Skip to content

IAI Actuarial Core Principles · Business Management · Professional negligence

A Mumbai insurer relies on a valuation actuary's negligent reserve estimate and pays an excessive dividend. Whatever the estimate said, the insurer's board had already resolved, for unrelated reasons, to pay exactly that dividend. Applying the 'but for' test, what is the likely outcome on causation?

Causation is not established. Under the 'but for' test, the dividend would have been paid in any case, so the negligent estimate did not bring about the loss. Negligence alone, without a causal link to the damage, does not make the actuary liable.

  1. ACausation is established because the estimate was negligent
  2. BCausation is established because the insurer is a regulated entity
  3. CCausation is not established because the dividend would have been paid anywayCorrect
  4. DCausation is established if the loss was foreseeable in general terms
  5. Causation is not established because dividends are pure economic loss

Explanation

The 'but for' test asks whether the loss would have occurred without the breach. The board would have paid the same dividend regardless, so the negligent estimate was not a necessary cause. Foreseeability concerns remoteness, not factual causation.

Did you get it right without looking?

One question tells you little. A timed set on Professional negligence shows your real accuracy, how long you take and where you lose marks.

Practise Professional negligenceFree diagnostic mock

More Professional negligence questions