the actuary as expert witness chuck mcclenahan, fcas mmc enterprise risk cas seminar on ratemaking -...
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The Actuary as Expert Witness
Chuck McClenahan, FCAS
MMC ENTERPRISE RISK
CAS Seminar on Ratemaking - March, 2002
CAS Seminar on RatemakingMarch, 2002 2
AGENDA
• What is an Expert Witness?
• Venues for the Actuarial Expert
• Issues for the Actuarial Expert
• Training for the Actuarial Expert
CAS Seminar on RatemakingMarch, 2002 3
AGENDA (Continued)
• Professional Standards
• Working with Attorneys
• Practical Examples
• Some Advice
CAS Seminar on RatemakingMarch, 2002 4
What is an Expert Witness?
CAS Seminar on RatemakingMarch, 2002 5
What is an Expert Witness?
• “An expert is a person who has made all the mistakes that can be made in a very narrow area.”
- Niels Bohr
CAS Seminar on RatemakingMarch, 2002 6
What is an Expert Witness?
• ASOP #17 - Expert Testimony by Actuaries
Expert - One who is qualified by knowledge,
skill, experience, training, or education to render
an opinion or otherwise testify concerning the
matter at hand
CAS Seminar on RatemakingMarch, 2002 7
What is an Expert Witness?
• Federal Rules of Evidence - Rule 702
Testimony by Experts - If scientific, technical,
or other specialized knowledge will assist the trier
of fact to understand the evidence or to determine
a fact in issue, [an expert witness] may testify
thereto in the form of an opinion or otherwise.
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What is an Expert Witness?
• Lay (non-expert) witnesses may not offer opinion testimony
• Expert witnesses may offer opinions based upon knowledge, skill, experience, training or education
CAS Seminar on RatemakingMarch, 2002 9
Venues for the Actuarial Expert
• Rate or other administrative hearings
• Arbitration, ADR, or other extra-judicial proceedings
• Depositions, declarations and affidavits
• Testimony in court
CAS Seminar on RatemakingMarch, 2002 10
Issues for the Actuarial Expert
• Actuarial present values - benefits, divorce
• Adequacy of rates, reserves
• Impact of financing alternatives
• Actuarial malpractice
• Relationship between risk and return
• Insurance company valuation
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Training for the Actuarial Expert
CAS Seminar on RatemakingMarch, 2002 12
Training for the Actuarial Expert
• “An expert is a person who avoids small error as he sweeps on to the grand fallacy.”
- Benjamin Stolberg
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Training for the Actuarial Expert
• Federal Rules of Evidence - Rule 703The facts or data in the particular case upon which the expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence.
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Training for the Actuarial Expert
• Three Sources for Facts or Data– Firsthand observation by expert– Presentation at the trial– Presentation outside of court
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Sources for Facts or Data
• Firsthand Observation by Expert– Example - testimony by treating physician
– Actuarial expert testimony generally not firsthand observation
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Sources for Facts or Data
• Presentation at the Trial– Hypothetical questions, or
– Expert attends trial, hears testimony
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Sources for Facts or Data
• Presentation outside of court– Extends beyond expert’s own perception
– Must be “of a type reasonably relied upon by experts in the particular field”
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Training for the Actuarial Expert
• Additional Skills Required– Ability to explain complex issues simply– Ability to construct logical sequence of questions– Ability to stand up under cross-examination– Ability to work quickly under pressure– Good memory -short/long term- for prior testimony
CAS Seminar on RatemakingMarch, 2002 19
Professional Standards
CAS Seminar on RatemakingMarch, 2002 20
Professional Standards
• Qualification Standards
• ASP 17 - Expert Testimony by Actuaries
• ASP 9 - Documentation and Disclosure
CAS Seminar on RatemakingMarch, 2002 21
Professional Standards
• Qualification Standards
– Code of Professional Conduct - Precept 2
– Qualification Standards for Prescribed Statements of Actuarial Opinion
CAS Seminar on RatemakingMarch, 2002 22
Professional Standards
• ASP 17 - Expert Testimony by Actuaries
– Revision being considered by ASB
– Standard provides good guidance and useful advice
CAS Seminar on RatemakingMarch, 2002 23
Professional Standards
• ASP 9 - Documentation and Disclosure
– Requires documentation whether or not there is a legal requirement
– Must be sufficient for another actuary to evaluate work
CAS Seminar on RatemakingMarch, 2002 24
Working With Attorneys
CAS Seminar on RatemakingMarch, 2002 25
Working With Attorneys
• “An expert knows all the answers - if you ask the right questions.”
- Unknown
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Working With Attorneys
• Q: Now doctor, isn't it true that when a person dies in his sleep, he doesn't know about it until the next morning?
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Working With Attorneys
• Lawyer: "Now, Mrs. Johnson, how was your first marriage terminated?"
• Witness: "By death."
• Lawyer: "And by whose death was it terminated?"
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Working With Attorneys
• Problems Presented by Actuaries
– Threatening Subject
– Personality (or Lack Thereof)
– Complex Issues
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Working With Attorneys
• Threatening Subject
– Jury hates, doesn’t understand math
– Actuary must make it interesting
– Actuary must make it simple
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Working With Attorneys
• Personality
– “I’m not weird, just unusual”
– “I understand this is difficult”
– “I’m here to help you understand”
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Working With Attorneys
• Complex Issues
– Actuary must simplify
– Visual aids where possible
– Do not condescend or patronize
CAS Seminar on RatemakingMarch, 2002 32
Working With Attorneys
• Problems Created by Attorneys
– Attempting to paraphrase
– Attempting to stretch or bend opinion
– Attempting to summarize
CAS Seminar on RatemakingMarch, 2002 33
Working With Attorneys
• Attempting to Paraphrase
– Language of actuarial science very precise
– Each word can be important
– Ask the question as written• Precise questions yield predictable answers
CAS Seminar on RatemakingMarch, 2002 34
Working With Attorneys
• Attempting to Stretch or Bend Opinion
– Expert has obligation to avoid misleading testimony
– Limitations and underlying assumptions must be disclosed
CAS Seminar on RatemakingMarch, 2002 35
Working With Attorneys
• Attempting to Summarize
– Lawyers like simple answers
– Rarely are the answers simple
– Expert has obligation to avoid misleading
CAS Seminar on RatemakingMarch, 2002 36
Working With Attorneys
• Jargon
– Actuaries Have Their Own Language• “Cohort” “Credibility” “Severity” “Convolution”
– Best to Avoid Jargon• “Group” “Weight” “Average Loss” “Possible
Event”
CAS Seminar on RatemakingMarch, 2002 37
Practical Examples
CAS Seminar on RatemakingMarch, 2002 38
Practical Examples
• “When facts are few, experts are many.”
- Donald R. Gannon
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Practical Examples
• Rate Hearing
• Civil Litigation
• Criminal Trial
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Rate Hearing
• Generally One of Three Parties
– Filer
– Regulator
– Consumer Advocate
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Rate Hearing
• Quasi-judicial
• Before Hearing Officer (Usually Regulator)
• Departures from Rules of Evidence
• Often Pre-Filed Testimony
• High Degree of Actuarial Advocacy
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Rate Hearing
• Advantages
– General understanding of actuarial issues
– Low expectations
– Reliance on pre-filed testimony
CAS Seminar on RatemakingMarch, 2002 43
Rate Hearing
• Disadvantages
– Advocacy often trumps expertise
– Rules, Regulations, Rulings
– Politics, Politics, Politics
CAS Seminar on RatemakingMarch, 2002 44
Rate Hearing
• Recommendations
– Know the filing, the history, the environment– Understand the theoretical underpinnings– Don’t overstate precision or reliability– Advocacy should not define testimony
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Rate Hearing
• Example: What is the proper profit provision and how should it be reflected in the rates?
CAS Seminar on RatemakingMarch, 2002 46
Civil Litigation
CAS Seminar on RatemakingMarch, 2002 47
Civil Litigation
• State or Federal Court
• Bench Trial or Jury Trial
• Relies Heavily on Depositions
• Generally Formal Expert Reports
• Some Actuarial Advocacy
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Civil Litigation
• Advantages
– Adequate time, documents for preparation
– Much testimony through deposition
– Less advocacy than rate hearings
CAS Seminar on RatemakingMarch, 2002 49
Civil Litigation
• Disadvantages
– Little understanding of actuarial issues
– Juries lack education, focus
– Cross-examination brutal
CAS Seminar on RatemakingMarch, 2002 50
Civil Litigation
• Recommendations
– Thorough knowledge of subject matter– Triple-check all calculations– Mock cross-examination– Be consistent with prior testimony– Document everything
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Civil Litigation
• Example: Should the reserving actuary have anticipated all or part of the adverse development?
CAS Seminar on RatemakingMarch, 2002 52
Criminal Trial
CAS Seminar on RatemakingMarch, 2002 53
Criminal Trial
• Advantages
– Interesting application of actuarial science
– Chance to meet a new group of people
CAS Seminar on RatemakingMarch, 2002 54
Criminal Trial
• Disadvantages
– Pressure
– Threats - real or implied
CAS Seminar on RatemakingMarch, 2002 55
Criminal Trial
• Recommendations
– Avoid advocacy at all costs
– Act as though you were the expert for both sides
– Keep it simple
CAS Seminar on RatemakingMarch, 2002 56
Criminal Trial
• Example: What are the chances that four homes owned by a single individual over a nine year period would be substantially destroyed by fire through random occurrence?
CAS Seminar on RatemakingMarch, 2002 57
Some Advice
• “If the world should blow itself up, the last audible voice would be that of an expert saying it can’t be done.” - Peter Ustinov
CAS Seminar on RatemakingMarch, 2002 58
Some Advice
• Rate hearing experience before litigation
• Deposition before court testimony
• Mock cross-examination
• If you don’t love it, don’t do it
CAS Seminar on RatemakingMarch, 2002 59
The Actuary as Expert Witness
• “If your mind is empty, it is always ready for anything; it is open to everything. In the beginner’s mind there are many possibilities; in the expert’s mind there are few.”
- Shunryu Suzuli