Actuaries Are From Mars;Judges and Juries Are From Jupiter

By

R. Timothy Muth

Sandra Zunker BrownReinhart Boerner Van Deuren s.c.

1000 North Water StreetMilwaukee, WI 53202

414-298-1000www.reinhartlaw.com

Overview

• Why You Should Care About How Judges and Juries Think

• What We Know About Juror Perceptions of Actuarial Work

• How This Impacts The Way Actuaries Testify In Court

• How This Information Impacts The Way Actuarial Work Product Is Communicated

Why You Should Care

Increasing claims against actuaries

At least 50 lawsuits have been filed against actuaries

• 70% filed in the last ten years.

• Casualty actuaries are the target in 50% of all suits filed against actuaries in the last six years.

Areas of Claims

• Reserve Estimates

• Mergers & Acquisitions

• Defined benefit plan valuations

• Withdrawal liability

• Insolvencies

• Conflict of interest

Some Claims Against U.S. ActuariesVerdicts Amount Outcome

Alabama Life/HealthInsurer $80M Verdict

Missouri Casualty Insurer $18M Verdict

Taft Hartley Plan $39M Verdict

Arizona Life Insurer $17.5M Verdict

Open or settled

Calif. Workers Comp Insurer $650M Settled

Valuation of Municipal pension plan $2.0B Open

Some Claims Against Actuaries Worldwide

Claim Amount Disposition

Canadian pension plan $30M settled

Dutch Life insurance software $15M pending

London market acquisition $500M settled

Ontario legal malpractice $100M pending

“First, sue all the consultants.”

Business Week magazine - June, 2000

Post- Enron Litigation Environment

• Weak economy/poor investment returns

• More claims against professionals

• Increasing juror cynicism

• More plaintiffs’ attorneys who understand this area and experts willing to testify for them

• A standard of perfection

Company Actuaries Find ThemselvesBefore Judges and Juries as Well

• Plaintiffs include liquidators, state insurance commissioners, purchasers of insurance companies, and reinsurers.

• Claims against company actuaries almost always assert fraud.

When actuaries make mistakes, great amounts of money are usually at stake

Juries have not favored the actuarial profession

• In 1998, the first jury trial of an actuarial malpractice case was conducted.

• The actuarial firm lost.

• Since then, actuaries are 1-4 in jury trials of malpractice cases.

Reasons for Losses

1. Work too complicated to do without mistakes/perfectly- Actuaries not used to working under microscope

2. Juries/Judges view actuary differently than the profession views itself:» impartial financial guardian» level of accuracy and detail that is rarely

practiced

Juries and the Actuarial Profession

What The Jury Hears First:

Plaintiff’s Opening Statement

What We Know About the People Who Hear This

A Jury is:

• “Twelve people who don’t know anything and can’t read.”

Mark Twain

• “Twelve people who weren’t smart enough to get out of jury duty.”

Norm Crosby

In surveys of mock jurors ...

74% admit that they do not know what an actuary is

Beyond life expectancy tables, juror understanding of actuaries is almost nonexistent

Most Jurors:

• Do not understand what you do

• Have never sat for jury duty before

• Do not understand insurance or jargon

• Do not understand statistics

• Cannot comprehend large numbers

• Suffer from “math anxiety”

• “Many people have a fear of numbers, and their anxiety causes them to view those who are comfortable with numbers as nerdy or different. ‘Math geeks’ often are ridiculed and mocked.”

“Statistical Evidence: How to Help Jurors Understand and Use it Properly.” 67 Defense Counsel Journal 386.

Juries have difficulty understanding actuarial

concepts

Jurors Assume Actuaries Can Get Perfect Information

• “Why would an actuary keep using bad data once the actuary knows the data is bad?”

• “Why not take aggressive steps to ascertain the correct data, whether or not it was your responsibility?”

• “Shouldn’t you have consulted the client more about the data?”

Applying a tail factor of .017...

Juries believe there is a great deal of precision in actuarial estimates.

The Jury Selection Process

• Parties can strike jurors for any reason

• Someone will have an incentive to have a jury who does not understand

• Persons who use math or statistics in their jobs are likely to be struck

Judges

• Plaintiffs must waive right to jury trial

• Few judges have heard actuarial malpractice cases

• A little knowledge can be dangerous

• Few judges have an insurance industry background

• Judges will award big damages

Juries and judges always have hindsight.

Testifying to Actuarial Issues

Two Modest Goals for Actuary Witnesses:

• Not to be brilliant

• Not to be persuasive

• To be UNDERSTOOD

• To be REMEMBERED

This Is Difficult Because You and the Jury Do Not Speak the

Same Language

• The jury is not allowed to speak or ask questions, so you must break the communication barrier alone.

• You cannot “test” the jury.

• You will be contradicted.

You Have An Expert Interpreter:

Your Attorney

Jury Studies• “Clarity of presentation was the most important

factor.”• “Jurors were more influenced by an expert’s ability to

convey technical information in a comprehensible manner and to draw firm conclusions than by education or credentials.”

• “The most believable witnesses were those who could present the information understandably. Experts who were very technical and complex were not persuasive.”

“Juror Assessments of the Believability of Expert Witnesses: A Literature Review.” 36 Jurimetrics Journal 371.

• “When jurors hear simple, clear testimony from experts, they make their decisions based on the arguments presented. But when experts give complicated explanations and use jargon that jurors can’t follow, jurors, without realizing it, rely on the expert’s credentials to make a decision.”

“Has the Jury Decided? What Juries Use to Make Up Their Minds.” Frontiers, October 1997.

Example of how to educate a jury about basic reserving

concepts

A BAD EXAMPLE

Points to Remember

• Define all terms using simple words

• Give simple examples from jurors’ lives

• Don’t assume anything

• Directional words are confusing

• Use charts

A BETTER EXAMPLE

Automobile Policies

»Covers January 1-December 31, 2001

100 ACCIDENTS Reported

2001 Year End

On December 31, 2001, the actuary knows:

• How many claims were reported.

• How many reported claims were paid.

• How many reported claims have not been paid yet.

Paid Claims• Accident occurred

• Accident reported

• Claim filed

• Claim paid or “closed”Example: minor “fender bender” in March 2001. Repair bill paid in 2001.

CLOSED

Claims Adjusters Set Reserves For Reported Claims That Have

Not Been Paid:

Open Case Reserves

Open Case Reserve

• Accident occurred

• Accident reported

• Claim “pending”

Example: Accident with property damage and minor injuries in August 2001. Lawsuit filed. Outcome still pending at end of 2001.

Case

Reserve

Reserves Actuaries Set

• Incurred But Not Reported claims (IBNR)

• Supplemental Development (changes in case reserves)

IBNR “Incurred But Not Reported”

• Accidents which have not yet been reported

Example: December 2001 accident. Not yet reported. Claim likely filed in 2002.

I.B.N.R.

Supplemental Development on Case Reserves

• Accident occurred

• Accident reported

• Case reserve set

• New information Example: Accident with minor injuries in August 2001. Lawsuit filed, case reserve set. Plaintiff then has back surgery and complications.

Supp.

Develop.

Writing Actuarial Work Product for Juries to Read

Consider the Audience and the Use of the Material

• First goal -- to avoid a judge or jury ever needing to read your work product.

• Arbitration and mediation are better forums for actuaries.

• Consider the likely readers’ access to data, actuarial knowledge, and information about the company

• Also LIMIT the audience and use of the material.

Standard Language AKA “Boilerplate”

• Boilerplate language is a term most common these days in the legal profession. Interestingly, the term arose from the newspaper business. Columns and other pieces that were syndicated were sent out to subscribing newspapers in the form of a mat (i.e. a matrix). Once received, boiling lead was poured into this mat to create the plate used to print the piece, hence the name boilerplate. As the article printed on a boilerplate could not be altered, the term came to be used by attorneys to refer to the portions of a contract which did not change through repeated uses in different applications, and finally to language in general which did not change in any document that was used repeatedly for different occasions.

• -Take Our Word For It, Sept. 28, 1998

In Praise of Boilerplate

• Boilerplate language in reports has won cases.

• Boilerplate language in reports has avoided cases.

Good Boilerplate Examples• Actuaries do not audit data• Actual results will vary from estimates, and the

variation may be significant• Results can be impacted by the validity of the

assumptions• Readers should have actuarial background or

assistance to assess the conclusions of the report • Report assumes that the reader has familiarity

with operations of insurance company

The Risks of Boilerplate

• Using boilerplate without thinking about its meaning

• Dismissing that language in testimony as “oh, that’s just boilerplate.”

• Missing the opportunity to write about the specific causes of variability and specific data concerns

Expressing the Concept of Variability

• Do not convey a sense of precision which does not exist» point estimates vs. range estimates

» rounding to significant digits

• Explain sources of variability in plain language

• Use graphs where appropriate

Practical Steps

• Have a non-actuary review the narrative section of a report for understandability

• Take a course in business writing

• Avoid the temptation to just update the numbers in the prior year’s report

• Present information in multiple forms -- charts, text and graphics

Label a Draft “DRAFT”

DRAFTDRAFT

•Creating actuarial work product is a dynamic process.

•Lawsuits occur years later when it is difficult to create a timeline of events and expectations

•Legal duties and jury expectations will be lower when everyone recognizes that work is still a draft.

Tips For Reducing Claim Exposure

• Know the audience and the intended use of your work.

• Caveat and disclaim.

• An oral understanding is as good as the paper it’s written on.

• Limit liability and third party use.

SOME CONCLUSIONS

• Write reports with an eye to how the report will appear if your estimates turn out to be incorrect.

• Testifying is a unique set of skills. Those skills can be learned, but you cannot assume that your normal business communication skills are the right skills for talking to a jury

• Arbitration is a better forum for actuarial disputes. You can define who will hear your disputes.