AAA Actuarial Memorandum Practice Note Flashcards
Introduction and Background
- Purpose of This Practice Note
a. To provide information that can be useful for appointed actuaries producing an Actuarial Memorandum in support of the Actuarial Opinion filed as part of the Health Annual Statement Blank - What Are Practice Notes?
a. The purpose of practice notes is to provide information to actuaries on current or emerging practices in which their peers are engaged
b. They supplement the available actuarial literature
c. They are not interpretations of actuarial standards of practice nor are they meant to be a codification of generally accepted actuarial practice
d. Actuaries are not in any way bound to comply with practice notes or to conform their work to the practices described in practice notes
Actuarial Memorandum
- Definition: a document or other presentation prepared as a formal means of conveying the appointed actuary’s professional conclusions and recommendations, of recording and communicating the methods and procedures, of assuring that the parties are aware of the significance of the appointed actuary’s opinion or findings and that documents the analysis underlying the Opinion
- Narrative component
a. Should provide sufficient detail to explain to company management, the regulator, or other authority the findings, recommendations and conclusions, as well as their significance - Technical component
a. Should provide sufficient documentation for another actuary practicing in the same field to evaluate the work.
b. Must show the analysis from the basic data to the conclusions.
- Objective of the Actuarial Memorandum is to provide sufficient narrative and technical detail to support the appointed actuary’s conclusions
a. The appointed actuary is encouraged to ensure that the Memorandum conforms to ASOP No. 41, Actuarial Communications, in addition to all other relevant ASOPs
b. The Annual Statement Instructions specify that the Actuarial Opinion include a statement of reliance that attests to the appointed actuary having reviewed the actuarial assumptions, methods, and the underlying basic liability records
Scope of The Practice Note
- Narrative and technical components of the Actuarial Memorandum
- Describes practices used in preparing an Actuarial Memorandum in support of the Actuarial Opinion for companies that file a Health Blank with the NAIC
- Actuarial Memorandum should be prepared in compliance with
* NAIC Health Annual Statement Instructions
* any individual state requirements that may modify or supplement the NAIC requirements
Overview of Items to Be Addressed in Memorandum
1. Items that are required to be included in the Actuarial Memorandum
a. An exhibit that ties to the Annual Statement and compares the actuary’s conclusions to the carried amounts
b. Documentation of the required reconciliation from the data used for analysis to the Underwriting and Investment Exhibit, Part 2B
c. Any other follow-up studies documenting the prior year’s claim liability and claim reserve run-off as considered necessary by the actuary
d. Documentation of the assumptions used for contract reserves and any material changes to those assumptions from the assumptions used in the previous Memorandum
- The Annual Statement guidance is general in nature
a. Providing sufficient information to justify the conclusions of the opining actuary
b. documentation of the items included in the scope of the Actuarial Opinion, even when the results of those calculations are zero (e.g. premium deficiency reserve);
c. Addressing the amount of margin relative to the amount of risk, and how moderately adverse is determined
d. how the actuary concluded that the data is accurate and complete, as well as any adjustments made to the data (e.g. netting out reinsurance)
e. documenting the extent of reliance on the work of others (like subject matter experts), including what exactly was relied upon, and how that reliance allowed the opining actuary
to draw their conclusions
f. Demonstrating how the reasonableness of the data, analysis, or conclusions was verified when relying on others
Additional Resources Available
- Actuarial Standards of Practice (ASOPs)
a. The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the US through the development and promulgation of ASOPs
b. ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating results
c. If the actuary departs from the guidance set forth in an ASOP, the actuary should refer to the Communication and Disclosure section of the relevant ASOP for guidance
- NAIC Resources
a. Health Reserves Guidance Manual (HRGM) provides guidance regarding the calculation and documentation of health reserves for statutory financial statements as described in the Health Insurance Reserves Model Regulation
b. Valuation Manual is primarily geared to life insurance, however requirements are applicable to accident and health insurance in states that have adopted the 2009 revisions to the NAIC Standard Valuation Law
c. Model Regulations
d. Statements of Statutory Accounting Principles (SSAPs) published by the NAIC in its Accounting Practices and Procedures Manual (AP&P)
i. SSAPs serve as the basis for preparing and issuing statutory financial statements for insurance companies in the U.S. in accordance with, or in the absence of, regulations promulgated by individual states
- State Departments of Insurance
a. Each state department of insurance has resources available to answer questions - Other Resources
a. Practice Notes
b. Actuarial Memorandum Checklist
Drafting the Memorandum
- Content Considerations and Sample Content
a. The Memorandum should have a narrative and technical component, and actuarial items that are included on a company’s balance sheet
b. present a narrative component with references to additional information that is necessary for other actuaries or technical reviewers to have a granular understanding of data and calculations
c. A degree of judgment is required with regard to how much detail to include in the body of a Memorandum and even how much information should be included in Appendix material
Audiences for the Actuarial Memorandum
- Company Management
a. The appointed actuary is required to report on the contents of the Actuarial Opinion to either the Board of Directors or the Audit Committee, with both the Opinion and the Memorandum supporting it made available to the Board of Directors
b. Boards will focus on significant items that impact the reported financials and have implications regarding the future profitability and solvency of the company
- Regulators
a. The NAIC Health Annual Statement Instructions require the Memorandum to be available by May 1 following the year-end for which the Opinion was rendered and to be available for regulatory examination for a period of seven years
b. Regulators use the Memorandum as part of their monitoring of financial solvency of a company
Narrative and Technical Components
- Narrative component is intended to be understood by non-actuaries, such as company management, the Board of Directors, and regulators with non-technical backgrounds
- Technical component is intended for health actuaries, and regulators with more technical and/or financial backgrounds
- Usual practice is to compose the body of the Memorandum to focus on addressing the narrative component, and then to provide additional details in appendices for the technical component
- The Memorandum must include an exhibit that ties to the Annual Statement and compares the actuary’s conclusions to the carried amounts, as well as support for conclusions related to Underwriting and Investment Exhibit by including:
a. Documentation of the reconciliation from the data used for analysis to the Underwriting and Investment Exhibit, and
b. Any other follow-up studies documenting the prior year’s claim liability and claim reserve runoff as considered necessary by the actuary
- Narrative Component of the Memorandum
a. The narrative component “should provide sufficient detail to clearly explain to company management, the regulator, or other authority the findings, recommendations and conclusions, as well as their significance.”
i. Sufficient has a qualitative aspect to it requiring judgment by the actuary
ii. In considering significance, the actuary considers the magnitude of a recorded amount relative to amounts recorded for other balance sheet items, as well as the potential that the actual value of an item could vary substantially from the recorded amount
iii. “Significance” includes
(1) the importance of the findings, recommendations, conclusions relative to the reporting entity’s financial position and results of operations
(2) the magnitude relative to the fair value measurement of reserves and related items that are included within the Opinion
b. The actuary’s judgment in developing actuarial assumptions and methods should consider the specific characteristics of the policy and contract provisions
c. Findings should be explained for each of the Scope items (e.g., Items A – I) of the Opinion
d. The appointed actuary may include a detailed explanation of any estimate: that requires substantial judgment; that is difficult to estimate; and/or for which the probable variance in the actual outcome versus the estimate has significant implications on income or solvency
e. The Opinion might include a Relevant Comments section if, for example, there has been any material change in assumptions and/or methods
- Technical Component of the Memorandum
a. The technical component “should provide sufficient documentation and disclosure for another actuary practicing in the same field to evaluate the work. This technical component must show the analysis from the basic data to the conclusions.”
i. “Sufficient” could mean that after reading the Memorandum, the reviewer has no more questions and the Memorandum has made it clear how the actuary came to conclusions
b. This component must show the details of the analyses for all components within the scope of the Actuarial Opinion
Actuarial Opinion Scope Items
- The main objective of the Memorandum is to explain how information was considered, and how conclusions were drawn for specific required items
- The process by which the actuary decided to include any additional or revised wording, or issue a Qualified, Adverse, or Inconclusive Opinion
Sample Actuarial Memorandum Construction
- Company Overview including product descriptions, provider contracting, and other characteristics
that have implications with regard to actuarial items to be addressed by the Opinion and supporting Memorandum
a. The overview will often include a description of the company, such as how the entity is organized and the markets in which it does business
b. A description of the products the entity sells in each of its markets
c. A high- level description of the entity’s relationships with its principal providers
d. A summary of changes in products, lines of business, company strategy, or regulatory environment, if applicable
e. A listing of products and relationships that are less material to the company and how or why the materiality determination was made
- Listing of Health Annual Statement Scope items and actuarial accruals that fall under Scope items
a. Providing Sufficient Information
i. The narrative component describes the method used, the source(s) of the data, how the reasonableness of the data was determined, any limitations of the data or analysis, and whether there were any changes in the methodology
ii. The technical component generally begins with the data and demonstrates how the liability was calculated from the data.
iii. The narrative and technical components should not only address items that have a positive or negative dollar amount, but also all items that are zero.
iv. Within the narrative component, actuaries often discuss provisions for adverse deviation associated with the most significant items as well as the total provision for adverse deviation held in aggregate.
v. include a description of any subsequent events that might have a material impact
vi. Actuaries might use sensitivity testing to determine the likelihood and magnitude of variances among estimates
vii. Many health actuaries will find the following items to be significant and therefore will include them in the technical component
1. incurred but not reported claim liabilities
2. capitation or provider incentive and risk-sharing liabilities or accruals
3. premium deficiency reserves
4. risk adjustment liabilities or accruals
5. medical loss rebate liabilities
6. pertinent hindsight testing performed, or
7. any other item the appointed actuary considers to be appropriate for
additional detail
viii. be prepared to provide upon request further documentation of all the estimates included within the scope of the Actuarial Opinion.
b. Claims unpaid
i. Amount of unpaid claims liability (UCL), broken down by line of business or other component categories
ii. The documentation often includes the development of the final estimates including explicit margin
iii. typically include any adjustments to the lag-based calculations, such as commercial and/or governmental reinsurance, pooling arrangements, as well as governmental or provider risk-sharing arrangements
iv. Include data with paid and incurred claims triangles and actual unpaid claims liabilities calculations
v. Description of the data
1. The source(s) of the data used for this purpose
2. The definition of incurred date used in the analysis
3. The extent of reliance on data provided by others
4. Any concerns that the actuary has with the data used, in accordance with ASOP No. 23, Data Quality
5. The required reconciliation from the data used for analysis to the Underwriting and Investment (“U&I”) Exhibit
vi. Description of the methodology
1. For lag-based calculations, how were the completion factors developed?
2. How were the estimated incurred claims determined for incurral months where completion factors were not used?
3. How were estimated incurred claims adjusted for seasonality?
4. Were claim recoveries considered in the completion factors?
5. Were there any changes in methodology from the prior year? What was the justification(s) for the change?
6. How was reinsurance reflected? Was reinsurance modeled?
7. Are there counterparty risks reflected in the calculations?
8. Are there any credit risks associated with reinsurance receivables?
9. Were there any adjustments for operational challenges, large claims, etc.?
10. Were there any special considerations (e.g., new company, new line(s) of business) that were reflected in the calculation?
11. How was capitation handled?
vii. Provision for Adverse Deviation (or Margin)
1. How is the margin determined?
2. Is the margin explicit or implicit?
3. Who sets the margin level? If the company determines the provision for adverse deviation or margin, does the actuary believe that it is reasonable?
4. Are there different margins for different lines of business or by service type?
5. Are there company-specific or external factors that may require an “extraordinary” margin?
6. Are there any assumption changes reflected in the calculations, and are the justifications for these changes documented?
c. Accrued medical incentive pool and bonus payments
i. describe how the accruals were calculated, details of the assumptions and methods, and any changes in the assumptions or methodology from the previous year
d. Unpaid claims adjustment expenses (“UCAE”)
i. Describe the UCAE and provide details of its calculation.
ii. include a description of the analysis performed to determine its reasonableness.
1. actual claims adjustment expense as a percent of incurred claims compared to the UCAE as a percent of unpaid claims over several years, or
2. a description of the approach used for a newer line of business where historical expenses are not available
e. Aggregate health policy reserves
i. Unearned premium reserve
ii. Premium deficiency reserve (“PDR”)
1. Calculation methodology
2. Grouping methodology
3. Projection period: The rationale for the choice of the projection period, as well as any changes in the projection period
4. Data used
5. Administrative expense allocation methodology
6. Treatment of investment income. If investment income is included, what are the assumptions used to project investment income? How is it allocated to the groups used for PDR reporting?
7. Claims projection assumptions
8. Premium increase assumptions
9. Treatment of amounts recoverable from reinsurance or other risk-sharing agreements
10. Method for amortizing the PDR during the year
iii. Medical loss ratio (“MLR”) rebate liability
1. state the amount of the MLR rebate liability, even if it is zero, and describe the assumptions and method
iv. Reserve for rate credit or experience rating refund
1. amount, assumptions, and methodology
v. Medicare Part D Risk-Sharing Asset or Liability
1. amount, assumptions, and methodology
vi. Contract reserves
1. amount, assumptions, and methodology
2. Document the treatment of reinsurance
3. Document how the actuary concluded the selected methods and assumptions to support the Opinion, including how minimum statutory requirements are met
f. Aggregate life policy reserves
g. Property/casualty unearned premium reserves
h. Aggregate health claim reserves
i. Provider insolvency reserve
ii. Reserve for future contingent events, for example, extension of benefit reserves
i. Any other loss reserves, actuarial liabilities, or related items presented as liabilities in the Annual Statement
j. Specified actuarial items presented as assets in the Annual Statement
i. Pharmacy rebates
ii. Amounts recoverable from risk-sharing programs
iii. Amounts recoverable under provider risk sharing agreements
iv. Amounts recoverable from reinsurance programs
v. Accrued retrospective premiums or contingent premium receivables
vi. Other amounts receivable from federal or state programs
Opinion
- In my (the actuary’s) opinion, the amounts carried in the balance sheet on account of the items identified above
a. Are in accordance with accepted actuarial standards consistently applied and are fairly stated in accordance with sound actuarial principles
b. Are based on actuarial assumptions relevant to contract provisions and appropriate to the purpose for which the statement was prepared
c. Meet the requirements of the Insurance Laws and regulations of the state and are at least as great as the minimum aggregate amounts required by any state
d. Make a good and sufficient provision for all unpaid claims and other actuarial liabilities of the organization under the terms of its contracts and agreements
i. The actuary might include support
ii. The actuary might describe the thought process behind the good and sufficient conclusion
e. Are computed on the basis of assumptions and methods consistent with those used in the Annual Statement of the preceding year-end
f. Include appropriate provision for all actuarial items that ought to be established
- Relevant Comments Section of the SAO
a. Describe items or challenges that are relevant to understanding the conclusions - Other than unqualified SAO
a. For any SAO (qualified or unqualified), actuaries discuss the conclusion in the Actuarial Memorandum to the extent the reasons are not already clear
b. If the opining actuary prepares an SAO that is not unqualified (inconclusive, qualified, or adverse), the actuary will explain in detail the reasons the SAO is not unqualified
Required Reconciliations
- The NAIC Health Blank Instructions provide guidance on the reconciliations
a. The technical component should provide sufficient documentation for another actuary practicing in the same field to evaluate the work, and must show the analysis from the basic data to the conclusions
b. The Memorandum must include: Documentation of the required reconciliation from the data used for analysis to the Underwriting and Investment Exhibit. Part 2B
c. The Actuarial Opinion requires a statement from the actuary, such as, I evaluated the data for reasonableness and consistency. I also reconciled the basic liability records to the Underwriting and Investment Exhibit, Part 2B
d. Claims unpaid
i. Reconcile the paid and incurred lag triangles to the Underwriting and Investment Exhibit, paid and incurred prior and current columns by line of business, and in total; and reconcile the corresponding unpaid claim liabilities to the Underwriting and Investment Exhibit, unpaid claims incurred prior and current columns by line of business, and in total.
e. Accrued medical incentive pool and bonus payments
i. Showing how these amounts are calculated, including the underlying data
f. Unpaid claims adjustment expenses
i. Showing how the estimated unpaid claims adjustment expense liability and the related expenses used to calculate this liability reconcile to the Underwriting and Investment Exhibit
g. Aggregate health policy reserves including unearned premium reserves, premium deficiency reserves and additional policy reserves from the Underwriting and Investment Exhibit
i. Unearned premium reserves—The actuary might demonstrate that premiums and UEP from policyholder records are consistent with accounting entries.
ii. Premium deficiency reserves—The actuary might demonstrate that claims, premiums, administrative expenses, and membership projections are reasonable relative to the current experience developed in the NAIC Health Blank.
iii. Additional policy reserves—The actuary might describe the underlying data, methods and assumptions and reconcile these reserve balances to the Annual Statement
iv. Medical Loss Ratio (MLR) rebate liability—If an MLR rebate accrual is being opined upon (even if $0), the actuary may reconcile total premiums and claims and unpaid claim liability to the NAIC Health Blank
h. Aggregate life policy reserves
i. The actuary should describe the underlying data, methods, and assumptions and reconcile these reserve balances to the Annual Statement
i. Aggregate health claim reserves
i. The actuary should describe the underlying data, methods, and assumptions and reconcile these reserve balances to the Annual Statement
j. Any other loss reserves, actuarial liabilities, or related items presented as liabilities in the Annual Statement
i. For companies writing MA, ACA medical coverage, or participating in arrangements that can generate risk adjustment, risk corridor, or risk-sharing liabilities that are actuarially determined, a payable for these amounts may be included here
ii. The actuary might demonstrate that the data underlying the calculation are consistent with the NAIC Health Blank
k. Specified actuarial items presented as assets in the Annual Statement
i. For companies writing MA, ACA medical coverage, or participating in arrangements that can generate risk adjustment, risk corridor, or risk-sharing assets,
these amounts may be included here
ii. The actuary might describe how pharmacy rebates and corresponding pharmacy rebate receivables are calculated
Hindsight Testing, Including Underwriting and Investment Exhibit, Part 2B, if not covered above
- Hindsight testing: comparing actuarial estimates reported in the Annual Statement to updated estimates using more current data or to the actual amounts once they are known
- Allows the actuary to monitor the assumptions and methodologies used and adjust for material variances
- Including hindsight testing in the Actuarial Memorandum allows the actuary to be transparent about his/her thought process involving the selection of the assumptions and methods used
- Claims unpaid
a. Compare the unpaid claims liability to periodically revised estimates with additional runout and determine whether there is a pattern of overstating or understating the liability
b. Compare the estimated reinsurance recoverable to the actual reinsurance amounts paid - Accrued medical incentive pool and bonus payments
- Unpaid claims adjustment expenses (“UCAE”)
a. Compare the UCAE as a percentage of UCL to the claims adjustment expenses as a percentage of incurred claims - Premium deficiency reserve (“PDR”)
a. Compare the PDR to the net underwriting losses for the year following the valuation date - Medical loss ratio (MLR) rebate liability a. Compare actual to the liability
- ACA risk adjustment transfer payments
a. Compare the actual risk adjustment transfer payments to the accruals held
Other Information that can be provided to reguator/management to support Opinion/ Memorandum
- The Annual Statement Instructions require the technical component of the Actuarial Memorandum to “show the analysis from the basic data, (e.g., claim lags) to the conclusions.”
- In order for the reviewing actuary to follow the analysis, it should be well organized
- Reliance letters should be included if others were relied upon
- If others performed the estimations included in the Opinion, their analysis or a summary upon which the actuary was able to form an opinion should be included in the Memorandum
Appendix I: ASOPs Relevant to Health Actuarial Memoranda
- ASOP No. 5, Incurred Health and Disability Claims
a. guidance to actuaries estimating or reviewing incurred claims - ASOP No. 7, Analysis of Life, Health, or Property/Casualty Insurer Cash Flows
a. guidance to actuaries who perform professional services involving the analysis of asset, policy, or other liability cash flows
b. Situations that might indicate a need for cash flow testing include the following:
i. where there are material asset risks
ii. where there are liabilities that have cash flows far out into the future
iii. where a company has a new or rapidly growing line of business
iv. where options have been granted to policyholders or borrowers and the likelihood of anti- selection in the exercise of these options is significant
- ASOP No. 11, Financial Statement Treatment of Reinsurance Transactions
a. guidance to actuaries relating to financial statements that contain material reinsurance transactions involving life or health insurance - ASOP No. 18, Long-Term Care Insurance
a. recommended practices for actuaries involved in designing, pricing, funding, or in evaluating liabilities for insurance providing LTC benefits.
b. for individual and group LTC insurance plans, LTC insurance benefits issued as riders or included within other insurance and annuity products, and self-insured plans providing LTC benefits
- ASOP No. 21, Responding to or Assisting Auditors or Examiners in Connection with Financial Audits, Financial Reviews, and Financial Examinations
a. guidance to actuaries while responding to auditors or examiners in connection with a financial audit, financial review, or financial examination
b. Applies to a responding actuary or a reviewing actuary
- ASOP No. 22, Statements of Opinion Based on Asset Adequacy Analysis by Actuaries
a. guidance to actuaries providing a statement of actuarial opinion relating to asset adequacy analysis of a life or health insurer, when such opinion is prepared pursuant to applicable law
- ASOP No. 22, Statements of Opinion Based on Asset Adequacy Analysis by Actuaries
b. This standard potentially applies to health benefit plans such as health insurers, health service plans, and HMOs
- ASOP No. 23, Data Quality
a. Provides guidance to actuaries when selecting data, performing a review of data, using data, or relying on data supplied by others, in performing actuarial services
b. also applies to actuaries who are selecting or preparing data that the actuary believes will be used by other actuaries
- ASOP No. 28, Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets
a. guidance to actuaries in issuing a written SAO regarding health insurance liabilities and health insurance assets - ASOP No. 41, Actuarial Communications
a. guidance to actuaries with respect to actuarial communications
b. Applies to actuaries issuing actuarial communications within any practice area
c. Does not apply to communications that do not include an actuarial opinion or other actuarial findings
d. Law, regulation, or another profession’s standards may prescribe the form and content of a particular actuarial communication
e. Actuarial communications include written, electronic, or oral communication issued by an actuary with respect to actuarial services
f. contains requirements for actuarial communications, including form and content, identification, disclosures, reliance, assumptions and methods, etc. - ASOP No. 42, Health and Disability Actuarial Assets and Liabilities Other Than Liabilities for Incurred Claims
a. guidance to actuaries estimating or reviewing health benefit plan actuarial assets and liabilities, other than liabilities for incurred claims. This ASOP complements ASOP No. 5
b. include such items as contract reserves, premium deficiency reserves, provider-related assets or liabilities with respect to risk-sharing arrangements, and actuarially determined assets or liabilities related to risk adjustment programs
- ASOP No. 45, The Use of Health Status Based Risk Adjustment Methodologies
a. guidance to actuaries applying health status-based risk adjustment methodologies to quantify differences in healthcare use due to differences in health status
b. quantifying differences in morbidity across organizations, populations, programs and time periods using health status-based risk adjustment models or software products
