ASOP 26: Actuarial Certification of Small Employer Health Benefit Plans

Question 1

Purpose, Scope and Effective Date

Answer 1

1. Purpose
   a. Guidance to actuaries preparing certification of compliance by identifying issues to be addressed and required documentation
2. Scope
   a. Actuarial certifications of compliance prescribed by regulatory requirements that a carrier’s methods and other practices comply with statutory and regulatory rating constraints
   * Applies to rating methods and other actuarial practices and not to other market activities (e.g. marketing, enrollment and billing, renewal notices)

Question 2

Definitions

Answer 2

1. Actuarial Soundness
   a. Premium rates are actuarially sound if, projected premiums in the aggregate, (including reinsurance cash flows, governmental risk adjustment cash flows, and investment income) provide for all expected costs (including: benefits, settlement expenses, marketing and administrative expenses, and cost of capital)
   b. Actuarial soundness is based on information available at the time premium rates were established
2. Carrier
   a. Any entity subject to state regulation that offers health coverage for sale
   b. Includes: insurance company, a prepaid hospital or medical service plan, fraternal benefit
   society, HMO
3. Cost of Capital
   a. Rate of return that capital could earn in an alternative investment
4. Health Benefit Plan
   a. Any hospital or medical policy, medical expense insurance, or subscriber contract provided by a prepaid hospital, medical service plan, or HMO
5. Small Employer
   a. Employs a number of eligible employees within a statutorily specified range
6. Subsequent Events
   a. Events that occurred since the end of the certification period and before the date of the certification, could materially affect certification rendered, about which the actuary has knowledge

Question 3

Analysis of Issues and Recommended Compliance

Answer 3

1. Introduction
   a. Purpose of actuarial certification of compliance is to satisfy regulatory requirements
   b. Actuary should review the applicable regulatory requirements
2. Testing of Rates for Compliance
   a. Ensure sufficient testing done so that he or she is satisfied there are no material violations of the rating constraints
3. Analysis of Rates for Actuarial Soundness
   a. For a retrospective certification of actuarial soundness, relates to premium in effect during period to which the certification applies, and should be based on information that was available when the premium rates were established.

b. For a prospective certification of actuarial soundness, relates to the premium rates developed for period to which the certification applies

4. Documentation of Compliance
   a. Rating Methods and Underwriting (u/w) Practices: documentation should include materials reviewed in order to certify compliance for rating methods and u/w practices such as:
   - Description of the carrier’s rating methods and u/w practices
   - Experience, reinsurance, pooling considerations, and other data used in the analysis
   - Health benefit plan contracts and certificates
   - Sales brochures for each health benefit plan
   - The rating manual
   - Formulas for calculating rate from the rating manual, including new business rates and renewal rates
   - A sufficient sample of test calculations of the rating formulas to verify rates actually charged are in accordance with rating manuals
   - Description of any material changes to previously reviewed plan contracts
   - Any policy fees, administrative charges, or application charges that may apply
   - Any other information prescribed by the regulatory requirements

b. Demonstration of Compliance with Rating Constraints
- Demonstration should explain how classes of business, average rates, rating bands, and rate increases comply with regulatory constraints

c. Demonstration of Compliance with Actuarial Soundness
- If certification of actuarial soundness is required, a written demonstration including underlying assumptions

5. Time Period Covered by Certification
   a. Should apply to the time period specified by regulatory requirements. Explicitly state the time period to which the certification applies
6. Qualified or Limited Opinions
   a. If actuary is aware that rating methods are not in compliance, noncompliance should be reported in a qualified opinion
   b. If regulatory requirement requires a certification of actuarial soundness and actuary does not believe the rates are actuarially sound, this should be noted in a qualified opinion
   c. If actuary is not able to certify some of the items required this should be noted in a limited opinion

Question 4

Communications and Disclosures

Answer 4

1. Content of Certification
   a. Certification whether all practices required to be included are in compliance
   b. Listing of practices that are covered in the certification
   c. Identification of the time period covered
   d. Changes in rating methods during the time period covered by the certification that affect compliance
   e. Description of any subsequent events
   f. Where a qualified certification is given, actions being taken to bring the carrier into compliance
   g. Where a limited certification is given, any sections of requirements that are not addressed
2. Additional Required Disclosure
   a. If actuary is unable to certify actuarial soundness based on this standard, but certifies actuarial soundness based on regulatory requirements at variance with this, the actuary
   should so state in the certification

b. The disclosure in ASOP No. 41, if any material assumption or method was prescribed by law

c. The disclosure in ASOP No. 41, if actuary states reliance on other sources and disclaims responsibility for any material assumption or method

d. The disclosure in ASOP No. 41, actuary has deviated materially from the guidance of this ASOP