Objective 3 - Reserving

Question 1

Additional considerations in establishing claim reserves

Answer 1

(in addition to ASOP #5 considerations)

1. Incurral dating method
2. Reserve basis - statutory, GAAP, and tax bases differ in their use of margin, interest rates, etc.
3. Interest - reserves for claims with long payouts may be discounted to reflect interest
4. Controls and reconciliation - the data used should be tested for accuracy
5. Insurance characteristics - reserves vary depending on the type of risk covered
6. Reserve cells - set up separate cells for each homogenous category of business
7. Managed care features - such as discounts and provider risk sharing arrangements
8. Trends
9. Seasonality
10. Claim administrative expenses - set up a reserve equal to a percentage of the claim reserve
11. Morbidity assumptions - for long-term claims, morbidity is reflected in continuance tables
12. Use of the case reserves method - very labor intensive, so only recommended for small blocks

Question 2

Advantages and disadvantages of stochastic approaches to reserving

Answer 2

Advantages

1. Provides explicit guidance for establishing provision for adverse deviation in the reserves
2. Provides guidance on potential variability in reported earnings and reserve levels
3. Allows for quantification of variability in items such as seasonality and claim trend
4. Allows for improved evaluation of reserve estimates (by knowing the variability of the estimate)

Disadvantages

1. Some audiences that are unfamiliar with this approach may have a false sense of confidence in the approach because of its sophistication
2. May be too complex to be used by all individuals who must perform related functions (such as forecasting and pricing)
3. Not every process can be modeled rigorously

Question 3

Stochastic modeling techniques for reserving

Answer 3

1. Fitting a parametric distribution to the data - this technique works best when the process being modeled is stationary over time
2. Ordinary least squares regression - this allows for investigation of the effects of specific explanatory variables, such as trend or seasonality
3. Generalized linear models - these models improve upon ordinary regression models because they allow for cases where the dependent variable being modeled is either bounded (e.g., must be greater than zero) or not normally distributed
4. Stochastic time series models - these are useful for handling situations where values are correlated across time (e.g., seasonal or cyclical patterns)
5. Monte Carlo simulation - this approach is of significant practical value when combining results from any of the other techniques

Question 4

Considerations when developing a stochastic approach to reserve estimation

Answer 4

1. Availability of data - historical data is needed to validate the model and assumptions
2. Appropriateness of data - consider whether the process reflected in the historical data are representative of the process being modeled going forward
3. Access to statistical software - lack of access to or understanding of modeling software will limit the available choices for modeling techniques
4. Appropriateness of the model - this can be validated through goodness-of-fit testing, residual analysis, and hold-out sample evaluation
   5, Covariances of modeled estimates - when reserve estimates are calculated through component estimates, the covariance between these components must be estimated

Question 5

Features (or aspects) of LTD and LTC contracts to consider when setting reserves

Answer 5

1. Periodic benefits - benefits typically equal some specified monthly or daily amount
2. Long-term benefit periods - these plans have maximum benefit periods that are much longer than benefit periods for other health benefits
3. Elimination periods - LTD and LTC plans have a variety of elimination periods (often 90 days or more)
4. Optional benefits - these may affect the timing or amount of monthly payments (e.g., partial disability benefits and cost of living adjustments)
5. Integration of benefits - these plans often coordinate benefits with Social Security and Medicare
6. Limitations and exclusions - some claims are excluded (such as intentionally self-inflicted injuries) or subject to limited periods (such as mental and nervous claims)

Question 6

Types of long-term claims and reserve methods

Answer 6

1. Open claims - claims currently being paid (uses tabular reserves)
   a) Reserve = Vn = SUM(t=n to BP) of (Benefit,t * Continuance,t * InterestDiscount,t)
   i) Benefit = monthly benefit (may vary over time due to product provisions)
   ii) Continuance = probability of a claim continuing to receive payments in the future
   iii) Interest discount = factor to reflect time value of money
   iv) Summation runs from current time period (n) to end of benefit period (BP)
2. Pending claims - claims that have been reported but payments have not yet begun
   a) Reserve for claims that are still in the elimination period = pending factor * tabular reserve
   b) Reserve for claims that have completed the elimination period = pending factor * (tabular reserve + accumulated value for past payments not yet made)
3. IBNR claims - claims that have been incurred but have not yet been reported to the company (see separate list for reserve methods)

Question 7

Methods for calculating IBNR reserves for long-term claims

Answer 7

1. Percentage of premium method (a special case of the factor method)
   a) For a historical year in which all claims have been reported, list all claims incurred prior to year-end that were reported after year-end. These are the IBNR claims
   b) Calculate a tabular reserve for each of these claims as of year-end of the historical year
   c) Sum these tabular reserves to get the IBNR reserve for the historical year
   d) Divide this reserve by earned premium for the historical year to get an IBNR reserve factor
   e) Multiply the IBNR reserve factor by earned premium from the current year to produce the IBNR reserve for the current year
2. Lag method (development method)
3. Loss ratio method (see separate list)
4. Combination methods - for example, use the lag method for earlier incurral months and the loss ratio method for recent incurral months where the completion factors are low

Question 8

Common data integrity errors related to claim reserving

Answer 8

1. Missing data
2. Misstated age or gender
3. Inaccurate elimination periods or benefit periods
4. Incomplete or inaccurate information on benefit integration
5. Inaccurate or inconsistent determination of the incurral date
6. Inaccurate information on cause of diability
7. Incorrect coding of claim status (open, closed, or pending)

Question 9

Methods for evaluating claim reserve adequacy

Answer 9

1. Runoff studies (commonly done by incurral year) - premium reserve balances are compared to subsequent claim payments and reserve balances, with adjustments for interest
2. Actual to expected claim termination rate studies (commonly done by claim duration) - compares the actual claim terminations to the expected claim terminations based on the table used for reserving
3. Experience studies - typically involves a gross premium valuation. The reserve is adequate if PV of future gross premiums + reserve > PV of future claim cost
   (note that the 2nd point is a specific type of the experience studies mentioned in the 3rd point)

Question 10

Duties of the actuary regarding the quality of data

Answer 10

1. Seek out and use appropriate data and communicate any imperfections
2. Review data for reasonableness and consistency (not necessarily an audit)
3. Disclose reliance upon other for a review, reconciliation, or audit of the data
4. Disclose situations where it is impossible or impractical to perform a sufficient review of the data
5. Consider whether the use of inappropriate data might create a material bias in the work product
6. Maintain adequate documentation to support the use of specific data
7. Address reconciliation of paid claims to check registers or general ledgers

Question 11

Types or reserve reporting

Answer 11

1. Regulatory reporting - concerned with solvency and policyholder protection, so conservative
2. GAAP reporting - emphasis on realistic earnings. Assumptions include provision for adverse deviation
3. Experience reporting for employers and providers - typically less sophisticated except for financial settlement and pricing reviews. For settlements, allow a 3 month run-out period to minimize the size of the estimated reserve.
4. Valuations for acquisitions - reserves are material to profitability, so they are often a focal point of negotiations. There is often a final settlement after several months to revisit the purchase prices and assess the impact of claim reserves

Question 12

Types of claim liabilities and reserves

Answer 12

1. Due and unpaid claims - liabilities that have been reported, adjudicated, and processed, but not paid. Is usually small. Itemize or base on historical averages
2. In course of settlement - liabilities for claims reported and received but not year adjudicated and paid. System may record receipt and run report. Otherwise, use simple method such as average claim times number of claims.
3. IBNR - liabilities for claims that are anticipated but have not been reported. Project by using existing payment data to develop average expected claims or claim payment patterns
4. Loss adjustment expenses - liabilities for the administrative costs of adjudicating unpaid claims. Usually a percentage of unpaid claims liability
5. Present value of amounts not yet due (“unaccrued”) - an estimate of future amoutns due to known open claims (commonly for disability or LTC claims). Usually reserved on a seriatim basis using a tabular approach
6. Resisted claims - includes claims for which a known litigation situation exists. Usually reserved seriatim assuming full benefits and possibly amounts for damages.
7. Outstanding accounting feed (may overlap with due and unpaid liability) - amounts which have been acknowledged as payments, but for which no check has been cut. Reserves are often based on accounts payable and billing notices.
8. Deferred maternity or other extended benefits - the loss is triggered before the valuation date, but benefits are deferred by contractual provisions
9. Other special reserves - such as for waiver of premium due to disability

Question 13

Methods of estimation for claim reserves

Answer 13

1. Case reserves - direct enumeration on a claim-by-claim basis. Typically used only when there are very few claims. Can’t use for IBNR.
   a) Examiner’s method - estimate ultimate payment and deduct what’s already been paid
   b) Average size claim method - the number of reported claims times an average claim amount minus the amount already paid
2. Projection method - develop a historical incurred claim rate as a function of some measure of exposure. Then apply this rate to projected exposure to get current incurred claims, and subtract claims already paid. The most common approach is: projected PMPM claim costs * member months - claims already paid.
3. Loss ratio method (aka claim cost method) - loss ratio * earned premium - claims already paid. This method and the projected method can be used when the volume of data is small or to validate other methods.
4. Tabular method - apply a factor to open claims to calculate reserve. Typically used for LTC and disability. Can’t use for IBNR.
5. Development method (aka lag, completion, or triangulation method) - projects historical claim lag pattern into the future to estimate the reserve based on experience data
6. Factor method (aka formula method) - historical studies are done of reserves paid after the valuation date for claims incurred before that date. These past reserves are stated as a percentage of some unit of exposure in the past time period (such as annual premium in force) to develop a factor. Current reserves equal this factor multiplied by the current amount of exposure.
7. Stochastic approaches - methods where a probabilistic statement can be made about the level and adequacy of the reserve amount. Any of the methods discussed previously can be given a stochastic treatment.

Question 14

Types of coverages for which the development method works well

Answer 14

1. Ability to record incurral and payment dates for each claim
2. Fairly consistent lag patterns
3. Short incurral periods relative to the ultimate run out (monthly is preferred for medical)
4. A sufficient volume of business in each cell, in order to obtain reasonably stable results
5. Availability of either earned premium or exposure data (for volume adjustments and smoothing)

Question 15

Steps of the development method

Answer 15

1. Summarize the data by incurral month vs. paid month to get a claims triangle
2. Sum the cells of the first claims triangle to get cumulative paid claims by incurral month
3. Calculate age-to-age development factors as the ratios of month to month cumulative claims
4. Smooth the month-to-month variations in age-to-age development factors. Various methods are used to do this (see separate list)
5. Calculate age-to-ultimate development factors (called completion factors) from the smoothed age-to-age factors
6. Divide each incurral month’s cumulative paid claims by its completion factor to get fully incurred claims
7. Subtract cumulative paid claims from the fully incurred claims to get the unpaid claims liability

Question 16

Smoothing methods to apply to development factors

Answer 16

1. Simple averaging - average development factors for each lag month (3 month average is more current; 12 month average is smoother but may bury trends in the payment patterns)
2. Removing bumps - throw out the high and low factors and average the rest. May also remove large “shock” claims from the claim triangle and analyze them separately.
3. Weighted averaging - give more credibility to most recent results. Approaches include sum of digits, squared sum of digits, and constant declining percentage.
4. Other types of means - harmonic (use the reciprocal of the “mean of reciprocals”) or geometric (the nth root of the “product of n observations”)
5. Dollar-weighted methods (prior methods have been ratio weighted) - average cumulative payments for consecutive lag months and then compute age-to-age factors as the ratio of those averages
6. Per member age-to-age ratios - divide payments per lag by exposure to create PMPM payments, and then apply the dollar-weighted approach as before.

Question 17

Methods for adjusting development method reserve estimates for recent incurral months

Answer 17

Completion factors for the most recent months are typically too small to be credible and should be replaced using one of the following methods:

1. Loss ratio method
2. Projection method
3. Credibility-weighted average of completion estimates with estimates based on the projection or loss ratio method. Weights are usually assigned based on how close the completion factor is to 1.000, with the most recent month often receiving zero completion credibility

Question 18

Process for building in conservatism in claim reserves

Answer 18

1. Development method - can incorporate conservatism in the completion and projection factors. But usually use most likely factors and add an explicit margin to the reserve.
2. Tabular reserves - margins are typically included in the assumptions made to calculate the tabular factors
3. Projection method - add margins to the trend assumptions that are used to project costs per unit
4. Loss ratio method - margins can be explicit or implicit, depending on the choice of loss ratio

Question 19

Assumptions needed to estimate premium deficiency reserves

Answer 19

PDR = PV of future claim costs and expenses less PV of future premiums and current reserves (all types of reserves: contract, claim and premium)
(Use assumptions that are realistic, rather than conservative)
1. Rate increases - must be reasonable and likely to be implemented and approved
2. Enrollment - cannot project that new entrants will improve morbidity unless there is historical experience to justify this assumption
3. Lapses - should reflect any potential antiselection, particularly if induced by rating actions
4. Expenses - operating costs must be reflected. If other policies can be expected to cover overhead, then zero overhead costs may be assumed
5. Claims trend - reflect reasonable increases in claim costs
6. Interest rates - reasonable interest rate assumptions should be used to discount deficiencies
7. Taxes - reserves should be calculated on an after-tax basis
8. Provider arrangements
a) Provider settlements under risk sharing arrangements should not be used to offset claims unless they have been specifically determined and billed to the providers
b) Included capitations as claim costs at the level currently negotiated. Recognize that if the provider goes insolvent, the discounts are lost and costs will rise.
9. Reinsurance - the calculation of the reserve is usually net of reinsurance

Question 20

Types of outcome-based contractual reserves

Answer 20

1. Employer-based contractual liabilities - need to recognize liabilities for contracts where the employer shares the risk of emerging claims experience. The most common is the contractual claims stabilization reserve (CSR) = Premium period CSR + premiums earned + interest credits - claims incurred - risk and retention charge
2. Accruals for refunds needed to achieve minimum loss ratios, such as the ACA medical loss ratio requirement
3. Provider liabilities - for example, capitation payments owed, withholds, bundled payments, bonuses and incentives, stop loss settlements, and anticipated insolvency of capitated providers

Question 21

Steps for using the authorization method to project claims

Answer 21

1. Gather data on the number of authorized services as of the valuation date
2. Adjust authorized services - adjust for differences between initial authorizations and actual services rendered. Differences arise due to appeals, poor data, and issues with coordination of benefits and enforceability of rules
3. Calculate an average cost per service rendered - this average cost is frequently a blend of provider contractual amounts and actual payments made
4. Estimate incurred claims - multiply the number of services by the cost per services
5. Calculate the estimated IBNR - equals the estimated incurred claims minus the amount of paid claims to date

Question 22

Methods for calculating provider liabilities

Answer 22

1. Risk-based payments - liabilities are based on projected contractual pay out, which is commonly based on the difference between experienced and targeted costs. Settlements are often done several months after the period ends, so reserves play a minimal role. Reserves should consider any applicable stop-loss or carve-out provisions.
2. Bonus or incentive contracts - estimates are normally based on utilization studies

Question 23

Alternative approaches for estimating liabilities with the development method

Answer 23

1. Multiple triangles - this technique looks at claim triangles in both the traditional way (claims paid by service date) and in a new way (claims reported by service date)
2. Other kinds of lag triangles - some actuaries bucket payments into weekly cells and then apply the traditional development method
3. Time series and other statistical projections (aka “regression methods”) - these techniques use advanced statistical and computer tools to help in projecting claims. Uses include:
   a) Project payment patterns for partially complete incurral months (using statistical or time series techniques - instead of development factors - to complete the claims)
   b) Project PMPM costs that can be applied in projection method techniques

Question 24

Definitions of reserves and liabilities

Answer 24

Liabilities are obligations that are already incurred and accrued (such as the ongoing monthly payments on a known disability income claim)

2. Reserves are for obligations which have not yet been incurred or are not yet accrued
3. In practice reserves and liabilities are both referred to as “reserves”. Most reserve calculations focus almost entirely on calculating the combined value of the two.

Question 25

Reserve standards for the different types of financial statements

Answer 25

1. Statutory statement - the focus is on ensuring solvency, so reserves tend to be conservative
2. GAAP statement - the focus is on matching profit streams with revenue streams, with a lesser degree of conservatism (through provisions for adverse deviation)
3. Tax statement - IRS standards make sure profits beyond a set level are recognized, and therefore taxed, immediately
4. Embedded value based statement - may be needed for international companies. Standards are set by the International Accounting Standards Board.

Question 26

Types of premium reserves

Answer 26

1. Types of active life reserves:
   a) Unearned premium reserve (UPR) - reserve for the premium that has been booked to cover the portion of the coverage period which hasn’t yet occurred
   i) Is usually a pro-rata portion of the last gross premium received (gross UPR)
   ii) But when a company holds policy reserves, the gross UPR is replaced by a net UPR that is based on the net premium used in calculating policy reserves
   b) Policy reserves (contract reserves) - this is the portion of premium collected in early durations that is intentionally designed to help pay for anticipated higher claims in later durations. Is needed for products where the claim costs increase with age while the premium is level.
2. Premium paid in advance - reserve for premiums paid in advance for future coverage periods
3. Premium due and unpaid - an asset is created on the statement for the amount of premium that is expected to be received

Question 27

Formulas for policy reserves

Answer 27

1. The notation:
   ipx = probability of survival to duration i for a policy issued at age x
   v^t = (1 + annual interest rate) ^ -t = present value factor
   ziCx = claim cost at age x, duration i, and issue year z
   ziPx = net premium at age x, duration i, and issue year z
2. Prospective formula on a per original policy basis:
   ztVx = PV {future claims} - PV {future net premiums} = SUMi=t+1 to w {ipx * v^(i-t) * ziCx} - SUMi=t to w {ipx * v^(i-t) * ziPx}
3. Prospective formula on a per surviving policy basis: ztVxs = SUMi=t+1 to w {(i-t)p(x+t) * v^(i-t) * ziCx} - SUMi=t to w {(i-t)p(x+t) * v^(i-t) * ziPx}
4. Retrospective formula on a per original policy basis:
   ztVx = SUMi=0 to (t-1) {ipx * v^(i-t) * ziPx} - SUMi=1 to t {ipx * v^(i-t) * ziCx}
5. Retrospective formula on a per surviving policy basis:
   ztVxs = SUMi=0 to (t-1) {[ 1 / (t-i)px * v^(i-t) * ziPx } - SUMi=1 to t {[ 1 / (t-i)px] * v^(i-t) * ziCx }
6. Two-year full preliminary term method - for the first 2 years, ztVx(2PT) = 0. Thereafter, the reserve is calculated using the regular policy reserve formulas, but calculated as if the policy begins at time 2.
7. A modified method to reflect annual inflation (j) on both the claims and premiums - use the formulas above and multiply both the claims and net premium terms by (1+j)^i.

Question 28

Formula for deferred acquisition cost (DAC) reserves

Answer 28

1. DAC = AV {deferrable expense} - AV {net expense premiums}
2. The notation:
   ziEx = deferrable expenses at at x, duration i, and issue year z
   ziPxE = net expense premium at age x, duration i, and issue year z
3. The formula on a per surviving policy basis:
   ztDAVxs = SUMi=0 to (t-1) {[ 1 / (t-i)p(x+i)] * v^(i-t) * [ziEx - ZiPxE]}

Question 29

Types of policies for which policy reserves are required

Answer 29

1. Contracts that use level premiums

2. Contracts where the value of the future benefits at any time exceed the value of future net premiums

Question 30

Reasons why a deficiency reserve may be needed

Answer 30

1. A policy is noncancelable, so premium rates cannot be raised
2. Regulators are unlikely to allow the premium rates to rise to self-sufficient levels
3. The size of increases needed might trigger an antiselection spiral that makes it impossible to ever break even

Question 31

Challenges in valuations for group life and health business

Answer 31

1. Group insurance encompasses different lines of business with different features
2. There is a wide variety of benefits and financial arrangements
3. For groups beyond a certain size, contracts are usually customized and contain side agreements
4. Record keeping and administration practices for third party administrators do not always meet the actuary’s needs
5. Statutory experience refund reserves may not equal the group’s surplus due to a difference in valuation bases
6. There is a wide variety of benefit types, contract provisions, and rating practices
7. Group contracts are traditionally short term, but some liabilities may be long term
8. There are often data issues

Question 32

Considerations in assessing trends in disability termination rates

Answer 32

1. Changes in the mix of disabilities by cause, by severity, or by geographical region
   2, Changes in the level of benefits provided
2. Changes in claim administration practices
3. Economic cycles
4. Material change in inflation or benefit indexation
5. Changes in government plan definition of disability (this will impact benefit offsets)

Question 33

Common types of reinsurance for group life and heatlh business

Answer 33

1. Coinsurance - the insurer cedes a portion of the business to one or more reinsurers. Each reinsurer holds the policy liabilities on its portion of the business.
2. Modified coinsurance - the insurer cedes a portion of the liabilities to other insurers, but retains the assets backing the policy liabilities (as an amount owing to reinsurers)
3. Excess of risk reinsurance - the coverage of amounts above the insurer’s retention limit is ceded to a reinsurer who holds the policy liabilities related to the coverage

Question 34

Principles for determining premium deficiency reserves

Answer 34

According to the American Academy of Actuaries PDR work group

1. Situations that result in a PDR being established include:
   a) A block of business expected to have near-term losses
   b) A block of business expected to be profitable in the near term, but long-term guarantees will cause it to be unprofitable over the projection period
2. Should minimize false positives - no PDR should be required unless there is a meaningful potential for loss
3. Should minimize false negatives - a PDR should be required whenever there is an expectation for loss

Question 35

Contract groupings for premium deficiency reserve calculations

Answer 35

1. Contracts should be grouped in a manner consistent with how policies are marketed, serviced, and measured
2. Deficiencies on a product can be offset by profits on other products within its group, but not by profits in other contract groupings
3. The recommended groups from the Health Reserves Guidance Manual are:
   a) Comprehensive major medical
   b) LTC
   c) Income protection (disability income)
   d) Limited benefit plans

Question 36

Statements the actuary must make in the Statement of Actuarial Opinion for the health annual statement

Answer 36

1. The liabilities are in accordance with accepted actuarial standards
2. The liabilities are based on appropriate actuarial assumptions
3. The liabilities meet the requirements of the laws of the state of domicile
4. The liabilities make good and sufficient provision for all unpaid claims and other actuarial liabilities
5. Liabilities are computed based on assumptions that are consistent with the prior year’s assumptions
6. Liabilities include appropriate provision for all actuarial items that ought to be established

Question 37

Approaches for signing the Statement of Actuarial Opinion when reserves are too high or too low

Answer 37

1. Issue a qualified opinion - be straightforward in laying out the concerns, and then state the actuarial opinion with those exceptions noted
2. Convince management to change the reserves to an appropriate level
   3, If other options fail, notify management that you must sign an opinion stating that reserves are inadequate - this decision cannot be taken lightly, since you will probably lose your job as a result

Question 38

ASOP considerations for estimating incurred claims

Answer 38

ASOP #5 - Incurred Health and Disability Claims

1. Plan provisions and business practices - reflect practices that materially affect the cost, frequency, or severity of claims
2. Economic influences - such as unemployment levels, cost shifting, and catastrophic events
3. Organizational claims administration - lag factors may vary due to staffing levels, computer system changes, or seasonal backlogs
4. Risk characteristics and organizational practices by block of business - consider the effects of marketing and underwriting on the types of risks accepted
5. Legislative requirements - consider how regulations mandating benefits, risk characteristics, rating, reserving, and underwriting practices can affect incurred claims
6. Carve outs - consider the effect of carved-out benefits on incurred claim levels
7. Special considerations for long-term products - such as cost of living adjustments and inflation effects

Question 39

Types of statements of actuarial opinion

Answer 39

ASOP #28 - Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets

1. Unqualified opinion
   a) For NAIC Health Annual Statement, says the reserve amount makes good and sufficient provision for all unpaid claims and other actuarial liabilities, and that obligations are covered even under moderately adverse conditions
   b) In other circumstances, says the liability and asset amounts are reasonable for the intended purpose
2. Adverse opinion
   a) For NAIC Health Annual Statement, says the aggregate amount established is not sufficient for the actuary to provide an unqualified opinion
   b) In other circumstances, says the liabilities fall outside a reasonable range for the specified purpose
3. Qualified opinion - issued when there are certain liabilities or assets that the actuary believes cannot be reasonably estimated or for which the actuary is unable to render an opinion
4. Inconclusive opinion - issued when the actuary cannot reach a conclusion due to deficiencies or limitations in the data, analyses, assumptions, or related information

Question 40

Information to include in a statement of actuarial opinion

Answer 40

ASOP #28 - Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets

1. The words “statement of actuarial opinion” ( or alternative required wording) in the title
2. The intended users
3. The intended purpose
4. The liabilities being opined upon
5. The stated basis of the amounts presented
6. The scope of the analysis underlying the opinion and the review date if different from the date the opinion is signed
7. The type of opinion (see separate list)

Question 41

Considerations in determining contract reservse

Answer 41

ASOP #42 - Determining Health and Disability Liabilities Other Than Liabilities for Incurred Claims

1. Interest rates - rates should be reasonable and consistent with the purpose of the reserve
2. Morbidity - this assumption should reflect the underlying risk, including factors such as age, gender, durational effects, and adverse selection
3. Persistency - this assumption should include both involuntary and voluntary terminations
4. Expenses - consider whether maintenance, acquisition, or claim expenses should be included
5. Trend - inflation, utilization, morbidity, and expense rates should reflect the appropriate trend
6. Premium rate changes - assumptions for future rate changes should reflect market conditions, regulatory restrictions, and rate guarantees
7. Valuation method - when the valuation method is not prescribed, the actuary should choose an appropriate method

Question 42

Considerations for determining provider-related liabilities

Answer 42

ASOP #42 - Determining Health and Disability Liabilities Other Than Liabilities for Incurred Claims

1. Risk-sharing and capitation arrangements - the nature of the arrangement should be considered when determining whether to establish a liability
2. Provider financial condition - consider whether the provider will be able to meet its obligations
3. Provider incentive payments - if an agreement with a provider calls for incentive payments, consider whether a liability should be held for those payments

Question 43

Impact of the ACA on actuarial liabilities

Answer 43

1. Claim liabilities - claim payment patterns and PMPM claim cost levels will change at the beginning of 2014 due to required plan design changes, the addition to the risk pool of many individuals who were previously uninsured, changes in claim operations, and other effects of the ACA. This will make it challenging to set reserves using the typical reserving methods
2. Contract reserves - some insurers have held contract reserves in the individual market to account for the effect of underwriting wear-off. These will no longer be appropriate beginning in 2014 because underwriting will not be allowed.
3. Due and unpaid premium asset - this asset will be affected by the 90-day premium grace period provision that must be given to those who receive premium subsidies through the exchange
4. Premium deficiency reserve - enhanced reviews of rate increase filings could result in needed rate increases being denied, which could result in the need for a PDR. Also, insurers will need to decide whether to treat exchange products as separate blocks of business for PDR purposes.