Corporate Governance and External Peer Review

Robert J. Walling III | November 07, 2023 |

External peer review is a process commonly used as an effective means of increasing stakeholders' confidence in actuarial work products. Insurance companies, captive insurers, self-insureds, boards of directors, auditors, insurance regulators, lawyers, and others employ an independent, credentialed actuary to assess the reasonableness and appropriateness of an actuarial analysis and report without an additional independent actuarial analysis.

Peer review is intended to "ensure the correctness of the results and the proper applicability of the work product to the issue being addressed," according to the American Academy of Actuaries Committee on Professional Responsibility in Peer Review—Concepts on Improving Professionalism (April 1997). However, a wide variety of different issues can be identified during an external peer review. A systematic approach, the use of proven best practices, and compliance with professional standards can significantly increase the efficiency and benefit of this process.

Pinnacle has developed a rigorous, principles-based approach to external peer review that applies a uniform set of criteria in the review of another actuary's work product. This creates an effective process to evaluate reasonableness, appropriateness, and compliance with professional standards. This structured, efficient process examines specific criteria to ensure that the actuarial report produces reasonable results, is properly documented for the intended audience, and complies with all applicable professional standards.

Key Points

External peer review is as follows.

  • An independent approach to evaluating the work product of another actuary
  • A comprehensive review of the reasonableness and appropriateness of the data, methods, assumptions, and findings of an actuarial analysis as well as how those results are communicated
  • Less time-consuming than an additional independent actuarial analysis
  • A more professionally sound evaluation of the actuarial work product than a review by an individual who is not a credentialed actuary
  • Best performed using a rigorous framework that includes a review of the form and content of the analysis, as well as compliance with actuarial professional standards

When Is External Peer Review Appropriate?

A number of scenarios exist where the principal, that is the actuary's customer or employer, or other interested parties may want to have an "independent set of eyes" review an actuarial work product for reasonableness and appropriateness.

Examples of when independent peer review may be appropriate include the following.

  • Periodic reviews of the work of an appointed actuary to identify areas of material optimism, pessimism, or opportunities for improvement
  • An auditor responsible for issuing the audit opinion of an insurance company or captive
  • Insurance regulators responsible for oversight of an insurance or self-insurance program
  • A reinsurer or fronting insurer reviewing the actuarial work of a current or potential program
  • Parties involved in collateral negotiations
  • Lawyers taking part in a directors and officers lawsuit after an insolvency or other action
  • Members of the board of directors of a company with insurance risk taking a proactive role in ensuring proper governance

Suboptimal Outcomes from Traditional Approaches

In the past, external reviews of an actuary's work product were often either performed by a nonactuary or through a complete, independent, ground-up actuarial analysis.

In a limited review, a nonactuary, such as an auditor, regulator, or member of a finance department, reviews an actuarial analysis and report for "obvious" errors. Such a limited review contains obvious drawbacks, most notably that the reviewer was often not independent from the audit or regulatory process and the reviewer may not have possessed actuarial credentials. This is significant, because nonactuaries don't have the training, education, or experience to know all of the intricacies in the data, methods, and assumptions of an actuarial analysis and report.

On the other hand, a complete, second actuarial analysis can also present problems. For example, an additional second independent analysis will often significantly increase costs, sometimes more than doubling total actuarial fees, as well as added time. In addition, a complete review for straightforward insurance programs may not add enough value to justify the additional costs. Finally, a second independent actuary is often challenged by such issues as time and cost constraints, making it difficult to learn the unique characteristics of an insurance program and perform as thorough an analysis as the first actuary. At times, this can even impact the accuracy of the analysis.

The Value of the Right Approach

In keeping with the goal of ensuring reasonable and appropriate results and documentation, external peer reviews are generally performed by another qualified, credentialed actuary.

The general approach to external peer review is borne out of and guided by both the CAS Code of Professional Conduct (the Code of Conduct) and the Actuarial Standards of Practice (ASOPs), which are promulgated by the Actuarial Standards Board of the American Academy of Actuaries (AAA). Precept 4 of the CAS Code of Conduct states as follows.

[a]n Actuary who issues an Actuarial Communication shall take appropriate steps to ensure that the Actuarial Communication is clear and appropriate to the circumstances and its intended audience and satisfies applicable standards of practice.

Actuarial Standard of Practice No. 41, "Actuarial Communications" (ASOP 41), in section 3.2 provides an even more direct description, stating as follows.

In the actuarial report, the actuary should state the actuarial findings, and identify the methods, procedures, assumptions, and data used by the actuary with sufficient clarity that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary's work as presented in the actuarial report.

The scope of an external peer review is very similar to the objective appraisal described in the above statement. To this end, Pinnacle's approach to external peer review applies a series of evaluation criteria that allows an objective appraisal of the actuarial report and the data, methods, and assumptions underpinning the analysis.

Critical Elements of a Successful Peer Review

For its part, ASOP 41, section 3.1.1, states that "(t)he actuary should take appropriate steps to ensure that the form and content of each actuarial communication are appropriate to the particular circumstance, taking into account the intended users."

For an actuarial work product to meet this standard, it should satisfy three key criteria, as follows.

  • The form of the report
  • The content of the report
  • Compliance with all applicable professional standards

A document extremely helpful in developing peer review criteria is a discussion paper prepared by the Committee on Professional Responsibility of the AAA titled Peer Review—Concepts on Improving Professionalism. Many of the questions posed in Pinnacle external peer review criteria are taken directly or indirectly from this document.


The evaluation of the form of an actuarial analysis and report is focused on the clarity and readability of the report by both "its intended audience" and "another actuary qualified in the same practice area." It is important to recognize that these may be very different standards. Some of the questions in the form portion of the review are relatively straightforward, as follows.

  • Is the principal requesting the performance of the actuarial analysis clearly identified?
  • Is the actuary responsible for the actuarial report clearly identified?
  • Is the scope of the work clearly defined?
  • Does the report meet its intended scope?
  • Is the report complete?

Further, the form evaluation also deals quite a bit with the flow of the report. For example, the clarity of an actuarial report can be materially improved if the tables and exhibits are well organized and footnoted. The flow and reconciliation of data from one exhibit to another and ultimately into the report are also essential. In our experience, we have seen actuarial reports that fail these basic criteria.

Another key form element deals with documentation. While it is often impractical to provide exhibits supporting every assumption in an actuarial analysis (e.g., industry loss development factors), the basis of all assumptions should be documented, and support for the assumptions should be available in the supporting client or project work papers. It is also important that the findings and conclusions of the report can be clearly drawn from and supported by the analysis.

Finally, it is very important to the form of an actuarial communication to avoid any statement that could lead to an unintended or inappropriate conclusion by the principal or another party permitted to use the report. This is especially important when an actuarial report, such as a legislative costing study, is intended to be distributed to a broad audience, many of whom have little or no experience with actuarial jargon. One example of this is the actuarial concept of (statistical) credibility, which has a very different meaning outside of the context of actuarial science. One trend intended to address this issue is the increased use of glossaries of terms to assist the nonactuarial reader.


The content element of a peer review is focused more on the analysis itself. This is the element that examines the reasonableness and appropriateness of the data, methods, and assumptions used in an analysis and their consistency with the project scope. Overall, there is a significant level of professional judgment associated with this section of the review.

Typical Content Peer Review Questions

Examples of the type of questions within the content section of the review are as follows.

  • Are the data sources and benchmarks identified?
  • Are the data sources appropriate for use in this analysis?
  • Are all assumptions specified? Are they reasonable?
  • Are the methods used reasonable and appropriate?
  • Are any modifications of data or methods identified and explained?
  • Are the calculations correct?
  • Are the results, findings, and recommendations reasonable and adequately supported by the analysis?
  • Are any reliances and limitations appropriate and clearly delineated?
  • Are the potential variability and risk factors of results adequately discussed?

Two qualified actuaries may have perfectly sound reasons to rely on different data sets (e.g., countrywide versus by state loss data), different methods (e.g., loss development techniques versus stochastic loss reserving), or different assumptions (e.g., trends or loss development factors). Further, these two different approaches may well both result in a reasonable range of actuarial estimates.

Professional Standards

The final element of the external peer review is compliance with professional standards. While this may sound simple enough, the need to focus on this element is crucial. For example, the reviewer needs to ask, "Do the analysis and report meet applicable standards of practice, statements of principles, and other standards (e.g., National Association of Insurance Commissioners statutory accounting standards)?"

Many times, just asking this question may be enough. However, there are a number of issues that can materially complicate this part of the review. For example, accounting standards and requirements regarding the statement of actuarial opinion are constantly changing, particularly for captive insurance companies. Instances exist where long-standing actuarial analyses and statements of actuarial opinion may not immediately respond to these changes. Similarly, ASOPs and actuarial practice notes are frequently updated and can require updated wording in many parts of actuarial reports. A current example relates to Actuarial Statement of Practice No. 20, Discounting of Property/Casualty Claim Estimates (ASOP 20), which has added several new documentation requirements in actuarial reports when discounting is used.

Another major source of problems with professionalism is rare or unique situations. Insurance programs can have significant operational changes (e.g., changes in third-party administrators or case reserving practices), environmental changes (e.g., COVID-19), or other changes (e.g., a recent judicial ruling) that need to be considered in the actuarial analysis. With the use of external peer review, however, a user of the actuarial report can have increased confidence that these rarer situations are appropriately addressed.

Benefits of External Peer Review

The benefits of external peer review are many. First, the performance of the external peer review involves "another actuary qualified in the same practice area" as the report's author, ensuring the reviewer is familiar with the essential methods and assumptions as well as all applicable professional standards. The external peer reviewer is also independent, meaning they can review the actuarial report at arm's length from the principal. This can be essential, especially for auditors, lawyers, reinsurers, and insurance regulators who often have very different perspectives from the insurers, captives, and self-insureds they work with. Finally, the external peer review focuses on material risks and strives to avoid unnecessary time and expense.

As a result, parties requesting external peer review can experience the following.

  • Increased confidence in the original actuarial report
  • Identification of potential weaknesses in the original actuarial report and the impact of alternate data, methods, and/or assumptions
  • Improved understanding of the underlying risk
  • Demonstration of proactive oversight, which is often a concern for auditors, regulators, and boards of directors
  • Greater value than either a nonactuarial review or a complete second actuarial analysis

Effective Approaches to Differences and Disagreements

External peer review is not intended to be a superficial process that adds little or no value. In situations in which the reviewing actuary disagrees with the opining actuary, it is common for the reviewing actuary to perform a limited analysis of the impact of the differing assumptions. Sometimes, this sensitivity analysis or scenario testing does not produce material differences and such differences can simply be documented. Other times, however, the differences are material.

In cases when material differences between the two actuaries exist, it is incumbent on the actuaries to try to resolve these differences in an amicable manner. In fact, Annotation 10-1 to Precept 10 of the CAS Code of Professional Conduct states that "[d]ifferences of opinion among actuaries may arise, particularly in choices of assumptions and methods. Discussions of such differences between an Actuary and another actuary, or in observations made by an Actuary to a Principal on the work of another actuary, should be conducted objectively and with courtesy and respect." Such an approach to resolving differences leads to more informed and satisfied customers for all of the actuaries involved.

Understanding Limitations

It is important to also understand what external peer review is not. First and foremost, it is not simply one actuary "rubber-stamping” another actuary's work. Instead, the use of a qualified, credentialed actuary who is truly independent of the opining actuary helps ensure that the review has value. Further, it is also more than just someone proofreading the actuarial report. The actuarial report should have been exposed to technical and peer review before it was ever distributed, ensuring the quality of the work product itself. Rather, external peer review is intended to protect the interests of the interested party requesting the external review.

An external peer review is also not an adequate substitute for a complete independent analysis. An actuary serving as an external peer reviewer will often make disclosures such as the following.

  • The review was limited to work performed by others as documented in the actuarial report.
  • We did not audit or verify the data underlying the calculations included in the report.
  • An exhaustive technical review of the report exhibits was not performed; however, many of the calculations in the exhibits were checked for accuracy and no errors were found.
  • We did not conduct any independent actuarial analysis or calculations but conducted a review of the reasonableness of the data, methods, assumptions, and findings presented in the report.
  • We focused on the major actuarial issues to determine the reasonableness of the program and the pro forma financials presented within the application.
  • We did not prepare the analysis and, if asked to do so, we would not necessarily use the same data or methods, make the same assumptions, or produce the same results.

Understanding what an external peer review is and is not can help users of these reviews avoid unintended misuse and expectations that are not viable.


Appropriate governance and internal controls are modern realities for today's insurance programs. As a result, there is significant demand for external peer review of a wide variety of actuarial work products. Pinnacle's rigorous, principles-based approach to this review by one of our qualified, independent actuaries is consistently adding significant value and controlling incremental costs to our customers. This approach is providing our customers an effective means of increasing their confidence in the work of other appointed actuaries and providing alternative perspectives in areas that present material risk.

Robert J. Walling III | November 07, 2023