February 01, 2008|By Jay Angoff
Actuaries are the people who set rates for insurance companies based on their projections as to how much the company will pay out in the future. But when their predictions are wrong, they tend not to suffer any consequences - and they may even describe it as good news.
Well, it may be good news for the company when what its actuaries project it will pay out (which is what the company's rates are based on) turns out to be far greater than what it actually pays out. But it's lousy news for insurance consumers and taxpayers, as Marylanders have learned.
During 2003 and 2004, actuaries for Maryland's largest medical malpractice insurer, the Medical Mutual Liability Insurance Society, told the legislature and the insurance commissioner that its claims payments were increasing. It used these alleged increases to justify raising the company's rates and seeking to limit the company's liability.
But guess what? The actuaries were wrong. According to the most recent data filed by Medical Mutual with the insurance commissioner's office, its claims payments have instead been decreasing: from $77 million in 2003 to $57 million in 2004 to less than $45 million in both 2005 and 2006, and to an estimated $40 million in 2007.
When something like this happens, actuaries tell insurance regulators that losses have "developed favorably."
Although most state insurance commissioners have the authority to do so, they typically take no action to order refunds to compensate policyholders when actuarial errors have resulted in excessive rates. Happily for Maryland policyholders and taxpayers, the state's current insurance commissioner, Ralph S. Tyler, is an exception: He has ordered Medical Mutual to give back an $84 million subsidy the legislature had authorized in 2004, to pay its policyholders a $13.8 million dividend, and to reduce its rates by 8 percent. He has indicated that he may take further action.
To increase the accuracy of actuarial projections, however, the insurance commissioner should go a step further and adopt standards that actuaries must follow in making their projections.
Actuaries estimate future claims payments by looking at the trend over several years in the number of claims a company has paid, the company's average claim size, and the average time between an injury and the payment of a claim. The actuary has broad discretion, however, in selecting the period of years over which he calculates these trends. He can therefore select certain years in order to arrive at a preordained result.
For example, claims payments may have dropped over the most recent 10-year period but increased over the last three years; the actuary may base his projections on the last three years and disregard longer-term trends in order to justify a rate increase. Moreover, actuaries often use their subjective judgment to project a different trend than that indicated by the claims data they select.
By limiting the actuary's ability to cherry-pick data and to substitute his subjective judgment for claims data, the commissioner could minimize the extent to which actuaries project unreasonably high claims payments. In addition, the commissioner should continue to exercise his authority to order refunds to policyholders who have paid excessive rates.
The fundamental problem with actuarial practice, however, is that actuaries are inadequately regulated: No state or federal board licenses or disciplines them, or establishes ethical guidelines for them. The legislature should establish such a board.
Doctors who negligently injure patients can be held liable for medical malpractice and can be disciplined by the state medical board; a lawyer who misses a filing deadline can be held liable for legal malpractice and can be disciplined by the state bar. But actuaries whose estimates of claims payments consistently turn out to be wildly excessive suffer no penalty.
For the sake of policyholders, taxpayers and consumers, actuaries should be held accountable for their mistakes, just as other professionals are.
Jay Angoff, a former Missouri insurance commissioner, has served as a consultant to the Maryland Insurance Administration and the Maryland Trial Lawyers Association. His e-mail is jay@angofflaw.com.
