate of 2% of the gross claim value. This figure has been used under instruction from the company. Again APRA has under consideration minimum percentages to be added, but the details are not yet available. (PT29/1084)
104. Other than relying on the Company’s instructions he did not discuss the basis for the use of the 2% figure whether such use was reasonable and consistent with PS300 and if it was, not then the implications of divergence from PS300.
105. The June 2000 report was even more pre-emptory. It stated, “The general cost of running off an entire book of outstanding claims over and above the costs of the individual claims (which are part of the actual claim cost) are allowed for at the rate of 2% of the gross claim value. This figure has been used under instruction from the Company.” (PT30/1120)
106. There is no discussion of the reasonableness of the use of the 2% figure and whether its use is consistent with PS300. The implications of any divergence from PS300 are ignored.
107. No one of the reports complied with the requirements of PS300.
PART 7 – advising on the OCL not conforming with the steps provided in PS300
108. APRA contends and the Tribunal agrees and so finds that the Applicant failed in the various ways above indicated to comply with the requirements of PS300. The documentation was deficient. The thought process that led to a particular position being taken or opinion expressed was not clearly stated and in some cases not stated at all leading to a reader being misled as to the sufficiency of the data being available or the reasonableness of the assumptions being made.
109. Apart from an actuary being required to comply with PS300 as a part of his other professional obligations the rationale behind such requirement should be appreciated. A failure to comply indicates a lack of care and diligence on his or her part such as is expected of a reasonable and competent actuary in the carrying out of relevant work. The requirements are not mere formalities but necessary to ensure not only that a report is full and fair, but that as APRA contends and the Tribunal agrees to “ensure that a reader of the reports obtains an accurate and informed picture of the financial health” of the relevant insurance company.
disqualification power and decision
110. The Applicant maintains that in disqualifying him from acting as the actuary of a general insurer, APRA has deprived him of his livelihood. On the basis of the evidence before the Tribunal this may be so. The disqualification power is intended as a protective measure to safeguard the public. (See Kamha v Australian Prudential Regulation Authority [2005] FCA 480 at paragraph 25) But it has also a penalising effect upon one such as the Applicant. However, it is to the protective aspect that attention is to be primarily directed, the consequential impact on the Applicant’s welfare being incidental. The submission made on behalf of the Applicant that the Tribunal is to be satisfied that the Applicant was “so incompetent an actuary and his breach of standards so egregious both that any involvement with a general insurer constitutes an unacceptable risk to a company its shareholders and policyholders, and that he should thereby be punished with disqualification” places emphasis on the wrong consideration. It is not that “he should thereby be punished”, but that the interested parties, the stakeholders, should thereby be protected.
111. The Tribunal is satisfied that the Applicant advised as to figures for central estimates of outstanding claims liability that were underestimates and did not have a 50 per cent chance of being accurate, this contrary to the provisions of PS300 and the Code which he wrongly sought to maintain throughout the hearing did not apply to him in his work. He negated his responsibility. He inappropriately assessed FCHC. He placed uncritical reliance on the opinion of management. He provided inadequate documentation in his reports and failed to provide the basis for his estimates.
112. As was submitted on behalf of APRA, the Applicant did not demonstrate competence such as to satisfy the requirements of fitness and propriety for actuaries under GPS220. His lack of competence is demonstrated by his failure to adhere to relevant professional standards and by his failure to exercise the professional care and diligence expected of a reasonable and competent actuary in the performance of his work.
113. The Tribunal agrees with the submission made on behalf of APRA that the provision of advice to a general insurer on the subject of the insurer’s OCL is a critical aspect of the professional work to be undertaken by an actuary for a general insurer. Such advice is likely to be used by the general insurer to support its decision as to an appropriate OCP in the general insurer’s balance sheet. A high standard of professional care and diligence is to be expected on the part of an actuary when providing such advice. The Tribunal is satisfied that the Applicant failed to comply with the Code and PS300 and to analyse and substantiate assumptions. The manner in which the Applicant undertook his work was devoid of the appropriate degree of care. He made significant errors that should not have been made. He failed to identify those errors this demonstrating not only a lack of reasonable care in the performance of his work, but a deficiency in his work practises. The Applicant failed to exercise the professional care and diligence expected of a reasonable and competent actuary.
114. It is to be noted that there is no attack upon the integrity of the Applicant. It is to his competence that APRA directs the attention of the Tribunal. There is no attack upon his honour or character but upon his competence, his skill and ability to carry out the responsibilities and obligations of an actuary. Compliance with professional standards is relevant and a prerequisite to such an assessment. It is not only that the Applicant was negligent or made an error or mistake. He displayed a gross disregard for his professional obligations. He was aware or should have been aware of the instances of his incompetence. A lack of awareness would be further evidence of such lack of competence.
115. For the reasons herein before set forth the Tribunal affirms the decision under review and releases the decision in full without suppressing the names of any parties.
I certify that the 115 preceding paragraphs are a true copy of the reasons for the decision herein of The Hon RNJ Purvis AM QC, Deputy President and Ms G Ettinger, Senior Member
Signed: Associate
Dates of Hearing 4, 5, 6, 7 July 2005 and
12 and 13 December 2005
Date of Decision 6 March 2006
Counsel for the Applicant Mr P Cosgrave and
Mr C Bozzi
Counsel for the Respondent Mr P Hanks, QC and
Ms K Walker
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