This article originally appeared in the CIA (e)Bulletin.
By Josephine Marks, FCIA
As we collect our thoughts for our actuarial memoirs about how we survived the pandemic of 2020, a question may arise as to how we met our professional obligations during these unsettling and unexpected times. Even though actuarial work may not have been identified as an essential service, many of our duties will be affected by COVID-19 and we are still expected to provide a high level of professionalism. Actuaries performing a wide range of duties, including pension plan valuations and financial condition testing, may wish to brush up on the application of actuarial standards for “unexpected events” such as a once in a lifetime pandemic.
Fortunately for such a frantic actuary, our general standards provide several pearls of wisdom for these circumstances.
Setting the tone for all of our work, subsection 1140 adjures us to exercise reasonable judgment in applying our standards. This includes taking the spirit and intent of the standards into account and applying common sense. Yes, our standards do actually use the words “common sense” even though it is not one of our defined terms.
Paragraph 1150.02 reminds us that useful guidance may also be found in historical records. While little is known about the metrics of the black plague or early smallpox infestations in the new world, we are all surely now becoming experts in the history of the Spanish Influenza of the early twentieth century. Not only are we reading up on the metrics of this previous pandemic, but we are all thinking about their potential impact on actuarial assumptions and methods for this new, more recent, pandemic.
Paragraph 1160.02 reminds us that the application of any of the recommendations within our standards of practice beyond their scope should take relevant circumstances into account. For most of the work performed by actuaries, it is hard to envision an aspect where COVID-19 would not be a relevant circumstance. COVID-19 is affecting our physical and mental well-being, whether and how we interact with others, where and how we perform our actuarial duties and, ultimately, the results of that actuarial work.
Paragraph 1230.01 tells us that deviation from a particular recommendation within the standards is acceptable actuarial practice for an unusual or unforeseen situation for which the standards are inappropriate. While it is not clear whether COVID-19 will meet this threshold, the application of actuarial judgment discussed above allows us to consider whether it should or does.
If COVID-19 would have been an impediment to accepting an engagement, paragraph 1310.02 tells us that the actuary should renegotiate or discontinue the engagement, or at the very least, report on the impediment and its implications. Data that are not sufficient or not reliable (and cannot be remedied) would constitute such an impediment.
Subsection 1430 of the Standards of Practice deals explicitly with subsequent events and is reproduced here verbatim:
1430.02 For work with respect to an entity, the actuary should take a subsequent event into account (other than in a pro forma calculation) if the subsequent event
- Provides information about the entity as it was at the calculation date;
- Retroactively makes the entity different at the calculation date; or
- Makes the entity different after the calculation date, and a purpose of the work is to report on the entity as it will be as a result of the event.
1430.03 The actuary should not take the subsequent event into account if it makes the entity different after the calculation date and a purpose of the work is to report on the entity as it was at the calculation date. Nevertheless, the actuary should report that subsequent event. [Effective February 1, 2018]
Paragraph 1420.01 of the standards provides an event decision tree to aid in this interpretation.
If the pandemic constitutes an event that makes the entity different after the calculation date, paragraphs 1430.10–1430.12 would apply. These paragraphs explain whether to take the event into account but note that it is to be described in the reporting of the work in either case. My interpretation would be that the pandemic would reasonably be expected to “affect the entity’s future operations and the actuary’s subsequent calculations,” although it may well be that these effects are not well understood just at present. It may be that we will emerge from this experience and conclude that nothing has changed, although I submit that it would be a shame if we learned nothing from this.
Finally, paragraph 1620.03 notes that in selecting or reviewing assumptions, an appropriate assumption is the continuation of the status quo, unless there is a reasonable expectation that it will change. Paragraph 1620.23 notes that an extrapolation would take into account a change that affects the outlook.
As promised, there is a lot of wisdom hidden in our general standards that may guide us in these unsettling times. Perhaps most importantly, we can end this article where we started, with subsection 1140, which speaks to the importance of actuarial judgment. Applying this judgment is particularly important during periods of uncertainty and change.
Josephine Marks, FCIA, is Chair of the Actuarial Standards Board.
This article reflects the opinion of the author and does not represent an official statement of the CIA.