Actuarial Standard of Practice No. 28
Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets
STANDARD OF PRACTICE
TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets
FROM: Actuarial Standards Board (ASB)
SUBJ: Actuarial Standard of Practice (ASOP) No. 28
This document contains the final version of a revision of ASOP No. 28, now titled Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets.
In April 1997, the Actuarial Standards Board adopted ASOP No. 28, Compliance with Statutory Statement of Actuarial Opinion Requirements for Hospital, Medical and Dental Service or Indemnity corporations and for Health Maintenance Organizations.
This standard is a revised version of ASOP No. 28. The revisions were made in consideration of the development of the Health Annual Financial Statement Blank (successor to both the Health Service Company Blank and the Health Maintenance Organization Blank) and the revised health actuarial opinion instructions approved by the NAIC Blanks (E) Working Group in June 2009. The revision now encompasses all statements of actuarial opinion regarding health insurance liabilities and assets of health insurance or reinsurance companies and other health insurance financing systems (such as health benefit plans provided by self-insured or government plan sponsors).
The exposure draft of this revised ASOP was issued in June 2010 with a comment deadline of October 30, 2010. The ASOP No. 28 Task Force carefully considered the eleven comment letters received and made several modifications to the ASOP in response. A detailed summary of the issues contained in these comment letters and the responses of the reviewers is provided in Appendix 2.
The most significant modifications from the exposure draft include:
1. ASOP No. 28 has been modified so that it applies to statements of actuarial opinion regarding health insurance liabilities and assets. This change was made as a result of the 2010 update to the NAIC Health Annual Statement Instructions, which requires the actuary to opine on assets which are actuarial items. Modifications have been made to the title, scope and definition sections to incorporate these assets, and references to assets as well as liabilities are now included throughout ASOP No. 28.
2. Section 1.2, Scope, has been modified to clarify that ASOP No. 28 does not apply to actuaries preparing statements of actuarial opinion that are subject to ASOP No. 6, Measuring Retiree Group Benefits Obligations, or ASOP NO. 36, Statements of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves, and that it does not apply to actuaries preparing statements of actuarial opinion for life insurance companies, for which guidance is provided by ASOP No. 22, Statements of Opinion Based on Asset Adequacy Analysis for Life and Health Insurers. Furthermore, the scope has been clarified to indicate that actuaries preparing opinions subject to ASOP No. 28 may also be subject to ASOP No. 22.
3. Section 4.1, Actuarial Communication, has been modified to make it clear that in situations where the language prescribed by the NAIC for use in the NAIC Health Annual Statement is applicable and appropriate for the circumstances, yet does not encompass every disclosure identified by ASOP No. 28, the actuary may meet the requirements of disclosure by either using non-prescribed language or by addressing the various disclosures within the required detailed actuarial memorandum.
Also, section 4.2 has been modified to be consistent with the standard disclosure language required by the ASB for use in all ASOPs.
Other changes to ASOP No. 28 were made to add clarity to the standard in consideration of the various comments received.
The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure draft. The ASB adopted this revised standard at its June 2011 meeting.
ASOP No. 28 Task Force
Nancy F. Nelson, Chairperson
Jeremy J. Brown Darrell Knapp
John C. Llyod Cynthia Miller
Claus S. Metzner
Health Committee of the ASB
Robert G. Cosway, Chairperson
David Axene John C. Llyod
Cynthia Miller Nancy F. Nelson
Actuarial Standards Board
Albert J. Beer, Chairperson
Alan D. Ford Patricia E. Matson
Patrick J. Grannan Robert G. Meilander
Stephen G. Kellison James J. Murphy
Thomas D. Levy James F. Verlautz
The ASB establishes and improves standards of actuarial practice. These ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASB’s goal is to set standards for appropriate practice for the U.S.
Section 1. Purpose, Scope, Cross References, and Effective Date
The purpose of this actuarial standard of practice (ASOP) is to provide guidance to actuaries in issuing a written statement of actuarial opinion regarding health insurance liabilities and health insurance assets.
This standard applies to actuaries providing written statements of actuarial opinion with respect to health insurance liabilities and health insurance assets of insurance or reinsurance companies and other health insurance financing systems (such as health benefit plans provided by self-insured or government plan sponsors) that provide similar coverages, under one or more of the following circumstances:
a. the statement of actuarial opinion is prepared to comply with NAIC Health Annual Statement instructions;
b. the statement of actuarial opinion is otherwise prescribed by law or regulation;
c. the statement is prepared to fulfill contractual obligations of the principal, including review of the work product of another actuary; or
d. the statement of actuarial opinion is represented by the actuary as being in compliance with this standard.
The standard does not apply to actuaries preparing statements of actuarial opinion that are subject to ASOP No. 6, Measuring Retiree Group Benefits Obligations or ASOP No. 36, Statements of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves. The standard applies to actuaries preparing statements of actuarial opinion for life insurance companies with respect to health insurance liabilities and assets included in such analysis; in addition, ASOP No. 22, Statements of Opinion Based on Asset Adequacy Analysis for Life and Health Insurers, may apply.
If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority) or for any other reason the actuary deems appropriate, the actuary should refer to Section 4.
1.3 Cross References
When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the original referenced document, the actuary should consider the guidance of this standard to the extent that it is applicable and appropriate.
1.4 Effective Date
This standard is effective for all statements of actuarial opinion regarding health insurance liabilities rendered on or after December 31, 2011.
Section 2. Definitions
The terms below are defined for use in this actuarial standard of practice.
2.1 Actuarial Memorandum
A document that provides information regarding the analyses completed.
A demand for payment under the coverage provided by a plan or contract.
2.3 Contract Reserve
A liability established when a portion of the premium due prior to the valuation date is designed to pay all or a part of the claims expected to be incurred after the valuation date (sometimes referred to as an active life reserve or policy reserve). A contract reserve may or may not include a provision for unearned premiums.
2.4 Health Benefit Plan
A contract or other financial arrangement providing medical, prescription drug, dental, vision, disability income, accidental death and dismemberment, long-term care, or other health-related benefits, whether on a reimbursement, indemnity, or service benefit basis, regardless of the form of the risk-assuming entity, including health benefit plans provided by self-insured or governmental plan sponsors.
2.5 Health Insurance Asset (Asset)
An amount recorded in financial statements or accounting systems to reflect health benefit plan receivables valued using actuarial approaches to estimation. Common examples include pharmacy rebate receivables, provider settlement receivables and Medicare Part D settlement receivables.
2.6 Health Insurance Liability (Liability)
An amount recorded in financial statements or accounting systems in order to reflect health benefit plan obligations, including amounts that are recorded as zero dollars. Common examples include health claims in course of settlement, health claims that are incurred but not yet reported, liabilities for settlements of provider contracts, contract reserves, experience refund liabilities, premium deficiency reserves, premium stabilization reserves, reserves for amounts not yet due, and liabilities for reinsurance payable.
2.7 Loss Adjustment Expense
The cost of administering, determining coverage for, settling, or defending claims even if it is ultimately determined that the claim is invalid. It is also known as “claims adjustment expense.”
2.8 Moderately Adverse Conditions
Conditions that include one or more unfavorable, but not extreme, events that have a reasonable probability of occurring during the testing period.
2.9 Qualified Actuary
An actuary who meets the qualification requirements set forth by applicable law, regulation, insurance blank instructions or requirements defined by a licensing organization requiring an opinion of health insurance liabilities, and the American Academy of Actuaries’ Qualification Standards for Actuaries Issuing Statements of Opinion in the United States.
2.10 Provision for Adverse Deviation
An explicit amount to make some provision for uncertainty in an asset or liability. This sometimes is called a Provision for Uncertainty or a Margin for Uncertainty.
2.11 Statement of Actuarial Opinion
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.
2.12 Valuation Date
The date for which the actuarial opinion is provided.
Section 3. Analysis of Issues and Recommended Practices
3.1 Legal, Regulatory, and Contractual Requirements
When an actuary prepares a statement of actuarial opinion, the actuary should have the necessary knowledge to comply with specific requirements of law, of regulatory authorities, and of the principal to whom the opinion is to be expressed, as applicable. Further, if the opinion is prepared subject to contractual requirements, the actuary should have the knowledge necessary to meet the requirements of the principal.
3.2 Purpose of the Statement of Actuarial Opinion
The actuary should identify the intended purpose of the statement of actuarial opinion. For example, the intended purpose may be to satisfy the requirements for such an opinion under the NAIC Health Annual Statement instructions.
3.3 Liabilities and Assets Being Opined Upon
The actuary should identify the following regarding the liabilities and assets for which the opinion is being prepared:
a. the liability and asset amount(s);
b. the valuation date; and
c. the accounting standards applicable for the liabilities and assets (for example, US SAP, US GAAP, IFRS, etc.).
3.4 Stated Basis of Liability and Asset Presentation
The actuary should identify the stated basis of liability and asset presentation, which is a description of the nature of the amounts usually found in the financial statement and the associated footnotes and disclosures. The stated basis often depends upon regulatory or accounting requirements. It includes, as appropriate, the following:
a. whether the amounts are gross or net of specified recoverables, such as ceded reinsurance or salvage and subrogation, and follow any requirements for the treatment of these amounts specified by a particular accounting method;
b. types of loss adjustment expenses covered;
c. when the opinion is limited to only a portion of the liability or asset provision, the claims exposure to be covered by the liability (for example, type of coverage, line of business, year, state); and
d. any other items that, in the actuary’s professional judgment, are needed to describe the amounts sufficiently for the actuary’s evaluation of the liabilities.
To the extent the actuary does not know the above items, the actuary should request this information from the principal. If unable to obtain these items from the principal, the actuary should identify what the actuary assumed to be the intended basis of the liability presentation for purposes of the liability evaluation.
3.5 Scope of the Analysis Underlying the Statement of Actuarial Opinion
The actuary should identify the scope of the analysis upon which the opinion is based, which includes the following:
a. the date of the data that underlies the actuary’s analysis;
b. the date of the actuary’s analysis, to the extent it differs from the date the opinion is signed;
c. if separate amounts for different liability and asset items, such as unpaid claim liabilities, premium deficiency reserves, active life reserves, or pharmacy rebate receivables are disclosed in the statement of actuarial opinion, whether the actuary’s opinion applies to those items in the aggregate or individually; and
d. any other items that, in the actuary’s professional judgment, are needed to sufficiently describe the scope of the actuary’s analysis.
The actuary should evaluate materiality based on the actuary’s professional judgment, any applicable materiality guidelines or standards, and the intended purpose for which the actuary is preparing the statement of actuarial opinion.
The actuary should understand which financial values are usually important to the intended users of the statement of actuarial opinion and how those financial values are likely to be affected by changes in the liabilities and assets. For example, for a statement of actuarial opinion for an insurance company that is to be used for financial reporting to insurance regulators, materiality might be evaluated in terms of the company’s reported liabilities or statutory surplus.
3.7 Liability and Asset Evaluation
The actuary should consider the amount to be reasonable if it is within a range of estimates that could be produced by an appropriate analysis that is, in the actuary’s professional judgment, consistent with either ASOP No. 5, Incurred Health and Disability Claims, or ASOP No. 42, Determining Health and Disability Liabilities Other than for Incurred Claims, as appropriate, and the identified stated basis of the presentation. In addition to the methods used, the actuary should consider, as appropriate, relevant past, present, or reasonably foreseeable future conditions that are likely to have a material effect on the amounts being established.
A significant element in the selection of actuarial assumptions and methods is consideration of the policy and contract provisions affecting the liabilities or assets. The actuary’s judgment in developing actuarial assumptions and methods should take into account the specific characteristics of the policy and contract provisions affecting the items with respect to which the actuary is expressing an opinion.
When the actuary opines that the liabilities make good and sufficient provision, the actuary should include a provision for adverse deviation. The provision should result in amounts that, in the actuary’s professional judgment, are sufficient to cover obligations under moderately adverse conditions. Even when the specific language “good and sufficient” is not required, the actuary may determine that a provision for adverse deviation should be included.
If the actuary makes use of other personnel within the actuary’s control to carry out assignments relative to analysis supporting the opinion, the actuary should review their contributions and be satisfied that those contributions are reasonable.
The actuary may develop estimates of the unpaid claims for all or a portion of the liability or make use of another’s unpaid claims estimate analysis or opinion for all or a portion of the liability.
3.7.1 Evaluation Based on Actuary’s Estimate of Unpaid Claim or Other Liabilities or Assets
When developing estimates to evaluate the reasonableness of an amount, the actuary may develop a point estimate, a range of estimates, or both. The actuary should be guided by ASOP No. 5 for the development of unpaid claim estimates. The actuary should be guided by ASOP No. 42 for development of liabilities other than unpaid claims.
3.7.2 Evaluation Based on the Actuary’s Use of Another’s Estimates or Opinions
In the course of conducting a liability or asset evaluation, the actuary may make use of another’s supporting analyses or opinions. The actuary should understand the intended purpose of the analyses or opinions, and assess whether the analyses or opinions are consistent with the stated purpose of the presentation of the liabilities or assets. The actuary should only make use of another’s analyses or opinions when, in the actuary’s professional judgment, it is reasonable to do so. In making this determination, the actuary should consider the amount of the liabilities or assets covered by the others’ analyses or opinions in comparison to the total liabilities or assets subject to the actuary’s opinion, the nature of the business, how reasonably likely deviations may affect the actuary’s opinion on the total liabilities and assets subject to the actuary’s opinion and the credentials of the other individuals that prepared the analyses or opinions. Where, in the opinion of the actuary, the reviewed analyses or opinions need to be modified or expanded, the actuary should perform such additional analyses as necessary to render an opinion.
If, in using the analyses performed by others, the actuary reaches conclusions materially different from those in the others’ work, the actuary should, when practical, contact the producers of those analyses to discuss the differences. Where material differences exist, the issues underlying the differences should be understood by the actuary. (Note that materiality is measured relative to the actuary’s opinion, not relative to the others’ analyses.) If such understanding does not result in resolution of the differences, then the actuary should take this into consideration when forming an overall opinion.
3.8 Prior Opinion
If the actuary prepared the most recent prior opinion, or, if the actuary is able to review the prior opining actuary’s work, then the actuary should determine whether the current assumptions, procedures, or methods differ from those employed in providing the most recent prior opinion prepared in accordance with this standard. If the current assumptions, procedures or methods differ from those employed in the prior opinion, the actuary should consider whether the changes are likely to have resulted in an estimate that is materially different (see section 4.3(a) for related disclosure requirements).
The use of assumptions, procedures, or methods for new liability segments (for example, a new line of business or product) or new asset amounts is not a change in assumptions, procedures, or methods within the meaning of this section. Similarly, when the determination of the reasonableness of the liability or asset is based on the periodic updating of experience data, factors, or weights, such periodic updating is not a change in assumptions, procedures or methods within the meaning of this section.
3.9 Adverse Deviation
The actuary should consider whether there are significant risks and uncertainties that could result in future paid amounts being materially greater than those provided for in the liabilities or future amounts received being materially less than those provided for in the assets. When the actuary’s analysis derives separate liability or asset estimates for various segments or groupings, the actuary should consider the combined risks and uncertainties associated with the liabilities and assets that are the subject of the opinion (see section 4.3(f) for related disclosure requirements). In general, when establishing a provision for adverse deviation, the provision should increase as the level of uncertainty increases.
3.10 Collectability of Ceded Reinsurance
If the scope of the statement of actuarial opinion includes liabilities net of ceded reinsurance and the amount of ceded reinsurance is material, the actuary should consider the collectability of ceded reinsurance in evaluating net liabilities. The actuary should solicit information from management regarding collectability problems, significant disputes with reinsurers, and practices regarding provisions for uncollectible reinsurance. The actuary’s consideration of collectability does not imply an opinion on the financial condition of any reinsurer.
3.11 Statements of Actuarial Opinion
The statement of actuarial opinion should be one of the following types:
a. Unqualified Opinion: When an actuary is preparing an opinion to comply with NAIC Health Annual Statement instructions, the actuary providing an unqualified opinion represents that the reserve amount makes good and sufficient provision for the specified liabilities. In forming an opinion as to whether the actuarial items “make good and sufficient provision for all unpaid claims and other actuarial liabilities,” the actuary should be satisfied that the actuarial judgments made give recognition to any relevant factors, including the time periods over which the liabilities will extend. The actuary is expressing an opinion on the reasonableness of the aggregate liabilities and assets. The actuary should be satisfied that the liabilities, assets, and related items opined on make reasonable provision to cover obligations under moderately adverse conditions.
In other circumstances, such as under a contractual agreement with a principal, the actuary may provide an unqualified opinion if the liability and asset amounts are reasonable for the intended purpose. In this situation, the actuary should be explicit in the opinion or the supporting actuarial memorandum as to whether a provision for adverse deviation has been included in the determination of the reasonableness of the liability or asset.
b. Adverse Opinion: When an actuary is preparing an opinion to comply with NAIC Health Annual Statement instructions, the actuary should issue an adverse opinion when the aggregate amount established is not sufficient for the actuary to provide an unqualified opinion. In other circumstances, the actuary should provide an adverse opinion when the liabilities fall outside a reasonable range for the specified purpose.
c. Qualified Opinion: The actuary should issue a qualified statement of actuarial opinion when, in the actuary’s opinion, the liability or asset for certain items are in question because they cannot be reasonably estimated or when the actuary is unable to render an opinion on the liabilities or assets for those items. The actuary should determine whether the total amount makes a reasonable provision for the specified items other than the items to which the qualification relates. The actuary is not required to issue a qualified opinion if the actuary reasonably believes that the items in question are not likely to be material.
d. Inconclusive Opinion: The actuary’s ability to give an opinion is dependent upon data, analyses, assumptions, and related information that are sufficient to support a conclusion. If the actuary cannot reach a conclusion due to deficiencies or limitations in the data, analyses, assumptions, or related information, then the actuary should issue an inconclusive opinion. A statement of an inconclusive opinion should include a description of the reasons that cause the opinion to be inconclusive.
3.12 Adequacy of Assets Supporting Liabilities
This standard does not obligate the actuary to undertake evaluation of the adequacy of the assets supporting the stated liability amount except as may be needed to comply with any applicable law, regulatory requirement, or other ASOP. Guidance on the analysis of cash flows is provided in ASOP No. 7, Analysis of Life, Health or Property/Casualty Insurer Cash Flows. Guidance on statements of opinion based on asset adequacy analysis is provided in ASOP No. 22, Guidance on Statements of Opinion Based on Asset Adequacy Analysis by Actuaries for Life or Health Insurers.
The actuary should consider the intended purpose of the statement of actuarial opinion when documenting work, and should refer to ASOP No. 41, Actuarial Communications. When the statement is provided to meet regulatory requirements, the actuary should follow the detailed requirements specified by regulators as to the form and content of supporting reports and documentation.
The documentation should provide sufficient detail to allow another qualified actuary to understand and evaluate the methods and analyses of the opining actuary. Specific guidance regarding the content of an actuarial memorandum that documents the analyses supporting a Statement of Actuarial Opinion prepared to comply with the NAIC requirements is provided in the NAIC Health Annual Statement instructions.
Section 4. Communications and Disclosures
4.1 Actuarial Communication
When issuing a statement of actuarial opinion subject to this standard, the actuary should consider the intended purpose of the statement of actuarial opinion and be guided by ASOP No. 41. In addition, the actuary should provide reports, opinions and memoranda as required by applicable law.
When the statement of actuarial opinion is prepared to meet the requirements of the NAIC Health Annual Statement, prescribed language is published by the NAIC and any deviation from the prescribed language must be identified. In a situation for which the prescribed language is appropriate for the circumstances of the opinion and yet does not encompass every disclosure identified in ASOP No. 28, the actuary may choose to use non-prescribed language in the opinion or may meet the disclosure requirements of ASOP No. 28 by addressing the various disclosures within the required detailed supporting actuarial memorandum.
Consistent with the intended purpose, the actuary should include the following information in the statement of actuarial opinion:
a. the words “statement of actuarial opinion,” or alternative words with similar meaning if required by law or regulation governing the opinion, in the title of the written opinion;
b. the intended user(s) of the statement of actuarial opinion;
c. the intended purpose of the statement of actuarial opinion, as described in section 3.2;
d. the liabilities being opined upon, as described in section 3.3;
e. the stated basis of the amounts presented, as described in section 3.4. In certain circumstances, referring to specific financial statement liability figures and their specific source (for example, Statutory Annual Statement of Company ABC as filed with the Company’s state of Domicile) would satisfy disclosure requirements related to section 3.4;
f. the scope of the analysis underlying the statement of actuarial opinion as described in sections 3.5(c) and 3.5(d) and the review date (see section 3.5(b)) if different from the date the opinion is signed; and
g. the type of opinion, as described in section 3.11.
The actuary should include the following, as applicable, in an actuarial communication:
a. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, and other legally binding authority);
b. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and
c. the disclosure in ASOP No. 41, section 4.4, if in the actuary’s professional judgment, the actuary has otherwise deviated from the guidance of this ASOP.
4.3 Additional Disclosures
In certain cases, consistent with the intended purpose, the actuary may need to make the following disclosures in addition to those in section 4.2:
a. The actuary should disclose the nature of changes in assumptions, procedures or methods from those employed in the most recent prior opinion prepared in accordance with this standard, unless the actuary concludes the changes are not likely to have a material effect on the actuary’s estimate. This standard does not require the actuary to quantify the impact of such changes. If the actuary cannot review the prior opining actuary’s work, then the actuary should disclose that the prior assumptions, procedures and methods are unknown (see section 3.8).
b. If the actuary determines that the liability or asset amount is understated, the actuary should disclose the minimum amount that the actuary believes is reasonable.
c. If the actuary determines that the liability or asset amount is overstated, the actuary should disclose the maximum amount that the actuary believes is reasonable.
d. If the actuary issues a qualified opinion, the actuary should disclose in the opinion the item or items to which the qualification relates, the reasons for the qualification, and the amounts for such items, if disclosed by the entity, that are included in the liability. If the amounts for such items are not disclosed by the entity, the actuary should disclose that the liability or asset includes unknown amounts for such items. The actuary should also disclose whether the amounts established make a reasonable provision for the specified liabilities and assets, other than the item or items to which the qualification relates.
e. If the actuary relies on another person or firm for any aspect of the data or analysis supporting the actuary’s opinion, the actuary should disclose this reliance. In particular, the actuary should identify the specific types of liabilities or assets that were based upon data or analyses provided by others, and also specify that the data was examined for reasonableness and consistency. The actuary should also identify the individual(s) responsible for the data or analysis.
f. If the actuary reasonably believes that there are significant risks and uncertainties that could result in material adverse deviation, an explanatory paragraph should be included in the statement of actuarial opinion (see sections 3.6 and 3.9 for guidance on evaluating materiality and adverse deviations). The explanatory paragraph should contain a description of the major factors or particular conditions underlying risks and uncertainties that the actuary believes could result in material adverse deviation, and the amount of adverse deviation that the actuary judges to be material with respect to the statement of actuarial opinion.
The actuary is not required to include in the explanatory paragraph general, broad statements about risks and uncertainties due to economic changes, judicial decisions, regulatory actions, political or social forces, etc., nor is the actuary required to include an exhaustive list of all potential sources of risks and uncertainties.
g. If the liabilities being opined upon are net of ceded reinsurance and the amount of ceded reinsurance is material, the actuary should comment on the collectability of that reinsurance. This standard does not require the actuary to quantify the collectability (see section 3.10).
h. When the statement is provided to meet regulatory requirements, the actuary should follow the detailed requirements specified by regulators as to the form and content of the required disclosures, to the extent not addressed above.
Appendix 1 – Background and Current Practices
Note: This appendix is provided for informational purposes, but is not part of the standard of practice.
In the early 1980s, the National Association of Insurance Commissioners (NAIC) developed standards for a statement of actuarial opinion as to reserves and related actuarial items that were to be included in the annual statement filed by health service corporations. In response to this requirement, the American Academy of Actuaries promulgated Financial Reporting Recommendation 10, Statement of Actuarial Opinion for Health Service Corporation Statutory Annual Statements, setting forth the actuary’s professional responsibilities in providing such an opinion.
The form and content of these actuarial opinions, as specified in the instructions to the statutory statements, deal specifically with reserves and related actuarial items. Prior to the development of professional standards, some actuaries began to address other issues in forming their opinions, including asset adequacy analysis, claim settlement expense reserves, and the financial condition of capitated providers under health maintenance organization contracts.
In April of 1997, the ASB adopted ASOP No. 28. The original version of ASOP No. 28 was a revised and reformatted version of Financial Reporting Recommendation (FRR) 10, Statement of Actuarial Opinion for Health Service Corporation Statutory Annual Statements. The reformatting was done to conform to the revised uniform format for actuarial standards of practice adopted by the ASB in 1996. FRR 10 offered guidance to actuaries providing statutory statements of actuarial opinion for health service corporations. FRR 10 followed the Instructions to the 1983 NAIC Blank for Hospital, Medical, and Dental Service or Indemnity Corporations and the NAIC Blank for Health Maintenance Organizations. ASOP No. 28, as successor to FRR 10, was based on the current versions of the above two Blanks, and it provided more detailed and comprehensive guidance than that provided in FRR 10. It replaced FRR 10 entirely.
The type of asset adequacy analysis most widely used by actuaries is multi-scenario cash flow testing. To guide actuaries choosing to use this technique, the Actuarial Standards Board (ASB) adopted ASOP No. 7, Performing Cash Flow Testing for Insurers, in October 1988. ASOP No. 7 was revised in July 1991 and again in June 2002.
In July 1990, the ASB adopted ASOP No. 14, When to Do Cash Flow Testing for Life and Health Insurance Companies, to provide guidance in determining whether or not to do cash flow testing in forming a professional opinion or recommendation. ASOP No. 14 was repealed in September 2001 after a determination that relevant portions were incorporated in the 2001 revisions of ASOP No. 7 and ASOP No. 22, Statements of Opinion Based on Asset Adequacy Analysis by Actuaries for Life or Health Insurers.
To guide actuaries in the development of incurred health claim liabilities, the Interim Actuarial Standards Board approved an actuarial standard of practice, Incurred Health Claim Liabilities, in April 1988, which was subsequently reformatted and adopted by the ASB as ASOP No. 5 in January 1991 and revised in December 2000.
To guide actuaries in several important areas requiring special consideration for health
maintenance organizations (HMOs) and other managed-care health plans in several areas, including establishing actuarial reserves relating to the transfer of risk to providers and the financial condition of capitated providers, the ASB adopted ASOP No. 16, Actuarial Practice Concerning Health Maintenance Organizations and Other Managed-Care Health Plans, in July 1990. This ASOP was repealed in April 2007 after a determination that it provided information redundant to other ASOPs; the document outlining its repeal refers the reader to other relevant ASOPs.
To guide actuaries in the development of health and disability liabilities other than liabilities for incurred claims, the ASB adopted ASOP No. 42, Determining Health and Disability Liabilities Other Than Liabilities for Incurred Claims, in March 2004. These include contract reserves, premium deficiency reserves, provider-related liabilities, claim adjustment expense liabilities, and other liabilities of insurance entities, insured or noninsured risk-assuming entities, managed care entities, health care providers, government-sponsored health benefit plans, or risk contracts.
Health Actuaries are guided by ASOP Nos. 5, 7, 22, and 42. Additional guidance is provided in ASOP No. 23, Data Quality and ASOP No. 41, Actuarial Communications.
Numerous educational papers are in the public domain that are relevant to the topic of reserves, liabilities and assets and their evaluation, including those published by the Society of Actuaries. While these may provide useful educational guidance to practicing actuaries, these are not actuarial standards and are not binding.
Health actuaries preparing statements of opinion for liabilities and assets included in an NAIC Health Annual statement should also be familiar with the NAIC Health Annual Statement instructions which provide specific guidance to the actuary. These are updated annually and the actuary should be familiar with the current version of the instructions.
Appendix 2 – Comments on the Exposure Draft and Responses
The exposure draft of this ASOP, Statements of Actuarial Opinion Regarding Health Insurance Liabilities, was issued in June 2010 with a comment deadline of October 30, 2010. Eleven comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The ASOP No. 28 Task Force of the Health Committee of the Actuarial Standards Board carefully considered all comments received, and the Health Committee and ASB reviewed (and modified, where appropriate) the changes proposed by the Task Force.
Click here to view Appendix 2 in its entirety.