Actuary maybe

With actuaries more vulnerable to the risk of claims than ever before, where do the insurance companies stand? Robert Lloyd investigates

The field of actuaries' professional liability is by no means a well-trodden one. Despite this, the question is one of significant interest to at least a minority of London market underwriters and the small actuarial profession.

These 5,000 or so souls are facing something of an insurance crisis, with speculation as to whether actuaries have become uninsurable in the open market and will have to go down the mutualisation road. So where has this crisis come from, and why do some professional negligence textbooks have nothing to say about actuaries?

The historic position

The first section of the actuarial profession to attain notoriety was the general insurance (non-life) actuaries. They started

in the late 1980s, following a small band of pioneers, developing models to assess the pattern of future claims over insurance accounts.

In those times they were asked for their opinion of provisions against North American asbestos, health hazard and pollution claims or, worse still, to try to put a curve on the LMX spiral. Actuaries are generally a careful breed and, in this scenario, their reports typically expressed the assumptions and alternative projections that might be made and reflected the limitation of the work being based on unaudited raw data.

There were a number of court cases in that era, but no notable adverse judgments were recorded. However, there was NRG Victory v Ernst & Young and Bacon & Woodrow (1995), which was a claim for £400m concerning the sale of a reinsurance company, the reserves of which were actuarially assessed. On the face of it, the actuary was successful in that, although there was a breach of duty in failing to sufficiently qualify the accuracy of the advice given, this was not causative of the loss, as the transaction had not been affected by it.

Until recently, this case was easily the most famous, or alternatively the only significant, reported English case that was specific to an actuary. Unfortunately, although apparently a victory, this was costly to the image of the profession in the insurance market, because it highlighted the potential exposure of non-life actuaries to very large claims.

Was there a flood of successful actions against actuaries after 1995? No, but there have been a few more scares. As famous financial institutions and insurance companies have teetered or collapsed, there is inevitable speculation as to whether there is not some poor actuary in the background who inadvertently certified its health. Such thoughts derive a lot from the experience of the Lloyd's litigation prior to 1996, and more recently to the condition of 'Enronitis'. The key question as to what an actuary might have done to cause or contribute to such disaster, and which was relied upon by some claimant, is rarely answered and if properly investigated might be a great deal more reassuring.

SITA v Watson Wyatt

Not until October 2002 was there a clear adverse judgment which happened in SITA v Watson Wyatt SARL & ors and Maxwell Batley (2002). In that case Watson Wyatt's French office had been forced to settle with SITA after negligently advising on the application of French social security charges to an employee share scheme. Watson Wyatt failed to recover a contribution from the solicitors that drafted the trust documents. It should be noted that this was a very old-fashioned case – the actuary's liabilities arose from a rather simple and, with hindsight, glaring mistake. Watson Wyatt was acting in the capacity of HR consultants (as other actuaries do). Unfortunately, the settlement of $35m (£21m) – which was only a proportion of the claim – highlighted again the risk of large numbers.

One might be tempted to ask: “Is that it – two cases in eight years?” Indeed, the insurance market is perfectly capable of dealing with the risk of occasional large losses. Reinsurance was invented for just these circumstances. There could be a large number of undisclosed settlements, but there is no reason to think so. The real cause of the crisis lies in the 'black hole' of pensions. Insurance and reinsurance cannot cope with an unexpected flood of large claims.

The crisis in pension funds brings us back to the most traditional actuaries of all. Actuaries advise employers, trustees and sometimes beneficiaries on the value of pension fund assets and liabilities, offer opinions on the appropriate level and structuring of benefits and contributions and certify the minimum funding requirement. However, everyone now knows how fluid and insubstantial the value of those pensions assets is at a time when the liabilities of the fund are so grimly solid and growing. Hence, the numbers are large with pension funds too.

All this, of course, reflects the movements of financial markets, and there ought to be no particular reason for concern for the actuary whose work will make clear all the assumptions and qualifications that go with their opinions. However, actuaries, as with other professionals, cannot easily avoid exposure to claims made on the basis of oral representations external to their carefully crafted reports or liabilities to third parties who may not have been the intended recipients of their advice. In some respects they are better placed than accountants in their ability to contractually limit their liabilities and are not subject to statutory constraints in this respect, but nothing is foolproof.

The future

On 17 April 2003, The Times reported a threatened claim by Sygen against Watson Wyatt concerning the distribution of a surplus in the Dalgety Pension Scheme in 1998. This was described as the first of a “raft of legal suits” expected to hit the profession.

It may be quite reasonable to take a pessimistic view and accept such a forecast. However, the observation may be made that the pensions crisis is not exactly new and goes back to Robert Maxwell and the Pensions Review. Even in relation to the collapse in pension fund asset values, any claims are coming rather late in the bear market, and possibly after it has turned. It is far from a foregone conclusion that actuaries are going to be blamed for very much of this.

None of the above is intended to dispute that actuaries do represent an unusual and difficult risk, particularly as it is a small profession and risk spread is not easy. However, the SITA case aside, the record is rather positive. Underwriters in this market who avoid getting sucked into the black hole might do very well indeed.

Robert Lloyd is a partner at Fishburns