Actuarial Standard of Practice No. 26
Compliance with Statutory and Regulatory Requirements for the Actuarial Certification of Small Employer Health Benefit Plans
STANDARD OF PRACTICE
TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Compliance with Statutory and Regulatory Requirements for the Actuarial Certification of Small Employer Health Benefit Plans
FROM: Actuarial Standards Board (ASB)
SUBJ: Actuarial Standard of Practice No. 26
This booklet contains the final version of Actuarial Standard of Practice (ASOP) No. 26, Compliance with Statutory and Regulatory Requirements for the Actuarial Certification of Small Employer Health Benefit Plans.
Recently, statutes and regulations have been enacted by a majority of states that have imposed various constraints on carriers for small employer health benefit plans. These statutes and regulations often require an actuarial certification that a small employer carrier is in compliance with the statutory or regulatory constraints. This is a new area of practice for actuaries; therefore, this actuarial standard of practice has been developed to provide guidance for actuaries preparing such certifications.
The first draft of this standard was exposed for review in October 1995, with a comment deadline of March 29, 1996. Thirty-five letters of comment were received. Additionally, the Health Committee of the ASB, as the drafting committee of this standard, presented a workshop on the proposed standard at a Society of Actuaries meeting in June 1996. The committee took very seriously its responsibility to review all of the comments it received regarding the exposure draft. Most of the comments exhibited a great deal of thought, and many of the suggestions made were incorporated into the final standard. However, no substantive positions taken in the exposure draft were changed. The committee believes that the final standard—like that of the exposure draft—correctly reflects the ASB’s mission to provide guidance relating to the actuarial certifications of compliance required by state laws and regulations. (For a detailed discussion of the issues raised in the comment letters, and the committee’s responses to such, please see Appendix 2. Note in particular the discussion on p. 11 regarding the fact that this standard imposes a higher documentation requirement than those required by some states.)
A number of format changes have also been made since publication of the exposure draft. The ASB voted in May 1996 to change the format of all future actuarial standards of practice. Thus, sections 3 and 4 now form an appendix titled, Background and Current Practices. (Appendix 1 of this standard contains sections 3 and 4 of the exposure draft.) Further, sections 5 and 6 of the exposure draft have now been renumbered as sections 3 and 4. The “new” sections 3 and 4, along with sections 1 and 2, now form the actual standard of practice. The heading Preamble, which used to apply to the first four sections of the standard, has been deleted. The board made these format changes to help the reader distinguish between a standard’s substantive requirements and language intended for general information.
The Health Committee thanks everyone who provided input during the exposure process. The comments were helpful in making revisions. The ASB voted in October 1996 to adopt the final standard.
Health Committee of the ASB
Ted A. Lyle, Chairperson
Robert M. Duncan Jr. Mark D. Peavy
Robert J. Ingram John A. Price
Mary J. Murley Richard J. Shepler
William H. Odell Joe P. Sternfeld
David F. Ogden
Actuarial Standards Board
Richard S. Robertson, Chairperson
Phillip N. Ben-Zvi Frank S. Irish
Edward E. Burrows Daniel J. McCarthy
Harper L. Garrett Jr. Harry L. Sutton Jr.
David G. Hartman James R. Swenson
Section 1. Purpose, Scope, Cross References, and Effective Date
Many states require the filing of an actuarial certification of compliance stating that the rating methods and other actuarial practices applicable to carriers for small employer health benefit plans comply with relevant statutes, regulations, or other mandatory requirements set forth in any applicable, generally distributed interpretative materials. (Hereafter, the phrase regulatory requirements will refer to such statutes, regulations, and/or applicable, generally distributed interpretative materials.) The purpose of this actuarial standard of practice is to guide the preparer of a certification of compliance by identifying the issues to be addressed and the required documentation regarding relevant regulatory requirements.
This standard applies to actuarial certifications of compliance prescribed by regulatory requirements that a carrier’s rating methods and other actuarial practices applicable to small employer health benefit plans comply with statutory and regulatory rating constraints. Since specific regulatory requirements for such certifications vary between jurisdictions, the actuary must satisfy the specific regulatory requirements of a jurisdiction in preparing the certification.
This standard applies to rating methods and other actuarial practices only and does not apply to other market conduct activities (e.g., marketing, enrollment and billing procedures, and renewal notices) that may be covered under regulatory requirements.
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 originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.
1.4 Effective Date
This standard will be effective for all certifications rendered on or after January 1, 1997, regardless of the time period covered.
Section 2. Definitions
The definitions below are defined for use in this actuarial standard of practice.
2.1 Actuarial Soundness
Small employer health benefit plan premium rates are actuarially sound if, for business in the state for which the certification is being prepared and for the period covered by the certification, projected premiums in the aggregate, including expected reinsurance cash flows, governmental risk adjustment cash flows, and investment income, are adequate to provide for all expected costs, including health benefits, health benefit settlement expenses, marketing and administrative expenses, and the cost of capital.
For either a retrospective or a prospective certification, the determination of actuarial soundness is based on information available at the time the premium rates were established.
Any entity subject to state regulation that offers health benefit plan coverage for sale. Carrier includes an insurance company, a prepaid hospital or medical service plan, a fraternal benefit society, a health maintenance organization, and any other entity offering for sale a plan of health insurance or health benefits.
2.3 Cost of Capital
The rate of return that capital could earn in an alternative investment of equivalent risk. The source of the capital may be internal or external.
2.4 Health Benefit Plan
Any hospital or medical policy or certificate; medical expense insurance; or subscriber contract or contract of insurance provided by a prepaid hospital, medical service plan, or health maintenance organization.
2.5 Small Employer
Any person, firm, corporation, partnership, or organization that employs a number of eligible employees within a statutorily specified range that has an upper bound and that satisfies any other statutorily defined criteria.
2.6 Subsequent Events
Subsequent events are events (1) that have occurred since the end of the certification period and before the date of the certification, (2) that could materially affect current or future certifications rendered, and (3) about which the actuary has knowledge.
Section 3. Analysis of Issues and Recommended Compliance
The purpose of the actuarial certification of compliance is to satisfy applicable regulatory requirements. This certification should be appropriate to the circumstances. The actuary should review the applicable regulatory requirements, which generally contain a statement of purpose that the actuary should keep in mind when preparing the certification of compliance. The actuary should also consider any other mandatory requirements set forth in any applicable, generally distributed interpretive materials issued by regulators in support of the applicable regulatory requirements, and should satisfy those requirements when preparing the certification.
3.2 Testing of Rates for Compliance with Rating Constraints
The actuary should ensure that sufficient testing has been done so that he or she is reasonably satisfied that there are no material violations of the rating constraints. Such testing should be detailed enough to assure that an appropriate range of health benefit plan designs and demographic characteristics has been tested.
3.3 Analysis of Rates for Actuarial Soundness
If required, the actuary should perform sufficient analysis so that he or she is reasonably satisfied the rates are actuarially sound. For a retrospective certification of actuarial soundness, the certification relates to the premium rates in effect during the time period to which the certification applies, and the determination of actuarial soundness should be based on information that was reasonably available at the point in time when the premium rates were established. For a prospective certification of actuarial soundness, the certification relates to the premium rates developed for the time period to which the certification applies.
3.4 Documentation of Compliance
Documentation should be available to support the actuarial certification, and should include the items listed in sections 3.4.1–3.4.3 below, if applicable. The state will define what documentation should be submitted, if any.
3.4.1 Rating Methods and Underwriting Practices
Materials that have been reviewed in order to certify compliance with requirements for rating methods and new business and renewal underwriting practices, such as the following:
a. a description of the carrier’s rating methods and new business and renewal underwriting practices; this should include any exceptions or variations that may be used for the business or any subset of the business for which rates are determined;
b. when actuarial soundness is being certified, experience, reinsurance, pooling considerations, and other relevant data used in the analysis of the business for which rating practices are being certified;
c. the health benefit plan contracts and certificates;
d. the sales brochures and other materials for each health benefit plan;
e. the rating manual;
f. formulas for calculating any group’s rate from the rating manual, including both new business rates and renewal rates;
g. a sufficient sample of test calculations of the rating formulas to verify that the rates actually being charged are in accordance with the rating manuals;
h. a description of any material changes to previously reviewed health benefit plan contracts and certificates that were not mandated by regulatory requirements;
i. information concerning any policy fees, administrative charges, or application charges that may apply to any group in any class of business, regardless of whether such fees or charges are remitted to the carrier; and
j. any other information prescribed by the regulatory requirements.
3.4.2 Demonstration of Compliance with Rating Constraints
A written demonstration supporting the actuarial certification that the rates are in compliance with applicable regulatory requirements. The demonstration should include an explanation as to how items such as classes of business, average rates, rating bands, and rate increases comply with statutory and regulatory rating constraints.
3.4.3 Demonstration of Compliance with Actuarial Soundness
If a certification of actuarial soundness is required, a written demonstration supporting the determination, including documentation of underlying assumptions.
3.5 Time Period Covered by Certification
The actuary’s certification that the rates are in compliance should apply to the time period specified by applicable regulatory requirements. In the absence of any specification in such regulatory requirements, the actuary should generally certify to the prior calendar year. In any event, the actuary should explicitly state the time period to which the certification applies.
3.6 Qualified or Limited Opinions
If the actuary is aware that any rating methods or other practices are not in compliance with applicable regulatory requirements, such noncompliance should be reported in a qualified opinion. If the regulatory requirement requires a certification of actuarial soundness and the actuary does not believe the rates are actuarially sound, even though they are in compliance with the regulatory requirements, this should be noted in a qualified opinion. If the actuary is not able to certify some of the items required in the regulatory requirement, this should be noted in a limited opinion.
Section 4. Communications and Disclosures
4.1 Content of Certification
The content of the certification should include, as a minimum, the following:
a. certification whether all practices, as required by regulatory requirement to be included in the certification, are in compliance;
b. a listing of practices that are covered in the certification;
c. identification of the time period covered by the certification;
d. changes in rating methods and other practices that have occurred during the time period covered by the certification and that affect compliance;
e. a description of any subsequent events;
f. where a qualified certification is given, any actions that are being taken to bring the carrier into compliance; and
g. where a limited certification is given, any sections of the regulatory requirements regarding certification that are not addressed.
4.2 Additional Required Disclosure
If the actuary is unable to certify actuarial soundness based on sections 2.1 and 3.3 of this standard, but certifies actuarial soundness based on regulatory requirements at variance with those sections, the actuary should so state in the certification. The actuary should also include the following, as applicable, in an actuarial communication:
a. the disclosure in ASOP No. 41, Actuarial Communications, 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 materially from the guidance of this ASOP.
Appendix 1 – Background and Current Practices
Note: This appendix is provided for informational purposes, but is not part of the standard of practice.
In 1990, the National Association of Insurance Commissioners (NAIC) adopted a model act relating to small employer health insurance availability titled, Premium Rates and Renewability Coverage for Health Insurance Sold to Small Employer Groups. Since that time, two additional model acts have been adopted: Small Employer Health Insurance Availability (Allocation with or without an Opt-out), and Small Employer Health Insurance Availability (Prospective Reinsurance with or without an Opt-out); as well as a model regulation, Model Regulation to Implement the Small Employer Health Insurance Model Act (Prospective Reinsurance with or without an Opt-out).
Recently, statutes and regulations enacted by a majority of states, often adopting some sections of the NAIC model regulations, have imposed statutory and regulatory constraints on carriers for small employer health benefit plans. These constraints may vary substantially from the NAIC model regulations, but generally have a similar intent. In particular, many of these statutes and regulations focus on narrowing the differences between premium rates charged to individual small employers with similar plan designs and case characteristics. The stated goals of these regulations often include the broad pooling of risks, the avoidance of extreme rate differences (which have occurred under certain tier and durational rating methods), and the expansion of access to health insurance coverage.
As noted above, applicable regulatory requirements vary considerably as to the extent of rating constraints imposed, as well as the specific language describing such constraints. In most situations, few, if any, restrictions exist as to the number and design of health benefit plans that can be offered in the marketplace. The current variety of state statutes and regulations renders it extremely difficult to provide precise rules for determining compliance. These conditions necessitate that the actuary apply a great deal of judgment in completing the certification of compliance.
Appendix 2 – Comments on the Exposure Draft and Committee Responses
The first draft of this standard was exposed for review in October 1995, with a comment deadline of March 29, 1996. Thirty-five letters of comment were received. Additionally, the Health Committee of the ASB presented a workshop on the proposed standard at a Society of Actuaries meeting in June 1996 at Colorado Springs, which was attended by thirty-seven individuals (most responded positively to the proposed standard’s text).
Click here to view Appendix 2 in its entirety.