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`
`
`UNITED STATES PATENT AND TRADEMARK OFFICE
`
`____________________
`
`BEFORE THE PATENT TRIAL AND APPEAL BOARD
`
`____________________
`
`LIBERTY MUTUAL INSURANCE CO.
`Petitioner
`
`v.
`
`PROGRESSIVE CASUALTY INSURANCE CO.
`Patent Owner
`
`____________________
`
`Case CBM2012-00002 (JL)
`Patent 6,064,970
`
`____________________
`
`
`
`Supplemental Declaration of Michael J. Miller
`
` 
`
`CLI-2111242v1  
`
` 
`
`
`
`Progressive Exhibit 2020
`Liberty Mutual v. Progressive
`CBM2012-00002
`
`
`
`
`
` 
`
`

`

`
`
`
`
`
`
`Supplemental Declaration of Michael J. Miller
`
`I, Michael J. Miller, hereby declare under penalty of perjury:
`
`1.
`
`I provide this Supplemental Declaration in response to Petitioner Liberty
`
`Mutual Insurance Co’s First Set of Objections to Patent Owner Progressive Casualty
`
`Insurance Co.’s Exhibits, dated May 8, 2013.
`
`2.
`
`From 1975 to 2010, I was a member of the American Academy of
`
`Actuaries (“the Academy”). The Academy, through its associated Actuarial
`
`Standards Board, publishes professional standards of practice for actuaries in the
`
`United States.
`
`3.
`
`Progressive Exhibit 2012 is a true and accurate copy of a publication
`
`entitled “Risk Classification Statement of Principles,” published by the Academy in
`
`1980. I am personally familiar with and have followed the Principles set forth in
`
`Exhibit 2012 during my work as an actuary.
`
`4.
`
`Exhibit 2012 has been widely accepted and followed by members of the
`
`actuarial profession since its publication.
`
`5.
`
`Exhibit 2012 is further authenticated by Actuarial Standard of Practice
`
`No. 12, “Concerning Risk Classification,” issued by the Actuarial Standards Board in
`
`October, 1989. A true and accurate copy of that Standard of Practice No. 12 is
`
`attached to this Supplemental Declaration. Section 3 of the Standard of Practice No.
`
`CLI-2111242v1
`
`
`1
`
`

`

`12 states as follows with respect to the Statement of Principles identified as
`
`Progressive Ex. 2012:
`
`“Risk classification has been a fundamental part of actuarial practice since the
`
`beginning of the profession. The need for more formal standards has increased as
`
`risk classification has become more complex and more subject to public scrutiny.
`
`In
`
`1980, the Committee on Risk Classification of the American Academy of Actuaries
`
`(AAA) released the Risk Classification Statement afPritiCipZes that explains the need
`
`for the process and discusses considerations in the design of a risk classification
`
`system. This standard of practice gives guidance to the actuary in the application of
`
`those Principles.”
`
`Further, at pages iii — iv of the attached Standard of Practice No. 12, the Actuarial
`
`Standards Board states as follows:
`
`“Relationship between the standard and the Risk Classificatian Statement of
`
`Principles of the American Academy of Actuaries. One respondent inquired if the
`
`standard supersedes the Principtes.
`
`It does not. The standard is intended to give
`
`guidance to the actuary in risk classification situations, in keeping with the tenets
`
`expressed in the Statement of Princip/es.”
`
`As such, Exhibit 2012 remained in effect as ofJanuary. 1996.
`
`Date:
`
`5 all A0 .5
`
`Signature: ,
`
`{Li
`
`i
`
`I!
`
`CLl-2111242v1
`
`1
`
`

`

`Note: This version of ASOP No. 12 is no longer in effect.
`It was superseded in 2006 by ASOP No. 12, Doc. No. 101.
`
`
`
`
`
`Actuarial Standard
`of Practice
`No. 12
`
`
`
`Concerning Risk Classification
`
`
`
`
`
`
`
`
`Developed by the
`Committee on Risk Classification for the
`Specialty Committee of the
`Actuarial Standards Board
`
`
`Adopted by the
`Actuarial Standards Board
`October 12, 1989
`
`
`(Doc. No. 014)
`
`
`
`
`
`

`

`
`Transmittal Memorandum
`
`
`T A B L E O F C O N T E N T S
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
` iii
`
`PREAMBLE
`
`
`Section 1. Purpose, Scope, and Effective Date
`1.1
`Purpose and Scope
`1.2
`Effective Date
`
`
`Section 2. Definitions
`2.1
`Antiselection or Adverse Selection
`2.2
`Clear Actuarial Evidence
`2.3
`Cost
`2.4
`Equitable or Fair
`2.5
`Experience
`2.6
`Pricing
`2.7
`Risk(s)
`2.8
`Risk Classification
`
`1
`1
`1
`
`1
`1
`1
`1
`1
`1
`1
`2
`2
`
`2
`
`2
`
`3
`3
`4
`4
`4
`4
`5
`5
`5
`5
`5
`5
`
`5
`5
`6
`
`
`Section 3. Background and Historical Issues
`
`Section 4. Current Practices and Alternatives
`
`Section 5. Analysis of Issues and Recommended Practices
`5.1 Methods to Demonstrate Cost Differences
`5.2
`Causality
`5.3
`Objectivity
`5.4
`Practicality and Cost Effectiveness
`5.5
`Effect of Antiselection
`5.6
`Statute/Regulation/Adjudication
`5.7
`Industry Practices
`5.8
`Right to Reclassify
`5.9
`Operating Environment
`5.10 Data
`5.11 Applicability of Risk Classes
`
`
`Section 6. Communications and Disclosures
`6.1
`Existing Standards
`6.2
`Deviation from Standard
`
`
`
`
`
`ii
`
`

`

`
`TO:
`
`
`
`Members of the American Academy of Actuaries and Other Persons Interested in
`Risk Classification Standards
`
`October 1989
`
`Actuarial Standards Board (ASB)
`
`Actuarial Standard of Practice No. 12
`
`
`FROM:
`
`SUBJ:
`
`
`Enclosed is the final version of Actuarial Standard of Practice (ASOP) No. 12, Concerning Risk
`Classification. The purpose of this standard is to set guidelines for actuaries in designing, using,
`and updating risk classification systems.
`
`The standard was developed by the Committee on Risk Classification of the American Academy
`of Actuaries, at the request of the Specialty Committee of the Actuarial Standards Board. The
`draft was exposed for comment in April 1989. Twenty-three comments were received.
`
`There have been several changes made to the exposure draft as a result of comments received.
`Significant changes are noted below:
`
`1.
`
`Several commentators were concerned that the standard could limit the use of
`professional judgment in classifying risks. This was not intended by the drafters. The last
`sentence in the introductory paragraphs of section 5 was modified to say that the
`application, as well as the design, of the risk classification system required professional
`judgment.
`
`It was suggested that commonly used phrases in regulations and statutes concerning risk
`classification be incorporated in the standard. Where these phrases could be inserted
`without altering the substance of the standard, they were included.
`
`Several responders noted that in section 5.5, the standard stated that “When antiselection
`has occurred or is likely to occur, . . . appropriate measures should be taken or
`recommended to minimize the impact.” Concern was expressed that legal, regulatory, or
`judicial constraints may hinder the actuary from taking appropriate measures to minimize
`antiselection. This section was reworded to address this situation.
`
`
`2.
`
`
`3.
`
`
`4.
`
`
`
`It was noted that in several instances, risk factor and risk characteristic were used
`interchangeably. The revised standard consistently uses the phrase, risk characteristic.
`Similarly, it was noted that fair and equitable were used synonymously; section 2.4 was
`revised to reflect this.
`
`Relationship between the standard and the Risk Classification Statement of Principles of
`the American Academy of Actuaries. One respondent inquired if the standard supersedes
`iii
`
`
`In addition to the above, several respondents commented on the following items:
`
`1.
`
`

`

`the Principles. It does not. The standard is intended to give guidance to the actuary in risk
`classification situations, in keeping with the tenets expressed in the Statement of
`Principles.
`
`Use of HIV example. Several respondents felt that the HIV example in section 5.5 was
`too political. Concern was also expressed that the example could be quickly outdated if a
`cure were discovered for acquired immune deficiency syndrome. The committee was
`sensitive to these comments. After much discussion, the committee decided to make the
`example more generic.
`
`Use of broad risk classes. It was suggested that the standard should specifically allow the
`use of broad risk classes where justified. The standard does not proscribe the use of broad
`risk classes where justified; hence, no modification to the standard was made.
`
`Committee on Risk Classification
`(including Present and Past members)
`
`
`2.
`
`
`3.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`The revised version of the standard was adopted by the ASB on October 12, 1989. It is effective
`as of January 15, 1990.
`
`
`
`
`
`
`
`
`
`
`
`
`Chester T. Lewandowski, Chairperson
`John F. Fritz
`
`
`
`
`John W. Paddon
`
` Gary Grant
`
`
`
`
`W. Keith Sloan
`
`Joan E. Herman
`
`
`
`
`Karen F. Terry
` Richard M. Jaeger
`
`
`
`
`Donald B. Thaler
`
`James B. Keller
`
`
`
`
`Jean M. Wodarczyk
`
`John J. Kollar
`
`
`
`
`Richard D. Woll
`
`Timothy D. Lee
`
`
`
`
`Everett D. Wong
`
`
`Specialty Committee of the Actuarial Standards Board
`
` Geoffrey Crofts
`
`Frederick W. Kilbourne
`
`Jarvis Farley, Chairperson
`Robert J. Myers
`Richard S. Robertson
`
`
`
`
`
`
`
`Actuarial Standards Board
`
`Ronald L. Bornhuetter, Chairperson
`E. Paul Barnhart
`
`
`
`
`Walter N. Miller
`
` Willard A. Hartman
`
`
`
`
`George B. Swick
`
`James C. Hickman
`
`
`
`
`Jack M. Turnquist
` Barbara J. Lautzenheiser
`
`
`
`P. Adger Williams
`
`iv
`
`

`

`ACTUARIAL STANDARD OF PRACTICE NO. 12
`
`CONCERNING RISK CLASSIFICATION
`
`PREAMBLE
`
`Section 1. Purpose, Scope, and Effective Date
`
`Purpose and Scope—The purpose of this standard of practice is to set forth guidelines for
`actuaries in designing, using, and updating risk classification systems. The process of risk
`classification customarily occurs within the scope of financial security systems, including
`insurance, self-insurance, health service plans, pension plans, and continuing care
`retirement communities.
`
`Many jurisdictions require a demonstration that the risk classification system used is
`equitable. Such requirements might relate to expected differences with respect to a
`specific characteristic, or the requirements might relate to a complete classification
`system. One purpose of this standard is to guide the actuary in complying with such
`requirements.
`
`Effective Date—The effective date of this standard of practice is January 15, 1990.
`
`Section 2. Definitions
`
`Antiselection or Adverse Selection—The actions of individuals, acting for themselves or
`for others, who are motivated directly or indirectly to take financial advantage of the risk
`classification system. The two terms are often used interchangeably. In this standard, the
`term antiselection is used.
`
`Clear Actuarial Evidence—Appropriate statistical measurements or relevant collateral
`facts.
`
`Cost—The measured or expected financial effect of providing a financial security system.
`
`Equitable or Fair—Appropriately reflecting differences among the costs of identifiable
`risk characteristics. The two terms are used interchangeably in this standard.
`
`Experience—The statistics of events connected with assumption of risk. Experience may
`include estimates where data are incomplete or insufficient.
`
`Pricing—The determination of the amounts charged for a financial security system.
`
`1
`
`
`
`
`
`
`
`
`
`
`
`1.1
`
`
`
`
`1.2
`
`
`
`
`2.1
`
`
`2.2
`
`
`2.3
`
`2.4
`
`
`2.5
`
`
`2.6
`
`
`
`
`

`

`Risk(s)—(1) Uncertainty arising from the possible occurrence of given events; (2)
`individuals or entities covered by financial security systems.
`
`Risk Classification—The process of grouping risks with similar risk characteristics so
`that differences in costs may be recognized.
`
`2.7
`
`
`2.8
`
`
`
`
`Section 3. Background and Historical Issues
`
`
`Risk classification has been a fundamental part of actuarial practice since the beginning of the
`profession. The need for formal standards has increased as risk classification has become more
`complex and more subject to public scrutiny. In 1980, the Committee on Risk Classification of
`the American Academy of Actuaries (AAA) released the Risk Classification Statement of
`Principles that explains the need for the process and discusses considerations in the design of a
`risk classification system. This standard of practice gives guidance to the actuary in the
`application of those Principles.
`
`
`
`Section 4. Current Practices and Alternatives
`
`
`Over the years, a multitude of risk classification systems have been designed, have been put into
`use, and have been modified in an evolutionary manner as a result of experience. In a voluntary
`market system, risk classification is vital to ensure the equity and financial soundness of the
`system. Economic incentives such as the avoidance of antiselection often have led to innovations
`and changes in risk classification systems. Risk classification has become more complex and
`refined, thereby promoting more equitable risk classification, and encouraging widespread avail-
`ability of coverage. Legislatures, regulators, and courts have placed numerous constraints on risk
`classification, causing, in some cases, inconsistencies between costs and pricing.
`
`Risk classification is an integral part of the practice of most actuaries. Typical areas in which the
`process is used include the following:
`
`1.
`
`2.
`
`3.
`
`4.
`
`5.
`
`
`pricing and design of financial security systems,
`
`valuation of liabilities,
`
`distribution of surplus,
`
`compliance with laws, and
`
`expert testimony.
`
`
`
`2
`
`

`

`STANDARD OF PRACTICE
`
`Section 5. Analysis of Issues and Recommended Practices
`
`
`
`
`to be fair,
`
`
`Consistent with the Risk Classification Statement of Principles, there are three primary purposes
`of risk classification:
`
`1.
`
`2.
`
`to permit economic incentives to operate and thereby encourage widespread availability
`of coverage, and
`
`to protect the soundness of the financial security system.
`
`
`3.
`
`In order to achieve these purposes, certain basic principles should be present in any sound risk
`classification system:
`
`1.
`
`The system should reflect cost and experience differences on the basis of relevant risk
`characteristics.
`
`
`2.
`
`3.
`
`4.
`
`Both the design and the use of risk classification systems require the actuary to exercise
`professional judgment as well as to use statistical tools.
`
`5.1 Methods to Demonstrate Cost Differences—A risk classification system is equitable if
`material differences in costs for risk characteristics are appropriately reflected in the rate.
`Classification subsidies result when the price paid by an individual or class of individuals
`fails to reflect differences in costs among the risk classes.
`
`The system should be applied objectively and consistently.
`
`The system should be practical, cost-effective, and responsive to change.
`
`The system should minimize antiselection.
`
`
`
`
`
`
`
`A relationship between a risk characteristic and cost is demonstrated if it can be shown
`that experience is different when the characteristic is present. In demonstrating the
`relationship, the actuary can rely on actual or reasonably anticipated experience; the
`actuary is not constrained to using only the experience of the actuary’s client or company.
`Relevant information from any reliable source, including statistical or other mathematical
`analysis of available data, may be used. Information gained from clinical experience, or
`from expert opinion regarding the effects of change on future experience (e.g., medical or
`engineering) may be used.
`
`In the absence of actual experience, an actuary may rely on clear actuarial evidence that
`differences in costs are related to a particular risk characteristic. In demonstrating this,
`
`3
`
`

`

`the actuary may rely on clinical experience or expert opinion. For example, an
`environmental that which has been demonstrated by clinical experience to be related to
`additional deaths may be used until further actual experience becomes available.
`
`Sometimes it is appropriate for the actuary to make inferences without specific
`demonstration. For example, it would not be necessary to demonstrate that persons with
`seriously impaired, uncorrected vision would represent a high risk as operators of motor
`vehicles.
`
`Causality—Risk classification systems provide a framework of information which can be
`used to understand and project future costs. If a cause-and-effect relationship can be
`established, this tends to boost confidence that such information is useful in projecting
`future costs, and may produce some stability of results.
`
`However, in financial security systems, it is often impossible or impractical to prove
`statistically any postulated cause-and-effect relationship. Causality cannot, therefore, be
`made a requirement for risk classification systems.
`
`Often, the term causality is not used in a rigorous sense of cause and effect, but in a
`general sense, implying the existence of a plausible relationship between the
`characteristics of a class and the hazard for which financial security is provided. For
`example, living in a river valley would not by itself cause a flood insurance claim, but it
`does bear a reasonable relationship to the hazard insured against, and, thus, would be a
`reasonable basis for classification.
`
`Risk classification characteristics should be neither obscure nor irrelevant to the
`protection provided, but they need not exhibit a cause-and-effect relationship.
`
`Objectivity—A risk classification system should use objective characteristics to
`differentiate risks. A characteristic is considered objective if it is based on specifically
`determinable facts. An objective characteristic should not be easily manipulated and
`should be readily verifiable. For example, a classification of “blindness” is not objective,
`whereas a classification of “vision corrected to no better than 20/100” is objective.
`
`Practicality and Cost Effectiveness—A balance is required between precision and the
`expense of administering a risk classification system. Economic incentives and voluntary
`market forces should be considered along with the operational considerations in
`determining whether a risk classification plan is practical and cost-effective.
`
`Effect of Antiselection—Antiselection may result from the design of the classification
`system, or may be the result of externally mandated constraints on risk classification.
`Classes that are overly broad may produce unexpected changes in the distribution of risk
`characteristics. For example, if an insurer chooses not to screen for a specific risk
`characteristic, or a jurisdiction precludes screening for that characteristic, this may result
`in individuals with the characteristic applying for coverage in greater numbers and/or
`amounts, leading to increased overall costs.
`
`4
`
`
`
`
`5.2
`
`
`
`
`
`
`
`
`5.3
`
`
`5.4
`
`
`5.5
`
`
`
`

`

`
`
`
`5.6
`
`
`5.7
`
`
`5.8
`
`
`5.9
`
`When antiselection has occurred or is likely to occur, its actual or potential effect should
`be disclosed to the client, and appropriate measures taken or recommended to minimize
`the impact.
`
`Statute/Regulation/Adjudication—The actuary may be constrained by a statute, a
`regulation, or a court decision from applying certain elements of a risk classification
`system. The actuary should comply with such constraints, disclose their impact to the
`client, and take or recommend appropriate action to minimize their impact.
`
`Industry Practices—The actuary should be aware of usual and customary risk
`classification practices for the type of financial security system under consideration.
`Effects of departing from those practices should be disclosed to the client.
`
`Right to Reclassify—Some insurance contracts limit the right to reclassify. Some changes
`in classification require regulatory approval. All such restrictions should be considered.
`
`Operating Environment—Changes in the operating environment, such as new products,
`changing customs, disease outbreaks, and medical advances should be examined for
`effects on classification systems.
`
`
`5.10 Data—Relevant data should be verifiable, and examined for reliability. Standard
`statistical tests should be applied when appropriate and necessary.
`
`
`5.11 Applicability of Risk Classes—Different classification systems may be needed to
`accomplish different objectives, even of the same financial security system. For example,
`a gender-neutral classification system may be required for benefit determination in a
`pension plan. Because of differing life expectancies, however, a gender-based system
`may be appropriate in determining the liabilities of that plan.
`
`
`
`
`
`6.1
`
`
`
`
`
`
`
`
`Section 6. Communications and Disclosures
`
`Existing Standards—Interpretative Opinion 3 of the AAA Guides and Interpretative
`Opinions as to Professional Conduct applies to all written communications by actuaries
`on actuarial subjects and, unless clearly inapplicable, to oral communication as well.
`Section (a)(2) of this Opinion states,
`
`
`
`“The form and content of any actuarial communication should meet the needs of
`the particular circumstances, taking into account the knowledge and under-
`standing of the users and the actuary’s relationship to the users.”
`
`An actuarial communication concerning risk classification may in some circumstances be
`read and used by sponsors and participants in financial security systems, government
`personnel, or other members of the public. This section supplements Opinion 3 with
`respect to such actuarial communications.
`
`5
`
`

`

`
`6.2
`
`Deviation from Standard—An actuary who uses a procedure which differs from this
`standard should include, in the actuarial communication disclosing the result of the
`procedure, an appropriate and explicit statement with respect to the nature, rationale, and
`effect of such use.
`
`
`
`6
`
`