Ethically Speaking

Ethically Speaking
by Linden Cole

Ever wondered if it is truly necessary to teach ethics to beginning actuaries. The answer is, "Yes, it is." Here's why.

The Society of Actuaries teaches its Code of Conduct, the existence and importance of Standards of Practice, and the actuarial profession's system of discipline to beginning actuaries at the Associateship Professionalism Course, and later at the Fellowship Admissions Course. It all comes under the heading of "Professional Ethics." Most of our students accept this without question, but once in a while someone wonders why we bother. Is all this stuff really necessary? I have taught these courses many times, and student questions and comments have helped to clarify this issue for me. The answer is a definite yes–it is all really necessary. Let me explain.

Most of us, or maybe all of us, have an instinctive feeling for what ethical behavior is. If we could illustrate this with a picture, it might look like this. There would be a hillside at the top, with fresh air and pretty little birds flying around. That represents the "ethical high ground." Then there would be a swamp at the bottom, with foggy air, murky water and lurking alligators. That is the "ethical swamp," representing unethical behavior. Any society will function better if its members live their lives ethically, high on the ethical hillside. Human nature being what it is, however, some people choose to function in the swamp, with resulting damage to our societies.

You may respond that our societies already have ways for dealing with unethical behavior. We create a system of laws, with enforcement methods. Legal is intended to be based on what is generally assumed to be ethical, and illegal is intended to be based on what is generally assumed to be unethical. We have legislatures, a court system, police, a legal profession, prisons, probation officers and so on. We know where the line between legal and illegal is drawn, and have courts to decide where it is when we disagree. Let's call that line the Barely Legal Line. Isn't all this enough? Why can't we rely on it, and not construct another system with a separate code of conduct, standards of practice, and an enforcement method for the actuarial profession?

Unfortunately, problems begin to arise as soon as the line between legal and illegal has been defined by the lawmakers for a particular situation. Human nature being what it is, some people immediately begin looking for ways of getting around the intention of the new law, for financial advantage. It would be incorrect to say that there is a small army of people who try to find ways around particular laws. The fact is that there is a large army of people doing that. Some management consultants make lots of money by helping companies get around existing laws, showing them ways they would never have thought of. Some lawyers make lots of money by helping companies get around existing laws by pointing out loopholes, inventing strained interpretations, etc. The Barely Legal Line gets pushed lower and lower, sometimes falling beneath the surface of the ethical swamp. Unfortunately, some companies function as close to the Barely Legal Line as they can, and end up functioning out of the ethical swamp.

Once a company and its leaders sink into the swamp, the murky water and polluted air make it very hard to distinguish the legal from the illegal, let alone the ethical from the unethical. And when they get caught, they become a feast for the alligators. Who are the alligators? They include regulators, consumerists and class–action lawyers. The alligators are eating well these days.

When people who practice on the Barely Legal Line get caught doing something blatantly unethical, they often start their defense by claiming that their actions were legal. Their actions were presumably just above the Barely Legal Line. No matter how the inevitable lawsuits work out, the damage to society is already extensive by the time the practices are identified and stopped. With ENRON, for example, a whole lot of people found their retirement security wiped out, and investors lost billions of dollars. Ah, you say, but this sort of unethical behavior, once discovered by the public, will trigger a new round of stricter laws. Think of Sarbanes–Oxley, for example. But as soon as the new laws are on the books, a new cycle begins of looking for loopholes, inventing strained interpretations, and so on. The cycles go on and on.

An excellent description of one way of dodging the law is laid out in Tales of a New America, by Robert B. Reich. Chapter 18 is entitled "The Miasma of Regulation," and gives an illustration (hypothetical, I hope) of a lawyer advising a business how to break a law for several profitable years, ending with a small fine when the business cannot keep the lawbreaking going any longer. Dr. Reich summarizes the chapter as follows: "The profession of discovering and exploiting loopholes is both intellectually and financially rewarding. It is also eminently respectable." Here is his conclusion, at the end of the analysis. "The story, exasperatingly, suggests no obvious plan of action. For any fundamental improvement to occur would require a broader definition of responsibility by which businesses would not simply yield to the letter of the law but endorse its spirit, or else openly challenge the goals underlying the laws."1 This is not likely to happen.

Actuaries will understand the following example of life in the ethical swamp, from a recent report in Time entitled "The Broken Promise" (mostly about the decline in retirement security for employees and the decrease in defined benefit pension plans). During the 1980s, the article observes, corporate raiders bought companies and immediately withdrew substantial sums of cash from the pension plans of those companies. The article says that an estimated $21 billion, originally set aside for employee pensions, went into the pockets of the corporate raiders.2

I recall news that went around my office in the late 1970s, when a corporate raider bought a large manufacturing company with borrowed money, then terminated the well–funded pension plan completely and paid off the loan with the money released. If anyone suggested to the raider that he had gained ownership of the company by stealing the retirement security of hundreds of workers, he undoubtedly pointed out that it was all legal, which it was. But these business dealings came straight out of the ethical swamp. In 1990, and only after an extended public outcry, Congress finally dealt with this with new legislation providing severe penalties for this practice, but of course a whole lot of money was already gone. And the people who practice on the Barely Legal Line went to work on the new law, no doubt.

The bottom line here is that business practice which is consistently as close as possible to the Barely Legal Line is often in the ethical swamp already, with bad results for society. Now, finally, we come to the point for the professions.

Some functions in society are so important that it would be unthinkable to allow practice on the Barely Legal Line. A much higher "minimum" acceptable level of practice is called for. That is the reason for codes of conduct, standards of practice, and the other pieces of our organizations that define ethical behavior for the professions. In addition, professions have traditionally been committed to the "public interest," with each profession having its own special public interest. Examples include the medical profession, the engineering profession, the auditing profession and the legal profession.

The auditing profession provides a good example. Our capitalistic society depends on investors being willing to invest their money in business enterprises. Investors, however, are not likely to invest in an enterprise unless they can trust its financial statements. How can you be reasonably sure that the numbers they give you accurately reflect the condition of the enterprise? They might be deliberately distorted to give a picture that is wildly optimistic. If, however, the financial statements have been approved as accurate by an independent CPA whose work is controlled by a code of conduct and Generally Accepted Accounting Principles, potential investors can be reasonably sure that they do have an accurate picture (note how much damage was done when the system failed in the ENRON situation). Thus, the viability of our society absolutely requires an auditing profession whose organization enforces a full system of professional ethics. For this special public interest, the Barely Legal Line is not even close to being an adequate minimum.

The actuarial profession has its special public interest too, although it is not often verbalized. Our special public interest is the viability of financial security programs involving risk. Within our profession, we have the ability to determine the needed contribution of each participant to a risk pool, and to manage the risk pool during its lifetime. The objective is to make it as certain as we can that if the risk insured against actually happens to a participant, there will be enough money in the risk pool to pay the benefits. This sometimes means that we need to alert those in charge that more money needs to be added to the fund (i.e., increase actuarial reserves), to ensure the payment of all benefits in the long run.

There are many financial security programs involving risk. The predecessor organization of the Society of Actuaries spent much effort on the risk of premature death, for example, while the Casualty Actuarial Society was initially concerned with the risk of industrial accidents and the financial situation of the injured workers. The CAS expanded into the risk of fire, the risk of incurring liability, the risk of theft, and other similar risks. The SOA expanded into the risk of outliving one's assets in retirement, the risk of high medical expenses and other similar risks. The common thread in all this is that certain unfortunate events that sometimes occur can damage a person's financial condition irreparably, and that this is not a good thing for society. It is definitely unhealthy for society to have a lot of people around who have been reduced to poverty by adverse events.

The financial security of people in our society is thus a high priority concern, and it is the actuary's special concern where there are risks that could impair that financial security. This is so important that the actuarial profession has developed its own system of defining and enforcing professional ethics. Here again, the Barely Legal Line is not even close to being an adequate minimum.

The Code of Conduct, the Standards of Practice and the discipline system set a high standard for the minimum acceptable level of practice for actuaries. This is to make it as certain as possible that we will be able to meet our responsibility for our special public interest, the funding and managing of financial security programs. With the combination of private insurance programs and social insurance programs, virtually every citizen of our modern societies is covered by several of these programs. These citizens may not know that we are there, working behind the scenes, but they are the public whose interest we serve, and they are depending on us.


  1. Robert B. Reich, Tales of a New America–The Anxious Liberal's Guide to the Future (New York: Random House, Inc., 1988), pp. 220–221.
  2. Donald L. Barlett and James B. Steele,TIME, October 31, 2005, p. 42.

Linden Cole, FSA, MAAA, is retired and regularly teaches SOA professionalism courses. He can be reached at