Purdue University March 3, 2008

The Actuary as Expert Witness

Purdue University

March 3, 2008

Stuart Klugman, FSA, Actuarial Education Consultant, SOA and Professor of Actuarial Science, Drake Univ.

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Today’s Presentation• Skit• What is an expert witness?• What are some guidelines?• Personal experience

– DNA forensics– Backward projections– Sampling old policies– Life insurance overcharges

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Skit – “the worthless actuary”

The players• Stuart Klugman, defense witness, played by

Jeff Beckley• Bill Price, defense attorney, played by Richard

Penney• Nan Horvat, prosecution attorney, played by

Stuart Klugman

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Definition – from lectlaw.comWhen knowledge of a technical subject matter might be helpful to a trier of fact, a person having special training or experience in that technical field, one who is called an expert witness, is permitted to state his or her opinion concerning those technical matters even though he or she was not present at the event. For example, an arson expert could testify about the probable cause of a suspicious fire.

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Definition - continued

A person who testifies at a trial because she has special knowledge in a particular field. This entitles her to testify about her opinion on the meaning of facts. Non-expert witnesses are only permitted to testify about facts they observed and not their opinions about these facts.

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Definition – legaldictionary.com

a person who is a specialist in a subject, often technical, who may present his/her expert opinion without having been a witness to any occurrence relating to the lawsuit or criminal case. It is an exception to the rule against giving an opinion in trial, provided that the expert is qualified by evidence of his/her expertise, training and special knowledge.

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Definition - continued

If the expertise is challenged, the attorney for the party calling the "expert" must make a showing of the necessary background through questions in court, and the trial judge has discretion to qualify the witness or rule he/she is not an expert, or is an expert on limited subjects. Experts are usually paid handsomely for their services and may be asked by the opposition the amount they are receiving for their work on the case.

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ASOP 17• What is an ASOP – Actuarial Standard of

Practice?• What does ASOP 17 – Expert Testimony by

Actuaries say?

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Advocacy

There may be occasions when an actuary acts as an advocate for a principal when giving expert testimony. Nothing in this standard prohibits the actuary from acting as an advocate. However, acting as an advocate does not relieve the actuary of the responsibility to comply with the Code of Professional Conduct and to use reasonable assumptions and appropriate methods.

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Testimony of others

When the actuary testifies concerning other relevant testimony, including opposing testimony, the actuary should testify objectively, focusing on the reasonableness of the other testimony and not solely on whether it agrees or disagrees with the actuary’s own opinion.

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Written reports

Expert testimony delivered by means of a written report should describe the scope of the assignment, including any limitations or constraints. The written report should include descriptions and sources of the data, actuarial methods, and actuarial assumptions used in the analysis in a manner appropriate to the intended audience.

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The truth• Witnesses are to tell the whole truth and

nothing but the truth.• True or false? – witnesses are to tell the whole

truth.• True or false? – witnesses are to tell nothing

but the truth.

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Advice from others• The following is from the April/May 2006 issue

of The Actuary.• “Taking the Stand: The Actuary as Expert

Witness” by Darryl Wagner.• “First Hand Testimony from a Health Insurance

Expert” by Barbara Niehus

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Scope and tasks• Any time there are actuarial quantities in

dispute.• More often than not, the actuary does not testify

in court.– Case settled.– Deposition, but not called.– Calculations done in support of testimony of others.

• May be “fact witnesses” to what was done.

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Why an actuary?• At times the work to be done falls within our

purview.• To be credible the actuary must be

professionally qualified.– Who decides?– Know your country’s qualification standards– Know the applicable SOPs (not just #17).

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Know what you are doing• Know the entire case, not just your narrow role.• Be prepared for odd questions from the other

side.• Be really prepared for the questions from your

side.

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Examples• Reinsurance arbitrations. A dispute between an

insurer and its reinsurer is a common situation requiring expert services of an actuary.

• Individual actions or class actions against an insurer for rating, underwriting or claim practices.

• Disputes between a group policyholder and its insurer with respect to experience refunds or amounts due to the insurer.

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Audience is the jury• They are not your peers.• So you must explain it terms they can

understand.• Could you explain these?

– Reserves– Universal Life cost of insurance charges– Consequences of not immunizing a portfolio

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Case I – DNA fingerprinting• What is it?• What does it mean to say that the probability it

was someone else is 1 in 6 billion?• How does this story connect with Charlie’s

Angels?• How does this story connect

with OJ Simpson?

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Case II – Backwards projection• Data from 40 group policies for each of 4 years.• Need to project back in time for the previous 4

years.• Data are on the next slide.

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The other side’s method• Four year averages: $100.48, $106.59,

$111.74, and $123.73; jump to big in year 4.• Use average increase from years 1 to 3 - $5.63.• Project each of the 40 numbers backward by

taking off $5.63 per year.• Base for these deductions in on the next slide

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Setting the baseline• If the value for 2002 is higher than 2003,

subtract $5.63 each year from the 2002 value.• If the value for 2002 is lower than 2003,

subtract $5.63 each year from the average of the 2002 and 2003 values.

• If any projected value is negative, project a constant amount using the last positive projected value.

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What would you say to this?• Need to criticize this approach• Need to offer a superior approach.

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My approach• Work with logarithms (thus assuming changes

are proportional, not linear).• Delete outliers when determining slope.• Take average of four values, place at midpoint

of the four years and project backwards.• This could also be done as a credibility

problem.

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Case III – Sample size• History – many companies sued over racial

discrimination in sales several decades ago.• Problem – how to tell which of these very old

policies was discriminatory.• No computer files, only paper records. Time

consuming to evaluate a record.• When an application form is pulled it can be

determined if was discriminatory.

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Problem, continued• For a particular policy type, either all policies

are discriminatory or none are. However, an examination of a policy does not always reveal the truth.

• Decision rule – if more than 80% of policies of one type are discriminatory than all are; otherwise, none are.

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Sample size?• How big a sample is need to know with a high

degree of confidence if 80% are discriminatory?• Standard statistical theory ways for 95%

confidence of being within 2%, need a sample of (1.96/0.02)2(.2)(.8)=1,537.

• This is not acceptable.

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Credibility approach• We have a prior opinion. Data confirms that in

most cases the policies are either less than 5% discriminatory or more than 95%.

• If you know a coin is either 95% heads or 95% tails, it does not take many flips to know which kind of coin you have.

• It turns out that 5-10 in the sample is sufficient.

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Case IV - Overcharges• In 1991 an insurance company raised the cost

of insurance charges on universal life policies.• Some policyholders were not happy and filed a

class action lawsuit in 1997.• Around 64,000 policies were affected.• About 2002 the court ruled that the company

was wrong in raising the charges.

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The next step• In 2005 I was hired to calculate the

accumulated value of the overcharges.• There was to be a jury trial.• I did my calculations

– Affidavit stating them– Deposition taken by opposing counsel– Second deposition taken by opposing counsel

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Interesting considerations• All data concerning these policies was supplied

by the defendant insurance company.• In early 2005 both sides stipulated that the data

was accurate and that no more data would be forthcoming.

• In the course of my work I discovered that some of the numbers were clearly wrong. For example, a set of policies could not have earned 40% interest in one year.

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What to do? ASOP 23 – Data QualityReliance on Data Supplied by Others – In most situations, the data are provided to the actuary by others. The accuracy and comprehensiveness of data supplied by others are theresponsibility of those who supply the data. The actuary may rely on data supplied by others, subject to the guidance in section 3.5. In doing so, the actuary should disclose such reliance in an appropriate actuarial communication.

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Section 3.5

The actuary should review the data used directly in the actuary’s analysis for the purpose of identifying data values that are materially questionable or relationships that are materially inconsistent. If the actuary believes questionable or inconsistent data values could have a material effect on the analysis, the actuary should consider further steps, when practical, to improve the quality of the data.

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Result• We had to correct the numbers even though it

meant we would be asking for less money.

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Other issues• The other side found fault with 8 things I had

done.• My view was that

– For 3 they were just wrong and I was right.– For 3 it was not my call regarding what to do.– For 2 they were probably right but it would have

been unlikely they would be allowed to submit the evidence needed to support their position.

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Conclusion• One day before the trial (October 2007), the

two sides settled for about 80% of what we were asking.