Objective 5 - Statement of Actuarial Opinion

Question 1

Sources of requirements and guidance for setting reserves

Answer 1

1. State laws and regulations - these often prescribe certain requirements for calculating reserves or particular language to include in the actuarial opinion
2. NAIC Accounting Practices and Procedures Manual - is intended to be used in situations where state regulations are silent (SSAPs 54, 55, 84)
3. NAIC annual statement instructions - these specify what should be included in various annual statement line items. The health instructions also include standard wording for the actuarial opinion.
4. ASOPs (5, 22,28, 42, 45)
5. Health Reserves Guidance Manual - is intended to assist actuaries that estimate reserves and examiners who review the financial statements (covers claim reserves, contract reserves, provider liabilities & PDRs)
6. Actuarial practice notes - developed to provide information on current practices in new and developing areas. They are not binding on any actuary.

Question 2

NAIC model laws for reserving

Answer 2

1. The Standard Valuation Law
2. The Actuarial Opinion and Memorandum Regulation - specifies language for actuarial opinion and the need for asset adequacy analysis
3. The Minimum Life and Annuity Reserve Standards
4. The Health Insurance Reserves Model Regulation - for claim reserves, premium reserves, and contract reserves

Question 3

Standard wording for the actuarial opinion in the health insurance annual statement

Answer 3

1. Identification paragraph - identifies the actuary and his or her relation to the company
2. Scope paragraph - identifies the liabilities on which an opinion is to be expressed
3. Opinion paragraph - states that it is the actuary’s opinion that the liabilities on the balance sheet:
   a. Are in accordance with accepted actuarial standards and sound actuarial principles
   b. Are based on relevant and appropriate actuarial assumptions
   c. Meet the requirements of the state laws
   d. Make good and sufficient provision for all actuarial liabilities of the organization
   e. Are computed based on assumptions that are consistent with the prior year’s assumptions
   f. Include appropriate provision for all actuarial items that ought to be established
4. Statement in the opinion paragraph that:
   a. The Underwriting and Investment Exhibit - Part 2B was prepared in accordance with ASOP #5
   b. The methods, considerations, and analyses used in forming the opinion conform to the relevant ASOPs

Question 4

Major small group rating requirements from the NAIC Small Employer Health Insurance Availability Model Act

Answer 4

1. Certain case characteristics are recognized as allowable rating factors (see separate list). This means they are not subject to the following premium range limitation tests.
2. Index rate
   a. The average of the base premium rate (the lowest rate that could be charged) and the corresponding highest premium rate
   b. Calculated only after all rates have been adjusted for all allowable case characteristics and benefit design variations
3. Rating restrictions between classes - the rating differential between classes is limited to 20% between the lowest and highest class index rates
4. Rating restrictions within a class of business - the premium rates charged to different groups within a given class cannot vary from that class’ index rate by more than 25%
5. Rate increase limit for a given group - the increase is limited to the sum of the following:
   a. The percentage change in the new business rate from the prior to the new rating period
   b. 15% annually for experience
   c. Adjustment due to change in coverage or case characteristics
   Post-ACA, rating must be on a pooled basis without variation except for allowable characteristics; classes will be eliminated; small group will be those groups with 2-100 employees; all small group rate increases must be filed in each affected state; and 80% MLR will be implemented.

Question 5

Allowable case characteristics under the NAIC small group model act

Answer 5

1. Age
2. Gender
3. Geographic area
4. Family composition
5. Group size (maximum of 20% from highest to lowest)
6. Industry (maximum of 15% from highest to lowest
7. Other characteristics, with commissioner’s prior approval
   ACA limits characteristics to plan design, provider network, age, family composition, geographic area, and tobacco use.

Question 6

Information needed for reviewing and certifying small group rates

Answer 6

1. The small group rate manuals used during the rating period being reviewed
2. The small group rate manuals used during the prior period
3. The policy and certificate forms used for the business
4. Listing of groups in formce during the testing period, and the following for each group:
   a. Rates charged in the current and prior period
   b. Group size
   c. The value of allowable case characteristics
   d. The value of any change in benefit from the previous year
5. Depending on the type of certification required, may also need:
   a. Loss ratio and claim experience reports
   b. Sales brochures and other solicitation materials
   c. Description of the underwriting procedures
   d. Underwriting results for each new group
   e. Marketing materials
   f. Underwriting manual

Question 7

What to read, think, write in preparing a Statement of Actuarial Opinion

Answer 7

1. Read what the statement actually says, as well as applicable standards of practice and other guidelines
2. Think about what you are signing, and whether you can really make those statements
3. Write what you actually think, rather than signing the standard language if you don’t believe it to be true

Question 8

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

Answer 8

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 9

Definition and examples of statements of actuarial opinion (SAOs)

Answer 9

1. Definition - an opinion expressed by an actuary in the course of performing actuarial services and intended by that actuary to be relied upon by the person or organization to which the opinion is addressed
2. Examples of SAOs - annual statement opinion, rate filing opinion, actuarial appraisal, expert testimony, loss reserve opinion, asset adequacy analysis, and pricing opinion
3. May contain SAOs - speech, phone conversation, and congressional testimony
4. Not SAOs when used alone - experience study and personal computer program
5. Not SAOs - draft of an actuarial report not provided to a client, letters to the editor, and interview by the media

Question 10

Qualification Standards for US actuaries

Answer 10

1. All actuaries issuing SAOs in the US must meet the Qualification Standards
2. The General Qualification Standard applies to most SAOs and requires the following:
   a. Basic education and experience requirement - must be a member of the Academy or similar organization, have 3 years of responsible actuarial experience, and be knowledgeable of applicable law (additional requirements apply for issuing SAOs in a specialty track)
   b. Continuing education requirements - must complete 30 hours each calendar year of relevant continuing education, consisting of at least 3 hours on professionalism, at least 6 hours of organized activities, and no more than 3 hours of general business courses
3. For actuaries issuing SAOs for annual statements, Specific Qualification Standards also apply. These include basic education on specific topics, such as statutory accounting and reserving, and 15 hours of continuing education that is directly relevant to the subject of the SAO.

Question 11

Purposes of actuarial standards of practice

Answer 11

1. To offer guidance and provide a framework for performing work - ASOPs do not dictate a single approach or mandate a particular outcome
2. To be used by qualified actuaries - others should obtain the advice of a qualified actuary before relying on ASOPs
3. To be principles-based and leave room for the actuary to use professional judgment - ASOPs do not attempt to dictate every step and decision in an actuarial assignment
4. Not to shift the burden of proof in litigation - failure to satisfy an ASOP provision should not, in and of itself, be presumed to be malpractice

Question 12

Compliance with ASOPs

Answer 12

1. Actuaries are required by the Code of Professional Conduct to ensure that work performed by them or under their direction satisfies applicable ASOPs
2. Actuaries are expected to take a good faith approach in applying ASOPs, exercising good judgment and common sense
3. Actuaries should observe those ASOPs that are relevant to the task at hand.
4. Actuaries are expected to use professional judgment, exercise reason, and perform certain tasks only if practical.
5. It may be appropriate for the actuary to deviate from an ASOP’s provisions if it is done in a manner described in the ASOP or if a law, regulation, or other binding authority requires such a deviation.

Question 13

List of all ASOPs and their purpose

Answer 13

1. ASOP #5 - Incurred Health and Disability Claims - preparing or reviewing financial reports, claims studies, rates, and actuarial communications involving incurred claims under a health benefit plan; covers total health and disability claims and includes LTC products. Methods for estimating incurred claims are also covered in Objective 4.
2. ASOP #7 - Analysis of Life, Health, or Property/Casualty Insurer Cash Flows - performing cash flow analysis
3. ASOP #8 - Regulatory Filings for Health Plan Entities - preparation and review of regulatory filings for health plan entities for new and existing plans; applies to rate or benefit filings and projection filings
4. ASOP #12 - Risk Classification - designing, reviewing, or changing risk classification systems involving classifying individuals or entities into groups intended to reflect relative likelihood of expected outcomes
5. ASOP #17 - Expert Testimony by Actuaries
6. ASOP #19 - Appraisals of Casualty, Health, and Life Insurance Business
7. ASOP #21 - Responding to or Assisting Auditors or Examiners in Connection with Financial Statements - applies to responding actuaries and reviewing actuaries
8. ASOP #22 - Statements of Opinion Based on Asset Adequacy Analysis by Actuaries for Life or Health Insurers
9. ASOP #23 - Data Quality - selecting data, relying on data supplied by others, reviewing data, using data, and making appropriate disclosures regarding data quality; applies to all actuaries in all practice areas
10. ASOP #25 - Credibility Procedures Applicable to Accident and Health, Group Term Life, and P&C Coverages - selection of a credibility procedure and assignment of credibility values
11. ASOP #26 - Compliance with Requirements for the Actuarial Certification of Small Employer Health Benefit Plans - actuarial certification stating that the rating methods and other actuarial practices comply with regulatory requirements
12. ASOP #28 - Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets - issuing SAOs regarding health insurance, reinsurance, or other health insurance financing systems to comply with law, regulation, or contractual obligations
13. ASOP #41 - Actuarial Communications - does not apply to communications that do not include and actuarial opinion or other actuarial findings
14. ASOP #42 - Determining Health and Disability Liabilities other than Liabilities for Incurred Claims - applies to health benefit plans, risk-sharing arrangements, and self-insured plans; considerations for determining premium deficiency reserves are discussed in Objective 5
15. ASOP # 45 - The Use of Health Status Based Risk Adjustment Methodologies - used to quantify differences in morbidity across organizations, populations, programs and time periods; does not apply to risk adjustment models

Question 14

Master list of communications/disclosures and data quality

Answer 14

1. Communication, disclosure, and documentation
   a. The scope, purpose of analysis, and intended users
   b. Assumptions and methods are in compliance with ASOPs 41 and 23
   c. Sensitivity of work to the assumptions
   d. Changes from prior analysis
   e. Sources of data
   f. Whether relied on other sources and disclaim responsibility
   g. Effects of adverse selection and recommendations to mitigate impact
   h. Limitations
   i. Unresolved concerns
   j. Retain for a reasonable period of time
   k. Sufficient clarity that another actuary qualified in the same area could evaluate reasonableness
   l. Be prepared to justify different procedures if deviated from this ASOP
   m. Components prescribed by law
   n. Departures from industry practices
2. Data quality
   a. Refer to ASOP 23
   b. Sources are: accounting systems and other internal systems, claim and utilization data, medical records and patient reported data, population exposure, consulting firms, state administered data

Question 15

ASOP considerations for estimating incurred claims

Answer 15

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
   Incurred claims = paid claims + estimate of unpaid claims liabilities at the end of the valuation period - estimate of unpaid claims at the end of the prior valuation period

Question 16

Purposes of cash flow analysis

Answer 16

1. Determination of reserve adequacy
2. Determination of capital adequacy
3. Product development or ratemaking studies
4. Evaluations of investment strategy
5. Financial projections or forecasts
6. Actuarial appraisals
7. Testing of future benefits that may vary at the discretion of the insurer (such as dividend scales)

Question 17

When to do cash flow testing

Answer 17

1. Situations where cash flow testing is needed:
   a. Where there are material asset risks (aka credit risk)
   b. Where there are liabilities that have cash flows far out into the future
   c. Where a company has a new or rapidly growing line of business
   d. Where policyholder options are likely to result in antiselection
2. Situations where cash flow testing is not needed:
   a. Products with short-term liabilities supported by short-term assets
   b. Business that is not sensitive to changes in economic conditions or interest rates
   c. If the risk being evaluated is unanticipated sources of significant claims (ex: AIDS and asbestos)

Question 18

Considerations in projecting cash flows

Answer 18

1. Regarding the characteristics of the insurer’s assets:
   a. Sensitivity to economic factors, such as interest rates and inflation
   b. Limitations on the ability to use asset cash flows to support the liabilities
   c. Impact on cash flow associated with asset quality
   d. Costs of maintaining assets or converting assets into cash
   e. Relevant historical experience of similar assets
2. Regarding the investment strategy:
   a. Insurer’s strategy regarding the sale of assets prior to maturity or in a declining market
   b. Insurer’s strategy for investing future cash flows
   c. Insurer’s use of derivative contracts
   d. Costs or gains due to foreign currency exchange risk
   e. Borrowing and capital contribution strategy
   f. Other factors that are likely to have a material effect on investment strategy
3. The policy’s cash flow characteristics:
   a. Insolvency risk
   b. Effect of external factors, such as interest rates
   c. Policyholder options that may affect cash flows
   d. Effect of rate changes
4. Management’s policy concerning settlement of liabilities

Question 19

Cash flow testing modeling and data

Answer 19

1. Scenarios - should reflect a range of conditions consistent with the purpose of the analysis and should consider a sufficient number of scenarios
2. Sensitivity testing of key assumptions

Question 20

Cash flow analysis documentation required by actuarial standards

Answer 20

1. Whether any prior analyses were relied upon
2. The purpose of the analysis and risks analyzed
3. Type of analysis performed (such as cash flow testing)
4. Results of the analysis
5. The actuary’s conclusions or recommendations
6. Any conclusions or recommendations related to sensitivity testing
7. The data, assumptions, and methods used

Question 21

Recommended practices for preparing health filings

Answer 21

1. State the purpose of the filing - including the regulatory requirements with which the filing intends to comply
2. Understand the business plan, and use assumptions consistent with that plan
3. For projecting future results, use past experience that is properly adjusted (see separate list)
4. Recognize pertinent plan provisions, such as:
   a. Plan documents
   b. Administrative procedures
   c. Plan interpretations that are not written in the plan documents
5. Projections of capital and surplus should account for future actions that are likely to have a material effect
6. Projections done to compare results with a regulatory benchmark should be based on appropriate available information
7. Assumptions should be reasonable in the aggregate, and for each assumption individually

Question 22

When using past experience to project future results, adjust for material changes in:

Answer 22

1. Selection of risks
2. Demographic and risk characteristics of the insured population
3. Policy provisions
4. Business operations
5. Premium rates, claim payments, expenses, and taxes
6. Trends in mortality, morbidity, and lapse
7. Administrative procedures

Question 23

Considerations when selecting risk characteristics to use in a risk classification system

Answer 23

1. The relationship between the risk characteristics and the expected outcomes. Rates are considered equitable for a given risk characteristic if differences in rates reflect material differences in expected cost.
2. Causality - the risk characteristic should be related to expected outcomes, but it is not necessary to establish a cause and effect relationship
3. Objectivity - select risk characteristics that are capable of being objectively determined
4. Practicality - reflect the tradeoffs between practical and other relevant considerations
5. Applicable law - consider whether the law limits the choice of risk characteristics
6. Industry practices - consider usual and customary risk classification practices for the given situation
7. Business practices - consider limitations created by business practices for the given situation

Question 24

Considerations when establishing risk classes

Answer 24

1. Intended use - select a risk classification system that is appropriate for the intended use
2. Actuarial considerations
   a. Adverse selection - may occur if the variation in expected outcomes within a risk class is too great
   b. Credibility - risk classes should be large enough for expected outcomes to be credible
   c. Practicality - must balance the conflicting objectives of accuracy and efficiency
3. Other considerations - should comply with applicable law, consider industry practices, and consider limitations created by business practices
4. The reasonableness of results from using the risk classes

Question 25

Recommended practices for actuaries providing expert testimony

Answer 25

1. Take reasonable steps to ensure the the testimony is not used to mislead other parties
2. May act as an advocate for a principal, but still must comply with Code of Professional Conduct and use appropriate assumptions and methods
3. Should identify the principal on whose behalf the expert testimony is given
4. If calculations are performed using prescribed or alternative assumptions, state whether the results are consistent with your expert opinion
5. Subject to the constraints of the forum (e.g., if the court allows it), may refuse to answer hypothetical questions that are based on assumptions you believe to be unreasonable
6. Not required to volunteer information that may be adverse to the interest of the principal
7. Be mindful of past statements you have made. If different methods or assumptions are now being used, be prepared to explain why.

Question 26

Recommended practices for performing actuarial appraisals

Answer 26

An actuarial appraisal is an appraisal of an insurance business presenting a set of actuarial appraisal values based on a range of discount rates and assumptions

1. When setting assumptions:
   a. Consider historical experience, adjusted for trend and known environmental changes
   b. Ensure that each set of assumptions used is internally consistent
   c. Consider the circumstances, needs, and strategies of the intended audience
2. Consider displaying appraisal values using several discount rates
3. Perform validation tests to determine whether the model reasonably reproduces results
4. Address the sensitivities of the appraisal value to changes in key assumptions
5. Provide documentation in sufficient detail that another actuary qualified in the same practice area can evaluate the reasonableness of the work

Question 27

Items included in an actuarial appraisal report

Answer 27

1. The scope of the assignment and any limitations as to the availability of data
2. The actuary’s principal (client or employer)
3. The duty, if any, that the actuary is assuming with respect to any user of the report other than the actuary’s principal
4. A description of the intended use of the report
5. A description of the business being valued
6. The appraisal date
7. An appraisal value or range of appraisal values
8. The methodology used to develop the appraisal and reasons for the choice of methodology
9. The projection model, the accounting basis used, and other key items included in the analysis
10. Results of the model valuation
11. A discussion of the level of capital reflected in the appraisal and how this level was determined
12. The assumptions, described in sufficient detail that another actuary qualified in the same practice area could evaluate their reasonableness
13. The source of any assumption selected by someone other than the actuary
14. The extent to which taxes have been considered and on what basis
15. Any sensitivity testing results deemed material by the actuary
16. The source and extent of reliance on information supplied by others
17. Disclosures in accordance with ASOP #41 if applicable

Question 28

Responsibilities of actuaries related to audits or examinations of financial statements

Answer 28

1. Responsibilities of the responding actuary - reply to reasonable requests, which may include:
   a. Discussion of the data used, the source of prescribed assumptions (if any), the methods used, and the basis for assumptions that are not prescribed
   b. Discussion of environmental considerations that affected the preparation of the financial statement (such as changes in operations or in the entity’s methods, policies, or procedures)
   c. Requests for data and sample calculations
2. Responsibilities of the reviewing actuary:
   a. Planning - discuss the project’s scope with the auditor, inform the responding actuary about the expected timing, and request the information needed
   b. Documentation of the procedures planned and followed, the items subject to review, and the results of the review
   c. Preserve the confidentiality of any information received
3. Both actuaries should disclose any relationships with the entity whose financial statement is being audited
4. Both actuaries should comply with ASOP #41 in communicating findings and documenting work

Question 29

Methods used for asset adequacy analysis

Answer 29

1. Cash flow testing - is appropriate where cash flows of existing assets and liabilities may vary under different economic or interest rate scenarios
2. Gross premium reserve test - may be appropriate where the policy and other liability cash flows are sensitive to moderately adverse deviations in the actuarial assumptions
3. Demonstration of extreme conservatism - when the degree of conservatism in the liabilities is so great that moderately adverse deviations are covered, then a demonstration of this conservatism is sufficient
4. Demonstration that risks are not subject to material variation - for products that have risks that are not subject to material variation, it is sufficient to demonstrate this fact and show that moderately adverse deviations are covered
5. Risk theory techniques - for products with short-term liabilities supported by short-term assets, it may be more appropriate to measure moderately adverse deviations using risk theory techniques
6. Loss ratio methods - these may be appropriate when the cash flows are of short duration

Question 30

Considerations when forming an asset adequacy opinion

Answer 30

1. Review the modeled conditions and test for reasonableness
2. Consider whether the liabilities being tested are adequate under moderately adverse conditions. It is considered excessive to hold reserves so great as to withstand any adverse circumstance.
3. Lack of reserve adequacy in only a small percentage of all scenarios does not indicate the need for additional reserves or liabilities
4. Separate blocks of business should not be combined for reserve testing if their assets cannot be shared for purposes of satisfying the liabilities
5. Results from separate blocks can generally be combined so that deficiencies in one business segment can be offset by sufficiencies in another segment
6. Consider using analysis of trends and reconciliation analyses in forming an opinion
7. Anticipated actions by management to address adequacy concerns should be considered
8. Consider all material events likely to affect the analysis up until the date the opinion is signed

Question 31

Actuarial standards for the use of data

Answer 31

1. Selection of data (see separate list)
2. Reliance on data and other information supplied by others - the actuary may rely on such information, but should disclose this reliance
3. Review of data - the actuary should review the data for reasonableness and consistency, unless such a review is not practical
4. Limitation of the actuary’s responsibility - the actuary is not required to audit the data or determine whether data supplied by others is intentionally misleading
5. Use of data - the actuary must decide whether the data is of sufficient quality, if adjustments need to be made, or if data defects prevent the analysis from being done
6. Documentation regarding data quality (see separate list)

Question 32

Considerations in selecting data for an actuarial analysis

Answer 32

1. Appropriateness for the intended purpose
2. Reasonableness, comprehensiveness, and consistency of the necessary data elements
3. Any known material limitations of the data
4. The cost and feasibility of obtaining alternative data in a reasonable time frame
5. The cost and benefit associated with using an alternative data set or data source
6. Sampling methods that were used to collect the data

Question 33

Required documentation related to data quality

Answer 33

1. The process the actuary followed to evaluate the data, and any limitations due to data that was not reviewed
2. A description of any material defects the actuary believes are in the data
3. A description of any adjustments or modifications made to the data
4. The source of the data
5. Any limitations on the use of the actuarial work product due to data quality issues
6. Any unresolved material concerns the actuary may have about the data
7. Any results that may be biased due to data quality issues, including the magnitude of the bias
8. Disclosures in accordance with ASOP #41 in the following situations:
   a. If any material assumption or method was prescribed by law.
   b. If the actuary relies on other sources and thereby disclaims responsibility for any material assumption or method
   c. If the actuary has otherwise deviated materially from ASOP guidance

Question 34

Desired characteristics for credibility methods

Answer 34

1. Produce results that are reasonable in the professional judgment of the actuary
2. Do not bias the results in any material way
3. Be practical to implement
4. Balance responsiveness and stability
   Care should be taken in selecting the related experience that is to be blended with subject experience (should be similar).

Question 35

Types of credibility procedures

Answer 35

1. Classical credibility procedures - use probability distributions
2. Empirical credibility procedures - use actual experience, without reference to the underlying probability distribution (statistical relationship to mean of experience and prior experience)
3. Bayesian credibility procedures - produce posterior distributions that reflect both the related experience and the subject experience
4. Approaches for determining partial credibility:
   N = volume of experience, F = full credibility standard, K = constant
   a. (N / F), raised to some fractional power
   b. N / (N + K)

Question 36

Documentation needed to support the actuarial certification of compliance with small group rating methods

Answer 36

1. Materials that have been reviewed to certify compliance with requirements for rating methods and underwriting practices, including:
   a. A description of the carrier’s rating methods and underwriting practices
   b. The rating manual and formulas for calculating rates from the manual
   c. Some test calculations to verify that the rates charged are in accordance with the rating manual
2. A written demonstration that the rates are in compliance with applicable regulatory requirements. Should explain how classes of business, average rates, rating bands, and rate increases comply with rating constraints
3. A written demonstration supporting the determination of compliance with actuarial soundness

Question 37

Items to include in an actuarial certification of compliance with small group rating methods

Answer 37

1. Certification that all practices required to be in the certification are in compliance with applicable regulatory requirements
2. A listing of practices that are covered in the certification
3. Identification of the time period covered
4. Changes in rating methods and other practices that have occurred during the time period covered that affect compliance
5. A description of any subsequent events that could materially affect current or future certifications
6. Where a qualified certification is given, any actions that are being taken to bring the carrier into compliance
7. Where a limited certification is given, any sections of the regulatory requirements that are not addressed

Question 38

Types of statements of actuarial opinion

Answer 38

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 39

Information to include in a statement of actuarial opinion

Answer 39

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 40

Disclosures required in an actuarial report

Answer 40

This report states the actuarial findings and identifies the methods, procedures, assumptions, and data used

1. The intended users of the report
2. The scope and intended purpose of the assignment
3. The acknowledgement of qualification as specified in the Qualification Standards
4. Any cautions about risk and uncertainty
5. Any limitations or constraints on the use or applicability of the findings
6. Any conflict of interest
7. Any information on which the actuary relied that has a material impact on the findings and for which the actuary does not assume responsibility
8. The information date (date through which the data and other information has been considered)
9. Subsequent events (may have a material effect on the actuarial findings)
10. If appropriate, the documents comprising the actuarial report

Question 41

Disclosure requirements for assumptions and methods used in an actuarial report

Answer 41

1. The communication should identify the party responsible for each material assumption and method
2. If the assumption or method is prescribed by law, disclose the applicable law, the assumption or methods affected, and that the report was prepared in accordance with the law
3. If a material assumption or method is selected by another party, the actuary has three choices:
   a. If it does not conflict with the actuary’s professional judgment, no disclosure is needed
   b. If it significantly conflicts with the actuary’s professional judgment, then disclose this fact
   c. If the actuary is unable or not qualified to judge its reasonableness, then disclose this fact
   In the case of either b or c, also disclose the affected assumption or method, the party who set it, and the reason it was set by this party, rather than the actuary

Question 42

Considerations for determining contract reserves

Answer 42

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 and appropriate method

Question 43

Considerations for determining provider-related liabilities

Answer 43

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 44

Considerations when selecting a risk adjustment model

Answer 44

1. Intended use - consider the degree to which the model was designed to estimate what the actuary is trying to measure
2. Impact on program - consider whether the risk adjustment system may cause changes in behavior because of underlying incentives
3. Model version - if a new version of a previously-utilized model is used, consider the materiality of the changes to the model
4. Population and program - consider if the population and program to which the model is being applied are consistent with those used to develop the model
5. Timing of data collection, measurement, and estimation - consider the impact of timing differences between when the model is developed and when it is applied
6. Transparency - consider whether the model provides an appropriate level of transparency for the intended use
7. Predictive ability - consider the predictive ability of the model and the characteristics of the various common predictive performance measures
8. Reliance on experts - consider whether the individuals incorporating their specialized knowledge into the model are experts in risk adjustment
9. Practical considerations - consider practical limitations, such as the cost of the model, the actuary’s familiarity with the model, and its availability