ASOP 42: Determining Liabilities Other Than for Incurred Claims Flashcards
Issues and Recommended Practices
1. Determination of liabilities is necessary for:
a. The completion of financial statements
b. Projection of claim trends
c. Development of premium rates
d. Management reports
2. General considerations
a. Health benefit plan provisions
i. Affect the cost and frequency of claims, premium rates, ability to change premiums, and renewability provisions
ii. Examples: elimination period, deductibles, pre-existing condition limitations, maximum service payment allowances, managed care restrictions
iii. Compare internal business practices to plan provisions
1. Differences in definitions of payment allowances, incurral dating methods, and benefit interpretations may affect claim costs and liabilities
b. Risk sharing arrangement provisions
i. May affect financial results
ii. Examples: allowances for number of enrolled lives, results of membership satisfaction surveys, actual usage of certain facilities
c. Economic influences
i. Changes in expected trends, managed care contracts, provider networks, provider fee schedules, and medical practices
ii. May affect frequency and cost of claims, continuation of disability, cost shifting
iii. Frequency of elective procedures may increase prior to plan terminations
d. Risk characteristics and organizational practices by block of business
i. Marketing and underwriting influence types of risks accepted
ii. Pattern of growth and maturity of block influence liabilities
iii. Claim admin influences claim rates and trends and liabilities
e. Legislative requirements
i. Influence new benefits, risk characteristics, care management practices, rating and underwriting, and claims processing
f. Carve-outs
i. Consider benefits, payment arrangements, and separate reporting of benefits subject to carve-outs
ii. Affects trend analysis and risk-assuming entity’s liabilities
g. Special considerations for long term products
i. Examples are cancer, LTC and LTD
ii. Lump sum, fixed or variable payments for services
iii. Cost of living adjustments
iv. Payment differences based on institutional or home based care
v. Social insurance integration
vi. Criteria for benefit eligibility
h. Reinsurance arrangements
i. Reflect reinsurance arrangements in liabilities
ii. Consider extended reporting periods and delayed collectability
i. Expenses
i. Consider whether to establish an explicit liability for expenses or implicit
j. Consistency of bases
i. Use consistent bases for related liabilities unless it would be inappropriate
- Considerations for contract reserves
a. Typically for entry age rated health benefit plans (premium based on entry age and level over lifetime of the contract) where rate guarantees or rate change limitations apply for multiple-year periods
b. Valuation on a seriatim basis, or using group techniques, or a combination of both
c. Assumptions - use assumptions that are reasonable in the aggregate
i. Interest rates
1. Use in the present value calculation that are reasonable and consistent with the purpose
ii. Morbidity
1. Reflect the underlying risk
2. May reflect factors such as age, gender, marital status, elimination period, dependent status
3. Risk selection, pre-existing condition limitation, changes in health benefit plans, changes in provider agreements, adverse selection due to premium rate increases, plan design
4. May be recognized by a set of assumptions that varies over time
iii. Persistency
1. Both involuntary terminations such as deaths and voluntary terminations
2. Reflect the impact of future rate increases
iv. Expenses
1. Consider an assumption for maintenance, acquisition, and claim settlement
v. Trend
1. Consider trend assumptions for inflation, utilization, morbidity, and expense rates
d. Premium rate changes
i. May be appropriate to reflect in the reserve calculation
ii. Take into account market conditions, regulatory restrictions, rate guarantees, and manner in which the rate change will be implemented
e. Previously established assumptions
i. May change in accordance with the standards of the financial statements
f. Valuation method
i. Most common are gross premium method, net level premium method, full preliminary term (1 or 2 year)
ii. Consider the expense structure and whether a method is prescribed
4. Considerations for Premium Deficiency Reserve
a. Performs a gross premium valuation to determine whether a deficiency exists
b. General considerations
i. Assumptions reasonable in the aggregate
ii. Exposure - reasonable increases and decreases
1. Reflect mortality, lapse, and impact of premium rate changges
iii. Premium rate change - reasonable in relation to:
1. Projected claim cost
2. Market conditions
3. Regulatory restrictions
4. Rate guarantees
iv. Claim trend
1. Risk selection, pre-existing condition limitations, provider agreements, adverse selection due to premium increases, plan design
v. Risk Sharing arrangements
1. If anticipate a payout for risk sharing arrangements, treat the payout as an expense
2. Include the amount due from the providers to offset losses if expect the amount to be collectible
vi. Interest rates
1. Use in present value calculation
2. Reasonable and consistent with the purpose
vii. Reinsurance
1. Consider effects of reinsurance and changes in reinsurance premiums
vii. Taxes
1. May include a tax credit due to losses where appropriate
ix. Expenses
1. Consider total expenses and whether expenses allocated to the block of business are reasonable
c. Additional considerations for financial reporting
i. Block of business
1. Consistent with applicable financial reporting requirements
2. Large enough so that its results are material relative to the entity as a whole
3. Characteristics may include:
a. Benefit Type (major medical, PPO, capitated managed care)
b. Contract type (group or individual)
c. Demographic grouping (group size or geographical area)
d. Rate guarantee period
ii. Time Period
1. Take into account any applicable law, regulation, or binding authority
2. Valuation date is the beginning of the time period
3. End is earlier of the end of the contract period or when the block no longer requires a premium deficiency reserve
5. Considerations for Provider related liabilities
a. Risk Sharing arrangements create potential liabilities for both parties
i. Provider incentive payments create liability to risk-assuming entity offering such provisions to providers
ii. Capitation arrangements create provider related liability for either party
b. Non-provider risk-assuming entities
i. Contractual arrangements may require a liability to be held by the risk-assuming entity
ii. for any amounts due from the provider, consider financial condition of provider and likelihood of collecting amounts due
iii. risk of a provider failing may create a liability for higher capitations or fees for services
c. Provider risk-assuming entities
i. Potential liability is the receipt of capitation by one provider with payment due to other providers using fee for service
d. Risk sharing and capitation arrangements
i. May require provide related liability
ii. Consider stop loss provisions included in the risk sharing or capitation arrangements
e. Provider financial condition
i. May increase claim liabilities of risk assuming entity
f. Provider incentive payments
i. Payments to a provider if quality of care standards or claim targets are met
ii. Risk assuming entity may hold a liability
6. Claim adjustment expense
a. Liability for expenses associated with unpaid claims, unless otherwise provided for appropriately
7. Other liabilities
a. Liabilities for payments to state pools - consider provision for state insolvency pools and risk sharing pools
b. Reserves for unearned premiums - consider provision for liabilities associated with period when premium will be earned
c. Liabilities for dividends and experience refunds payable under a health benefit plan
8. Follow up studies
a. Tests for reasonableness of the prior period estimates and methdos
b. Collect sufficient data
c. Perform studies in the aggregate or for blocks of business
d. Utilize the results, if appropriate, in preparing current liability
9. Margin for uncertainty - consider what might be appropriately included
10. Data requirements
a. Need increasing volume, type, detail, and frequency of data
b. ASOP 23
11. Documentation
a. Methods, assumptions, procedure, and sources of data
b. Such that another actuary qualified could assess the reasonableness of the work
Communication and Disclosures
- Disclose the following:
a. Sources of information
b. Reliance on information supplied by others
c. Limitations on the use of the product
d. Need for follow-up studies
e. Unresolved concerns
f. Conflicts arising from law, regulation, or other binding authority - May rely on information supplied by others
a. Disclose the extent of such reliance
b. Accuracy of the information is responsibility of those who supply it - Be prepared to justify the use of different procedures from those in this standard
a. Disclose nature, rationale, and effect of such departures
