CAS Seminar on Ratemaking - March, 2003
REG-1
The Actuary as Expert Witness
Charles L. McClenahan
10 South Wacker Drive, Chicago, IL 60606
AGENDA
What is an Expert Witness?
Venues for the Actuarial Expert
Issues for the Actuarial Expert
Training for the Actuarial Expert
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AGENDA (Continued)
Professional Standards
Working with Attorneys
Practical Examples
Some Advice
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What is an Expert Witness?
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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
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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
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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
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Venues for the Actuarial Expert
Rate or other administrative hearings
Arbitration, ADR, or other extra-judicial proceedings
Depositions, declarations and affidavits
Testimony in court
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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
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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 703
The 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
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Professional Standards
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Professional Standards
Qualification Standards
ASP 17 - Expert Testimony by Actuaries
ASP 9 - Documentation and Disclosure
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Professional Standards
Qualification Standards
– Code of Professional Conduct - Precept 2
– Qualification Standards for Prescribed Statements of
Actuarial Opinion
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Professional Standards
ASP 17 - Expert Testimony by Actuaries
– Revised effective July 15, 2002
– Standard provides good guidance and useful advice
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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
– Incorporates Statements of Principles
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Working With Attorneys
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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 keep 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
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Working With Attorneys
Problems Created by Attorneys
– Attempting to paraphrase
– Attempting to stretch or bend opinion
– Attempting to summarize
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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
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Working With Attorneys
Attempting to Stretch or Bend Opinion
– Expert has obligation to avoid misleading testimony
– Limitations and underlying assumptions must be disclosed
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Working With Attorneys
Attempting to Summarize
– Lawyers like simple answers
– Rarely are the answers simple
– Expert has obligation to avoid misleading
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Working With Attorneys
Jargon
– Actuaries Have Their Own Language
“Cohort” “Credibility” “Severity” “Convolution”
– Best to Avoid Jargon
“Group” “Weight” “Average Loss” “Possible Event”
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Practical Examples
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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
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Rate Hearing
Disadvantages
– Advocacy often trumps expertise
– Rules, Regulations, Rulings
– Politics, Politics, Politics
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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?
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Civil Litigation
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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
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Civil Litigation
Disadvantages
– Little understanding of actuarial issues
– Juries lack education, focus
– Cross-examination brutal
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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?
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Criminal Trial
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Criminal Trial
Advantages
– Interesting application of actuarial science
– Chance to meet a new group of people
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Criminal Trial
Disadvantages
– Pressure
– Threats - real or implied
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Criminal Trial
Recommendations
– Avoid advocacy at all costs
– Act as though you were the expert for both sides
– Keep it simple
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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?
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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
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Some Advice
Rate hearing experience before litigation
Deposition before court testimony
Mock cross-examination
If you don’t love it, don’t do it
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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
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