Claim Reserves
Increasingly, accountants are requiring claim reserves for self-funded plans:
If the employer is unable to obtain such reserve from the TPA, the employer will either (a) hire an actuary for such function or (b) let the actuary, employed by the accounting firm, provide such. This may be the easy out for the TPA, but often will ill-serve the best interests of the employer or its plan (more expensive, contrary to concept of one-shop shopping, weakens the dominance of the TPA, e.g.). Of considerable concern is that the employer will lose all control over such reserve determination by having an outsider do the calculation. This does not imply reserve-rigging rather expresses the reality that the TPA is closer to the claim lag than the accountants.
The Traditional Certification and the AICPA 92-6 Format are attached for review. Also attached is A Standard of Practice Checklist used to monitor professional performance in the computation of such reserves.
To provide the computation, a twelve-month lag study ending as of the valuation date is needed. Also, if the computation date is more than one-month after the valuation date, a twelve-north lag ending as of the computation date is needed.
TRADITIONAL FORMAT
Plan Administrator
Health Care Plan of _________________________
_________________________________________
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RE: |
Health Care Plan of ________________________________ Claim Reserves as of _______________________________ |
Dear Sir or Madam:
The scope and objectives of this actuarial certification were to value the claim reserves of said plan as of ___________________________.
The methodology was the standard extension of the claims triangle (incurred and paid) as of ________________________________ to estimate claims paid after such date which were incurred prior thereto. The basis of the estimate was the claims data furnished by ____________________.
See actuary’s statement, attached, for form and content.
Carlton Harker and the firm of Self-Funding Actuarial Services, Inc. are completely independent of the subject health care plan and its sponsor.
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Sincerely, Carlton Harker, FSA Self-Funding Actuarial Services, Inc. |
CH/rmh
Cc: _____________________
Enclosure (lag study)
CERTIFICATION
HEALTH CARE PLAN OF
__________________________
AS OF AND FOR THE PLAN YEAR
ENDING
___________________
______________________________________________________________________________
I,__________, am a principal of Self-Funding Actuarial Services, Inc., am a Fellow of the Society of Actuaries and am a member of the American Academy of Actuaries. My firm has been retained by _________________________to provide calculations of certain actuarial items for the above-cited health care plan.
I relied upon the plan supervisor or the claims administrator of the subject health care plan as to the accuracy and completeness of underlying information used in the computation of such claim reserves.
In other aspects, my examination included such review of the actuarial assumptions and methods and such tests of actuarial calculations as I considered necessary under the circumstances.
Claim reserves as of _________________…………………………$___________
Such reserve makes provision for claims which fall in any of three categories.
· Due and unpaid
· In course of settlement
· Incurred but not reported.
Reserves are net of excess loss recovery. No provision is made for additional claims due to ongoing lawsuits, if any. No provision is made for claim-related expenses. No contingency or error margins are included.
In my opinion, the claim reserve(s) certified
herein, met three criteria.
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Date |
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________________________________ ______ FSA, MAAA ______ Actuarial Services, Inc. |
1. Claims paid dates for the lag study and
understood by the actuary to be consistent with claims paid dates for the trust
account, if any.
2. No
specific audit/review of the accuracy of the submitted data was made.
3. With regards submitted claims lag data, the
actuary was not provided with (a) reported, (b) processing, (c) check
preparation or (d) check cleared date. The date paid for purposes of the claim
reserve is that date where the claim has been funded and the claim check
released effectively into the mail stream. That is, the actuary contemplates no
liability for claims (a) in course of settlement or (b) due and unpaid.
4.
Incurred date for a
hospitalization is assumed to be the date of discharge.
5.
No specific inquiry
is made by the actuary as regards claims backlog.
6.
The computation
assumes a constancy of plan design.
7.
Where possible, a
run-out test of the prior year’s reserve computation is made.
REQUISITE DATA
A claims lag study for the 12-month period ending with the date of the reserve determination. Also, if the computation date is one-month or more beyond the determination date, an additional lag study ending on the most recent available date is needed.
Plan Administrator
Health Care Plan of _________________________
_________________________________________
|
RE: |
Health Care Plan of ________________________________ Claim Reserves as of _______________________________ |
Dear Sir or Madam:
The scope and objectives of this actuarial certification were to value the claim reserves of said plan as of ___________________________.
The methodology was the standard extension of the claims triangle (incurred and paid) as of ________________________________ to estimate claims paid after such date which were incurred prior thereto. The basis of the estimate was the claims data furnished by ____________________.
See actuary’s statement, attached, for form and content.
_______________ and the firm of Self-Funding Actuarial Services, Inc. are completely independent of the subject health care plan and its sponsor.
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Sincerely, Carlton Harker, FSA Self-Funding Actuarial Services, Inc. |
CH/rmh
Cc: _____________________
Enclosure (lag study)
CERTIFICATION
HEALTH CARE PLAN
OF______________________
AS OF AND FOR THE PLAN YEAR
ENDING
___________________
______________________________________________________________________________
I,__________, am a principal of Self-Funding Actuarial Services, Inc., am a Fellow of the Society of Actuaries and am a member of the American Academy of Actuaries. My firm has been retained by _________________________to provide calculations of certain actuarial items for the above-cited health care plan.
I relied upon the plan supervisor or the claims administrator of the subject health care plan as to the accuracy and completeness of underlying information used in the computation of such claim reserves.
In other aspects, my examination included such review of the actuarial assumptions and methods and such tests of actuarial calculations as I considered necessary under the circumstances.
Claim reserves as of _________________…………………………$___________
Such reserve makes provision for claims which fall in any of three categories.
· Due and unpaid
· In course of settlement
· Incurred but not reported.
Reserves are net of excess loss recovery. No provision is made for additional claims due to ongoing lawsuits, if any. No provision is made for claim-related expenses. No contingency or error margins are included.
In my opinion, the claim reserve(s) certified
herein, met three criteria.
|
Date |
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________________________________ ______ FSA, MAAA ______ Actuarial Services, Inc. |
1. Claims paid dates for the lag study and understood
by the actuary to be consistent with claims paid dates for the trust account,
if any.
2. No
specific audit/review of the accuracy of the submitted data was made.
3. With regards submitted claims lag data, the
actuary was not provided with (a) reported, (b) processing, (c) check
preparation or (d) check cleared date. The date paid for purposes of the claim
reserve is that date where the claim has been funded and the claim check
released effectively into the mail stream. That is, the actuary contemplates no
liability for claims (a) in course of settlement or (b) due and unpaid.
4. Incurred date for a
hospitalization is assumed to be the date of discharge.
5.
No specific inquiry
is made by the actuary as regards claims backlog.
6.
The computation
assumes a constancy of plan design.
7.
Where possible, a
run-out test of the prior year’s reserve computation is made.
STATEMENT
OF ACTUARIAL OPINION OF THE BENEFIT OBLIGATIONS
FOR THE HEALTH CARE PLAN OF
_________________________________________
AS OF ___________________(VALUATION DATE)
________________________________________________
____________, am a principal of Self-Funding Actuarial Services, Inc., am a Fellow of the Society of Actuaries and am a member of the American Academy of Actuaries. My firm has been retained by _________________________ to provide calculations of certain actuarial items for the above-cited health care plan.
I relied upon the Claims Administrator of the subject health care plan as to the accuracy and completeness of underlying information used in the computation of such items.
In other aspects, my examination included such review of the actuarial assumptions and methods such tests of actuarial calculations as I considered necessary under the circumstances.
Benefit Obligations as of
Current Valuation Date for Plan Benefits Which Were In Effect on
These
Valuation Dates_
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Such Benefit Obligations Consist
of These Items |
__Prior |
Current__ |
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1.
Reserve for Claims Payable and Currently Due |
________ |
________ |
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2.
Reserve for Claims Incurred But Not Reported |
________ |
________ |
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a. Provider Service Date Prior to
Valuation Date |
________ |
________ |
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b. Provider Service Date prior to Valuation Date (Conforms with SOP 92-6) |
________ |
________ |
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3.
Total if (1) + (2a) + (2b) |
________ |
________ |
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4.
Stop-loss Premiums Due and Unpaid |
________ |
________ |
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5.
Accumulated Eligibility Credits |
________ |
________ |
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6.
Total of (3) + (4) + (5) |
________ |
________ |
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Benefit Obligations are net of stop-loss recovery. No provision is made for additional benefits due to ongoing lawsuits, if any. Provision is not made for benefit-related expenses. Not safety margins are included.
In the my Opinion, the Benefit Obligations certified herein, meet these
criteria.
Commentary relevant to my Computations is set forth in the Attachment
which is made part of this Opinion.
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Date |
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________________________________ ______ FSA, MAAA ______ Actuarial Services, Inc. |
ACTUARY’S
COMMENTARY
HEALTH
CARE PLAN OF _________________
BENEFIT OBLIGATIONS AS OF ____________
1.
Covered Persons
(participants and dependents) (active and COBRA) of the subject Health Care
Plan were included. Specifically excluded were those employees in their
eligibility waiting period with only an expectation of benefits. No retirees,
for which FAS No. 106 might be applicable are included. It may be, however,
that the Plan Document provide extended COBRA benefits to retirees who are, by
Plan terms, classed as COBRA participants and not retirees.
2. The Schedule of Benefits may
be attached to this Attachment if appropriate.
3. Where Plan Benefits were amended between the two valuation dates the financial impact as measured by the actuarially-determined Benefit Index is as follows:
|
Valuation Dates |
_Benefit Index_ |
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_____________ |
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_____________ |
_____________ |
4. Plan benefits include ______________;
Incurred Date for institutional care is ________.
5. No significant Plan liabilities, other than
for Benefits as set forth in the Actuarial Statement are contemplated.
6.
The Plan is funded as follows:
___________________________________________________________
___________________________________________________________
7.
Census applicable to
this Actuarial Opinion is as follows:
Active
Participants _________________
COBRA
Participants _________________
8. Actuarial Assumptions are as follows:
Claims Payable and Currently Due are those where the adjudication is complete and only the funding by the Plan Sponsor remains. The Incurred But Not Reported (IBNR) Claims are those which have not been adjudicate; such IBNR reserve includes claims both (a) in course of adjudication as well as (b) not yet received as of the Valuation Date.
b.
Claim Reserve Where Provider Service Date is Prior to the
Valuation Date.
The traditional of lag study/triangle methodology is used.
c.
Claim Reserve Where Provider Service Date is after the
Valuation Date (SOP 92-6).
Using
statistical/modeling techniques, the Actuary has determined that for a typical
self-funded medical plan with paid claims of
$1,000, e.g., during a 12-month period, that an additional SOP 92- 6 liability
of approximately $250 at the end of such period is required. Such $250 was
arrived at using the following assumptions.
i. Plan was modified allowing
all Participants to elect COBRA.
ii. Claims paid from the end of
such period to the end of such COBRA continuation period were estimated. COBRAs
whose election was prior to such period end would have such claims counted only
to the end of their COBRA continuation period. Such estimated future claims
paid are designated as C.
iii. Future COBRA premiums, for
those electing COBRA, were also estimated and designated as P.
iv. The assumption was also made
that most Qualified Beneficiaries with significant ongoing health problems, or
who were disabled, would elect COBRA. Also, that very few Qualified
Beneficiaries, with no significant ongoing health problems, would elect COBRA
v. Both C and P were discounted
from assumed date paid back to the Valuation Date by using reasonable interest,
mortality, morbidity and withdrawal assumption Such discounted amounts are
designated as C' and P'.
vi. For the typical plan under discussion, the following is the model's estimate:
C1-P1
= $250
Comment: This rationale is consistent with the
following words of SOP 92-6 (or official commentary thereof):
i. "For a self-funded plan, the cost of the IBNR includes the present value of the estimated ultimate costs to be incurred after the financial settlement date."
ii. "For
a self-funded plan, the cost of IBNR should be measured at the present value,
as applicable, of the estimated ultimate cost to the plan of settling the
claims. Estimated ultimate cost should reflect the plan's obligation to pay
claims to or for participants (for example, continuing health coverage or long-term
disability), regardless of status of employment, beyond the financial statement
date pursuant to the provisions of the plan or regulatory requirements."
iii. SOP 92-6 applies when FAS No. 35 is followed because employer-sponsored selffunded medical plans are defined benefit welfare plans" as contemplated by such directives. Even if such plans have no retiree benefits, as contemplated by FAS No. 106, SOP 92-6 will apply.
Examples
of estimated ultimate costs to be incurred after the financial settlement date
include:
i. Future payments for a participant on continuing disability.
ii. Days of care for a participant hospitalized on the financial settlement date which will go beyond such settlement date.
iii. Any other medical care of a continuing nature for any covered person.
* See Attachment for specific assumptions.
9. Miscellaneous Comments
a. Where the
Stop-Loss Agreement has the Plan Sponsor as the applicant, owner, payer and
beneficiary and no part of its premiums are paid by Plan Assets, such due and
unpaid premiums are not Plan-related liability.
b. Prior Plan Benefits are those of the previous Valuation Date;
i.e., without the amendments for the current Plan Year.
c.
Accumulated Eligibility Credits are rarely found in self-funded
health care plans.
d.
With regards
submitted claims lag data, the actuary was not provided with (a) reported, (b)
processing, (c) check preparation or (d) check cleared date. The date paid for
purposes of the claim reserve is that date where the claim has been funded and
the claim check released effectively into the mail stream. That is, the actuary
contemplates no liability for claims (a) in course of settlement or (b) due and
unpaid.
e. Incurred
date for institutional care is assumed to be the date of discharge.
f. No specific inquiry is made by the actuary as regards claims
backlog.
10. It is known that
the Benefit Obligation as of ______________was $_________; such Benefit
Obligation as of_________was $________. The reasons for the $________
difference are as follows:
a. Plan
Amendments ___________
b. Eligibility and
Related Due to Employer Charges ___________
(Mergers/Spinoffs,
e.g.)
a.
Significant Actuarial
Assumptions ___________
b.
Increased Benefit
Accumulations (Eligibility Benefits, e.g.) ___________
c.
Increase Due to
Passage of Time (Inflation Trending, e.g.) ___________
d.
Paid Benefits During Year ___________
g. Other ___________
Total
___________
11. The Actuary has not been informed by the Plan
Administrator that the subject medical plan is being, or is to be, terminated.
|
Date |
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________________________________ ______ FSA, MAAA ______ Actuarial Services, Inc. |
A claims log
study for the 12-month period ending with the date of the reserve
determination. Also, if the computation
date is one-month or more beyond the determination date, an additional lag
study ending or the most recent available date is needed.
STANDARD
OF PRACTICE CHECKLIST
PROMULGATED BY THE AMERICAN ACADEMY OF ACTUARIES
COMPUTATION DATE
_______________________________________
1. Benefits included in
this statement
____ Medical ____ Vision ____ Other ____________________
____ Dental ____ Disability
2.
Methodology
used
____ Tabular ____ Lag Study ____
Other ____________________
3. Reserves provide for these claims
categories
____
Due and unpaid
____ Incurred but not reported
____
In course of settlement ____
Other
4. Significance of Plan Provisions and related
____
Not material
____
Material and considered
____
Other
5. Determinations of Incurred Date
________ Single episode (physician visit) is date of such episode
________ Institutional Care (hospitalization, e.g.)
___________ Beginning of such care (admission date)
___________ Ending of such care (discharge date)
________ Maternity
___________ Date of conception
___________ Date of birth
6. Do certain claims or Recordkeeping practices detract from the relevance of the lag study to the projection
a. Claims practices ____ Yes ____ No
b. Accounting practices ____ Yes ____ No
a. Recordkeeping practices ____ Yes ____ No
7. Levels of lives exposed
____ Stable ____ Fluctuating ____ Other __________________
8. Large Claims Distortions
____ Not significant
____ Significant __________________________________________________________
9. Claims Paid Beyond the Valuation Date
____ Not considered ____ Other ____________________________________
____ Considered
10. General Claims processing Practices
____ Known
____ Not Known
____ Other _______________________________________________________________
11. Sufficiency of Data
____ Sufficient of reliability
____ Not sufficient for reliability
____ Other _______________________________________________________________
12. Certain
Factors
a. Interest
____ Considered at i = _____%
____ Ignored
b. Trend
____ Considered at f = _____%
____ Ignored
13.
Period of
Lag Study Period Deemed Representative
· Total period of Lag Study
____ ___________________ to ___________________
· Months included in Lag Study
____ ___________________
· If Less Than All Months Included, Reason for Exclusion
____ __________________________________________________________
__________________________________________________________
14. Claim Settlement Expenses
____ Included _________________________________________________________
____ Ignored
15. Reasonableness Test
____ Reasonable
____ No reasonable; action is _____________________________________________
_________________________________________________________________
16. Purpose of Computation
____ MEWA
____ State government entity
____ Tax
____ GAAP accounting
____ Other _____________________________________________________________
17. Margins
____ Best estimate
____ Margins added because of _____________________________________________
__________________________________________________________________
18. Information Provided
____ Lag study
____ Census
____ By month
____ Other _________________________________________________________
19. General Review of Submitted Data
____ Satisfactory
____ other ________________________________________________________________
20. Definition of Paid Date
____ Processed off computer or by examiner
____ Date the check prepared
____ Date the check released in mail stream
____ Date the check cleared
____ Other ________________________________________________________________
21. Paid Claims
____ Stop-Loss
____ Only claims below specific considered
____ Other __________________________________________________________
22. Claims Currency of Processor
Such currency when measured against lag period
____ Faster
____ Slower
____ About the same
23. Relevant Accounting Data
·
Paid Claim Reconciliation to Reported
____ Reconciliable
____ Not reconcilable
·
Checks Prepared and Not Cleared
____ Accounted for and reconciled
____ No accounted for or reconciled
·
Any Hidden Liability Due to Accounting
Error
____ Yes ______________________________________________________________
____ No
24. Potential But Not Easily Measured Backlog
____ PPO repricing or similar delags
____ Change in claims processors
25. Is A Special Analysis of Claims per participant Appropriate
____ Yes __________________________________________________________________
____ No
26. Pending Claims Problems
____ Yes __________________________________________________________________
____ No
27. Test of Reasonable
· percentage of paid claims
____ Yes ____ No
· Prior Year-end
____ Yes ____ No
28. Confidence Limits
____ Sampling and confidence limits considered
____ Sampling and confidence limits not considered
29. Plan Termination with Run-out Liability
____ Not considered
____ Considered ____________________________________________________________
30. Ongoing Or Pending Lawsuits
____ Not considered
____ Considered ____________________________________________________________
By________________________________________________
__________________, FSA
Principal
Source of Information ___________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________