Actuaries Are From Mars; Judges and Juries Are From Jupiter

1. Actuaries Are From Mars;Judges and Juries Are From Jupiter By R. Timothy Muth Sandra Zunker Brown Reinhart Boerner Van Deuren s.c. 1000 North Water Street Milwaukee, WI 53202 414-298-1000 www.reinhartlaw.com

2. 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

3. Why You Should Care Increasing claims against actuaries

4. 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.

5. Areas of Claims • Reserve Estimates • Mergers & Acquisitions • Defined benefit plan valuations • Withdrawal liability • Insolvencies • Conflict of interest

6. Some Claims Against U.S. Actuaries Verdicts 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

7. 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

8. “First, sue all the consultants.” Business Week magazine - June, 2000

10. 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

11. 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.

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

13. 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.

14. 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

15. Juries and the Actuarial Profession

16. What The Jury Hears First: Plaintiff’s Opening Statement

17. What We Know About the People Who Hear This

18. 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

19. 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

20. 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”

21. “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.

22. Juries have difficulty understanding actuarial concepts ? ALAE = DCCE ? loss ratio IBNR Bornheutter-Ferguson

23. 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?”

24. Applying a tail factor of .017... Juries believe there is a great deal of precision in actuarial estimates.

25. 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

26. 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

27. Juries and judges always have hindsight.

28. Testifying to Actuarial Issues

29. Two Modest Goals for Actuary Witnesses: • Not to be brilliant • Not to be persuasive • To be UNDERSTOOD • To be REMEMBERED

30. 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.

31. You Have An Expert Interpreter: Your Attorney

32. 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.

33. “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.

34. Example of how to educate a jury about basic reserving concepts

35. A BAD EXAMPLE

36. 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

37. A BETTER EXAMPLE

38. Automobile Policies • Covers January 1-December 31, 2001 100 ACCIDENTS Reported

39. 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.

40. Paid Claims • Accident occurred • Accident reported • Claim filed • Claim paid or “closed” CLOSED Example: minor “fender bender” in March 2001. Repair bill paid in 2001.

41. Claims Adjusters Set Reserves For Reported Claims That Have Not Been Paid: Open Case Reserves

42. Open Case Reserve • Accident occurred • Accident reported • Claim “pending” Case Reserve Example: Accident with property damage and minor injuries in August 2001. Lawsuit filed. Outcome still pending at end of 2001.

43. Reserves Actuaries Set • Incurred But Not Reported claims (IBNR) • Supplemental Development (changes in case reserves)

44. IBNR “Incurred But Not Reported” • Accidents which have not yet been reported I.B.N.R. Example: December 2001 accident. Not yet reported. Claim likely filed in 2002.

45. Supplemental Development on Case Reserves • Accident occurred • Accident reported • Case reserve set • New information Supp. Develop. Example: Accident with minor injuries in August 2001. Lawsuit filed, case reserve set. Plaintiff then has back surgery and complications.

46. Writing Actuarial Work Product for Juries to Read

47. 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.

48. 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

49. In Praise of Boilerplate • Boilerplate language in reports has won cases. • Boilerplate language in reports has avoided cases.

50. 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