Probably Tested

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. Claim administrative expenses: set up a reserve equal to a percentage of the claim reserve
10. Morbidity assumptions: for long-term claims, morbidity is reflected in continuance tables
11. Use of the case reserves method: very labor intensive, only recommended for small blocks

Skwire Ch 37

Question 2

Advantages and disadvantages of the stochastic approaches for reserving

Answer 2

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

Skwire Ch 37

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

Skwire Ch 37

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 processes 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

Skwire Ch 37

Question 5

Features 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 COLA 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)

Skwire Ch 38

Question 6

Types of long-term claims and reserve methods

Answer 6

1. Open claims: claims currently being paid
   - Reserves = the sum from now to end of BP of monthly benefit * probability of claim continuing * discount factor
2. Pending claims
   - Reserve for claims that are still in the elimination period = pending factor * tabular reserve
   - Reserve for claims that have completed the elimination period = pending factor * (tabular reserve + accumulated value of past payments not yet made)
3. IBNR claims: claims that have been incurred but not reported

Skwire Ch 38

Question 7

Methods for calculating IBNR reserves for LT claims

Answer 7

1. Percentage of premium method
   - List all claims incurred in prior year in which all claims have been reported that were reported after yearend
   - Calculate a tabular reserve for each of these claims as of yearend of the historical year
   - Sum these tabular reserves to get the IBNR reserve
   - Divide the IBNR reserve factor by earned premium for the historical year to get the IBNR reserve factor
   - Multiply this factor buy earned premium for the current year
2. Lag method
3. Loss ratio method
4. Combination methods

Skwire Ch 38

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 information on cause of disability
6. Incorrect coding of claim status (open, closed, or pending)

Skwire Ch 38

Question 9

Methods for evaluating claim reserve adequacy

Answer 9

1. Runoff studies (commonly done by incurral year): previous 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 the future gross premiums + reserve > PV of future claim costs and expenses

Skwire Ch 38

Question 10

Considerations when preparing a claim termination rate study

Answer 10

1. Credibility: sufficient data is needed before conclusions can be drawn from the study
2. Types of terminations included: only terminations due to recovery and death should be included (terminations due to benefit limitations should not be counted)
3. Exposure characteristics: if there is a disproportionate amount of one type of claim, adjustments may be needed
4. Voluntary claim settlements: claims that are voluntarily settled are commonly excluded when performing this study

Skwire Ch 38

Question 11

Types of reserves and liabilities

Answer 11

1. Premium reserves
2. Policy reserves (a type of premium reserve)
3. Claim reserves
4. Premium deficiency reserves
5. Expense reserves: to cover admin expenses
6. Reserves related to government plans (e.g., refund reserves for Med Supp, risk-sharing reserves for Medicare Part D, and special reserves needed for state Medicaid programs)
7. Reserves related to ACA-compliant plans, for risk adjustment, reinsurance, risk corridors, MLR rebates, and reconciliations of various government subsidies
8. Reserves for contracts with providers, such as for withholds, bonuses, or other risk-sharing mechanisms
9. Reserves for experience rating refunds

Leida Ch 6

Question 12

Definitions of reserves and liabilities

Answer 12

1. 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

Leida Ch 6

Question 13

Reserve standards for the different types of financial statements

Answer 13

1. Statutory statements: 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 (though 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 IASB

Leida Ch 6

Question 14

Types of premium reserves

Answer 14

1. Types of active life reserves
   - 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
   > Usually a pro-rata portion of the last gross premium received (gross UPR)
   > But when a company holds policy reserves, the gross UPR is replaced is replaced by a net UPR that is based on the net premium used in calculating policy reserves
   - Policy reserves (contract reserves): this is the portion of premium collected in early durations. 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 created on the statement for the amount of premium expected to be received

Leida Ch 6

Question 15

Types of policies for which policy reserves are required

Answer 15

1. Contracts that use level premiums
2. Contracts where the value of the future benefits at any time exceeds the value of future net premiums

Leida Ch 6

Question 16

Reasons why past claim patterns may not be representative of future patterns

Answer 16

These would affect the validity of using the development method of calculating reserves

1. The company starts using electronic submission of claims
2. A change in work flow due to a change in claim administrative systems
3. Slow-downs or speed-ups in the claim administration department
4. Changes in benefits
5. Changes in the level of claim backlog

Leida Ch 6

Question 17

Reasons why a deficiency reserve may be needed

Answer 17

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

Leida Ch 6

Question 18

Governing documents for the setting of reserves

Answer 18

Referred to as “Guidelines and standards of practice for calculating long-term claim reserves” in Skwire

1. US Statutory governing documents
   - NAIC Accounting Practices and Procedures Manual
   - NAIC model laws: Standard Valuation Law, Actuarial Opinion and Memorandum Regulation, and Health Insurance Reserves Guidance Manual
2. Canadian governing documents
   - International Financial Reporting Standards for annual statements
   - Publications and papers from the Canadian Office of the Superintendent of Financial Insurance and the Canadian Institute of Actuaries
3. US GAAP governing documents
   - Financial Accounting Standards Board: Statements and Interpretations, and Technical Bulletins
   - Accounting Principles Board opinions, statements, and interpretations
   - American Institute of Certified Public Accountants: Statements of Opinion, and Industry Audit and Accounting Guides
4. Tax governing documents
   - In the US: the IRS code
   - In Canada: the Canadian Income Tax Act, which requires some adjustments to be made to statutory numbers
5. Actuarial governing documents
   - Various ASOPs, including numbers 5,7, 10, 11, 12, 18, 21, 22, 23, 28, 41, and 41
   - The American Academy of Actuaries’ series of Practice Notes
   - The Guides to Professional Conduct of the American Academy of Actuaries
   - Literature published in textbooks and by the actuarial profession

Leida, Ch 6

Question 19

Duties of the actuary regarding the quality of data

Answer 19

1. Seek out and use appropriate data and communicate any imperfections
2. Review data for reasonableness and consistency (not an audit)
3. Disclose reliance upon others for a review, reconciliations, 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

GHFV-103-16

Question 20

Types of reserve reporting

Answer 20

1. Regulatory reporting: concerned with solvency and policyholder protection, so conservative
2. GAAP reporting: emphasis on realistic earnings. Assumptions include provisions 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 price and assess the impact of claim reserves

GHFV-103-16

Question 21

Types of claims liabilities and reserves

Answer 21

1. Due and unpaid liabilities: liabilities that have been reorted, 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 yet adjudicated and paid. Systems 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: an estimate of future amounts due on 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

GHFV-103-16

Question 22

Methods of estimation for claim reserves

Answer 22

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
   - Examiner’s method: estimate ultimate payment and deduct what’s already been paid
   - 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: loss ratio * earned premium - claims already paid. This method and the projection 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 or disability. Can’t be used 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: 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.

GHFV-103-16

Question 23

Types of coverage for which the development method works well

Answer 23

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 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)

GHFV-103-16

Question 24

Steps of the development method

Answer 24

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.
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

GHFV-103-16

Question 25

Smoothing methods to apply to development factors

Answer 25

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 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

GHFV-103-16

Question 26

Methods for adjusting development method reserve estimates for recent incurral months

Answer 26

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.

GHFV-103-16

Question 27

Process for building in conservatism in claim reserves

Answer 27

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

GHFV-103-16

Question 28

Assumptions needed to estimate premium deficiency reserves

Answer 28

PDR = PV of future claim costs and expenses less PV of future premiums and current reserves

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:
   - Provider settlements under risk sharing arrangements should not be used to offset claims unless they have been specifically determined and billed to the providers
   - Include 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

GHFV-103-16

Question 29

Types of outcome-based contractual reserves

Answer 29

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) = Prior 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 requirements
3. Provider liabilities: for example, capitation payments owed, withholds, bundled payments, bonuses and incentives, stop loss settlements, and anticipated insolvency of capitated providers

GHFV-103-16

Question 30

Steps for using the authorization method to project claims

Answer 30

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 service
5. Calculate the estimated IBNR: equals the estimated incurred claims minus the amount of paid claims to date

GHFV-103-16

Question 31

Methods for calculating provider liabilities

Answer 31

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

GHFV-103-16

Question 32

Alternative approaches for estimating liabilities with the development method

Answer 32

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 approaches: these techniques use advanced statistical and computer tools to help in projecting claims. Uses include:
   - Project payment patterns for partially complete incurral months
   - Project PMPM costs that can be applied in projection method techniques

GHFV-103-16

Question 33

Actuarial standards for the use of data

Answer 33

1. Data that is completely accurate, appropriate, and comprehensive is frequently not available, so the actuary should use available data that allows the actuary to perform the analysis
2. Considerations in selecting data
3. Review of data: the actuary should review the data for reasonableness, unless such a review is not necessary or practical
4. The actuary should use appropriate data
5. Reliance on data and other information supplied by others: the accuracy of this information is the responsibility of those who supply it. The actuary may rely on this information, but should disclose this reliance
6. Confidentiality: the actuary should handle data containing confidential information consistent with Precept 9 of the Code of Professional Conduct
7. 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

ASOP #23

Question 34

Considerations in selecting data to use in an actuarial analysis

Answer 34

1. The scope of the assignment and the intended use of the analysis
2. The desired data elements and possible alternative data elements
3. Whether the data is appropriate and sufficiently current
4. Whether the data is internally consistent
5. Whether the data is reasonable given relevant external information that is readily available
6. The degree to which the data is sufficient for the analysis
7. Any known significant limitations of the data
8. The availability of alternative data, and the benefit and practicality of obtaining this data
9. Sampling methods that were used to collect the data

ASOP #23

Question 35

Categories of appropriateness of data used in an actuarial analysis

Answer 35

1. The data is of acceptable quality to perform the analysis
2. The data requires enhancement before the analysis can be performed, and it is practical to obtain additional or corrected data
3. Judgmental adjustments or assumptions can be applied to the data, or the analysis results, to allow the actuary to perform the analysis
4. The data is likely to have significant defects
5. The data is so inadequate that it cannot be used to satisfy the purpose of the assignment

ASOP #23

Question 36

Required documentation related to data quality

Answer 36

1. The source of the data
2. Any limitations on the use of the actuarial work product due to uncertainty about data quality
3. Whether the actuary reviewed the data, and any limitations due to data that was not reviewed
4. A summary of unresolved concerns the actuary may have about questionable data values
5. A summary of any significant steps the actuary has taken to improve the data
6. A summary of significant judgmental adjustments or assumptions the actuary applied to the data or the results
7. The existence of results that are highly uncertain or potentially biased due to the quality of the data
8. The extent of the actuary’s reliance on data and other information supplied by others
9. Disclosures in accordance with ASOP #41 if:
   - Any material assumption or method was prescribed by law
   - The actuary relies on other sources and thereby disclaims responsibility for any material assumption or method
   - The actuary has otherwise deviated materially from the guidance of this ASOP

ASOP #23

CURL RAIDS

Question 37

Disclosures required in an actuarial report

Answer 37

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

1. Intended user 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 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

ASOP #41

Question 38

Disclosure requirements for assumptions and methods used in an actuarial report

Answer 38

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 assumptions 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:
   - If it does not conflict with the actuary’s professional judgment, no disclosure is needed
   - If it significantly conflicts with the actuary’s professional judgment, then disclose this fact
   - 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 by the actuary

ASOP #41