Objective 4 (C): Financial Statements

Question 1

Formula for the Gordan Constant Growth Model

Answer 1

P / D = 1 / (k - G); where

• P = price
• D = dividends one year from now
• k = required rate of return, or discount rate
• G = growth rate of dividends

This formula shows that maximizing value (represented by the price-to-earnings ratio of P / D) is accomplished by maximizing growth (G)

Question 2

Formula for sustainable growth rate (5)

Answer 2

Represents the limit on a company’s growth if there is no external source of capital

1) Sustainable growth rate = earnings retention rate * ROE
2) Return on equity (ROE) = Net income / Shareholder equity
3) Earnings retention rate = 1 - dividends / earnings
4) The above formulas show that if there are no dividends, then ROE = Sustainable growth rate
5) For the company to grow faster than the ROE, it would need to access external equity, which diminishes the percent of the company owned by existing shareholders

Question 3

The components of ROE (the Dupont Formula) (2)

Answer 3

1) Return on assets (ROA) = Total asset turnover * Net profit margin. This explains what return on all invested assets can be earned by the company
a) Total asset turnover = Revenue / Total assets. This explains how much total investment is required to meet the requirements of the business
b) Net profit margin = Net income / Revenue. This explains what percent on sales becomes profit.

2) Return on equity (ROE) = ROA * Total leverage ratio = Net income / Shareholder equity
a) Total leverage ratio = Total assets / Shareholder equity. This explains to what degree the business can be operated by leveraging other peoples’ money

Question 4

Common income statement ratios for health insurers (4)

Answer 4

1) Administrative expense ratio = administrative expenses / revenue
2) Health benefit ratio (or loss ratio) = health benefit expenses / premium revenues
3) For simple insured business (i.e. no non-premium revenues such as ASO fees); Operating profit margin = operating profits / revenues = 1 - health benefit ratio - administrative expense ratio
4) Net margin = net income / revenues
a) Net income = operating profits + investment incomes - interest expense - income taxes

Question 5

Adjustments needed when preparing the same-size income statement (4)

Answer 5

This statement expresses all relevant financial components as a percent of revenue

1) Reinsurance - should count reinsurance recoveries as offsets to health care costs
2) Commissions - count as an administrative expense
3) Investment income - count as non-operating income
4) ASO products - look at financial reports separately for each product type

Question 6

Core activities of a health insurer’s operations (4)

Answer 6

1) Premium cycle - The insurer collects premiums from customers in exchange for benefits
2) Investments cycle - The insurer invests excess funds, generating income from those investments
3) Benefits cycle - Policyholders receive benefits
4) Expense cycle - The insurer pays expenses other than the payment of insurance benefits

Question 7

Ways to classify health insurance contracts by reference to their contractual premiums terms (4)

Answer 7

1) Premium mode - the frequency with which premiums are due
2) Contract length and renewability options - U.S. contracts typically are 12 months and there are various renewability options, such as guaranteed renewable
3) Inflationary vs. non-inflationary benefits - will the cost of benefits be more in the next year due to inflation, for most medical and dental this is the case
4) Premium guarantee period - often 12 months of constant premiums for U.S. health insurance companies

Question 8

Health insurance products (13) split by four natural benefit liability characteristics

Answer 8

1) Block-level Unpaid Claim Liability (UCL); Policy Reserves
a) Issue-age-rated Medicare Supplement
b) Issue-age-rated supplemental benefits (e.g., cancer, critical illness)

2) Block-level UCL; No Policy Reserves
a) Group medical
b) Medicare Advantage
c) Medicaid managed care
d) Attained-age-rated Medicare Supplement
e) Attained-age-rated supplemental benefits
f) Group dental/vision
g) Group short-term disability

3) Seriatim Disabled Life Reserve (DLR) / In course of Settlement (ICOS), block-level IBNR, Policy Reserves
a) Individual disability income
b) Long-term care

4) Seriatim DLR/ICOS, block-level IBNR, No Policy Reserves
a) Group long-term disability
b) Group term life (DLR for the waiver-of-premium benefit)

Question 9

The two types of reference through which one can look at non-benefit expenses (8, 5)

Answer 9

Types of insurer expenses, also referred to as administrative expenses

1) Salaries paid to employees
2) Other employee benefits, e.g., health insurance, contributions to benefits
3) Commissions paid to brokers and agents
4) Payments to vendors and consultants
5) Rent on non-owned office space
6) Capital expenditures, e.g., computer systems, furniture, etc.
7) Non-income-based taxes and regulatory fees, e.g., premium taxes
8) Income taxes (this expense is not referred to as an administrative expense)

Functional classification of administrative expenses

1) Policy acquisition expenses - Costs associated with generating new business
2) Claim administration expenses - Costs associated with the adjudication of benefits
3) Other policy maintenance expenses - Costs associated with the ongoing admin of insurance contracts
4) Investment expenses - Costs associated with generating investment income
5) Corporate overhead - Executive officer salaries, branding campaigns, and other marketing costs

Question 10

Health insurance accounting topics in which actuaries may play some role in measurement (10)

Answer 10

1) Administrative services contracts
2) Partially insured contracts
3) Premium deficiency reserves
4) Quota share reinsurance
5) Excess-of-loss reinsurance
6) Capitation arrangements
7) Provider incentive programs
8) Experience-rated group contracts
9) Risk equalization
10) Risk corridors, rebates and remittances

Question 11

Ways in which administrative services only (ASO) contracts may lead to balance sheet items of actuarial interest (2)

Answer 11

1) Situations where the insurer has agreed to put a portion of the ASO fees it has received at risk, contingent on certain metrics. Three broad categories:
a) Performance guarantees, which relate to operational customer service measures
b) Discount guarantee, relates to the value realized by the customer from the insurer’s provider network
c) Trend guarantees, relates to the year-over-year growth in the customer’s total benefit costs

2) When the ASO contract ends, the insurer will need to adjudicate the claims runout. This is a future economic sacrifice and, therefore, a liability is appropriate.

Question 12

Federal government subsidies paid to insurers under Medicare Part D (2)

Answer 12

This is an example of a partial insured contract

1) The direct subsidy covers most of the premiums for Part D coverage
2) The other subsidies are based on the standard structure of the benefit plan which can change year to year
a) Reinsurance subsidy - “Catastrophic” claims are paid by government subsidy (80%), insurer (15%), and member (5%)
b) Low-income cost-sharing (LICS) subsidy - Cost share subsidies for certain low-income individuals paid for by the insurer but covered by the government
c) These subsidies are paid to insurers monthly and later, after claims run-out, the insurer settles up with the government

Question 13

The generally accepted accounting model for Part D (5)

Answer 13

1) Premiums received from the government and/or insureds are considered revenue
2) The portion of benefit payment to pharmacies that relate to risks borne by the insurer are considered expense
3) The other regular monthly inflows to the insurer, such as reinsurance subsidies and LICS subsidies do not impact the insurer’s income statement. When the insurer receives these amounts, it debits cash and credits balance sheet accounts.
4) The portion of benefit payments to pharmacies that relate to risks retained by the government are not supposed to impact the insurer’s income statement
5) The insurer may not be able to compute portions of payment in real time that represent the government’s risk, so in practice:
a) All payments made to pharmacies get debited to insured expense
b) On a monthly basis, analysis is performed to move amounts off the income statement as appropriate
c) Crediting claims expense and debiting balance sheet accounts

Question 14

Methods to estimate experience-rated refund reserves during the middle of a contract year (2)

Answer 14

1) Year-to-date method: The insurer records a liability based solely on actual year-to-date experience under the contract, as if the contract were to terminate as of the financial statement date
2) Prorated ultimate method: The insurer computes the amount owed to the employer for the full contract period, based on actual experience for the partial contract period and projected experience for the remainder of the contract period, and then prorates that amount

Question 15

The main ways the loss ratio (LR) for ACA rebate purposes differs from the LR appearing in the insurer’s financial statements (5)

Answer 15

1) The financial statement LR reflects an “accounting view”, in which incurred claims represent all claims paid plus the change in reserve, over a given period of time
2) The LR computed for rebate determination purposes reflects an “actuarial view” of the experience:
a) Claims both incurred and paid in the given period of time; plus
b) Claims that were incurred in the given year and paid during the specified runout period; plus
c) The estimated UCL as of the end of the specified runout for claims incurred in the period
3) The claims and premiums used for rebate purposes are gross of reinsurance (except for ACA transitional reinsurance), whereas a financial statement LR would normally be net of reinsurance
4) For rebate purposes, the LR numerator includes insurer expenses that meet a regulatory definition of quality-improvement activities (QIA)
a) Pre-ACA, these expenses would often be reported as part of admin expenses rather than claims
b) The insurer’s inclusion of QIA in the rebate LR calculation makes it easier for insurers to reach the MLR thresholds
5) Statutory language indicates that the LR denominator for rebate purposes shall exclude federal and state taxes and fees, which has required health insurers to develop methodologies for allocating income taxes down to the state/market level

Question 16

Basic formula for the ACA definition of “loss ratio” to determine ACA rebates

Answer 16

Prior to the credibility adjustment, the LR takes this form:

[Incurred Claims (actuarial view, gross of reinsurance) + QIA expenses] / [Earned premiums (actuarial view, gross of reinsurance, net of risk equalization) - Taxes & Fees]

Question 17

General principles captured in the income statement (2)

Answer 17

The income statement is the net effect of all the financial transactions recognized during that period:

1) For a revenue item, the amount recognized in the period is equal to the cash directly posted to revenue (e.g., paid premiums), plus the change in the period in any associated asset balance (e.g., due & unpaid premiums), less the change in the period in any associated liability balance (e.g., unearned premium)
2) For an expense item, the amount recognized in the period is equal to the cash directly posted to expense (e.g., paid salaries), plus the change in the period in any associated liability balance (e.g., accrued salaries), less the change in the period in any associated asset balance (e.g., DAC)

Question 18

Important points to emphasize about the “accounting view” of the income statement (2)

Answer 18

1) After an accounting period has closed, the amount of revenue and expense that accountants attribute to that period never changes
2) The amount of revenue and expense that accountants attribute to a given accounting period is a mixture of several different types of items:
a) Known cash flows relating to insurance coverage provided for the given period
b) End-of-period estimates relating to insurance coverage provided for the given period
c) The difference, if any, between the beginning-of-period estimates relating to insurance coverage provided prior to the given period, and the sum of:
i) Known cash flows occurring in the given period, but relating to insurance coverage provided prior to the given period
ii) End-of-period estimates relating to insurance coverage provided prior to the given period

Question 19

Reasons an actuary would not want to work with the revenue and claims as reported by the insurer’s accountant (2)

Answer 19

1) Those amounts are potentially distorted by prior-period effects
2) Those amounts included end-of-period estimates of quantities that become more certain with time

Question 20

Statutory financial reports required for insurers regulated by the NAIC (6)

Answer 20

1) The annual statement blank
2) The quarterly statement blank
3) The annual risk-based capital (RBC) report
4) The annual audited financial statement
5) The annual actuarial opinion
6) The annual actuarial opinion memorandum (AOM)

Question 21

Conceptual differences between SAP (statutory accounting principles) and GAAP financial reporting for insurers (5)

Answer 21

1) The parent company is usually regulated by the SEC (use GAAP), and subsidiary company that’s selling the insurance is regulated by the state (use SAP)
2) SAP is focused on financial solvency and GAAP focuses on the future earnings potential
3) Statement blanks used for statutory reporting are completely pre-formatted, thus consistent across insurers
4) Greater detail is required by insurers in statutory financial statements than provided in SEC filings
5) A prescribed statement of actuarial opinion does not exist for GAAP nor is it required on the consolidated GAAP reserves of the parent company

Question 22

Key characteristics used to distinguish short-duration contracts versus long-duration contracts under GAAP

Answer 22

1) Key characteristics of short-duration contracts include
a) Short-duration contracts specify that insurance protection is provided “for a fixed period of short duration”
b) The insurer has the right “to cancel the contract or to adjust the provisions of the contract at the end of any contract period, such as adjusting the amount of premiums charged or coverage provided”
2) Long-duration contracts specify that “the contract generally is not subject to unilateral changes in its provisions” and that “the contract requires the performance of various functions and services (including insurance protection) for an extended period”

Question 23

Financial accounting for premium deficiencies

Answer 23

Originally FAS 60, now ASC 944

For short-duration contracts:

1) A deficiency exists if the sum of expected claims, claim adjustment expenses, dividends, unamortized acquisition costs, and maintenance costs exceed unearned premium
2) The deficiency is first offset by reducing the unamortized acquisition costs to the extent needed
3) If the deficiency is greater than unamortized acquisition costs, a liability shall be accrued for the difference

For long-duration contracts - This is done via a “gross premium valuation”

1) Premium deficiency is calculated using revised assumptions based on experience. It equals:
a) PV of future benefits and expenses using the revised assumptions
b) Minus PV of future gross premiums using the revised assumptions
c) Minus the liability for future policy benefits
d) Plus unamortized acquisition costs
2) Shall be recognized by a charge to income and a reduction of unamortized acquisition costs or an increase in the liability for future policy benefits

Question 24

Accounting concepts that have influenced the development of NAIC SAP guidance (3)

Answer 24

The Preamble to the Accounting Practices & Procedures Manual (APPM) lays out three main concepts that have influenced the development of NAIC SAP guidance:

1) Conservatism - Statutory-basis financial statements’ primary interests are protecting the interests of policyholders. GAAP financial reporting emphasis is on helping providers of capital asses the entity’s prospects for future net cash inflows.
2) Consistency - Regulators benefit from having consistency across all the insurers they regulate, as seen in the pre-formatted financial statement blanks discussed earlier
3) Recognition - In accounting, “recognition” refers to the determination of whether or not a particular event ought to be included within the financial statements

Question 25

Compare and contrast NAIC SAP and U.S. GAAP on important aspects for health insurers (12)

Answer 25

1) Disabled life reserves SAP: Based on minimum standards GAAP: Based on its expected ultimate costs 2) Unpaid claim liabilities Both will be a best estimate while including some conservatism 3) Policy reserves SAP: Often based on assumptions at issue GAAP: Based on its expected ultimate costs 4) Acquisition costs SAP: Recognized as an expense when incurred. This may lead to recognize a loss in the short term, which is referred to as statutory strain GAAP: Allows the spread of the expense over a longer period of time, called deferred acquisition costs (DAC) 5) PDRs SAP: No DAC to increase assets, so in theory the PDR could be larger GAAP: Can release the DAC asset to make a PDR lower or possibly unnecessary 6) Additional actuarial reserves SAP: An opining actuary performing assets adequacy may feel the need to increase reserves above the current SAP to be comfortable signing the opinion GAAP: Appointed actuary has no corresponding requirement to perform asset adequacy analysis 7) Reinsurance - ceded claims SAP: Ceded reserves are a contra-liability, reducing the reserves shown on the liability side of a balance sheet GAAP: Reserves ceded are recorded on the asset side of the balance sheet 8) Health care receivables SAP: Claim overpayment will increase assets, but it must net out any known unpaid claims GAAP: Claim overpayment is a contra-liability since claim liabilities are reported on a net basis 9) Prepaid expenses SAP: Immediately recognize the expense GAAP: debit an asset account for prepaid expenses, and then over time recognize the expense and reduce the asset 10) ASO fees SAP: insurers are to recognize ASO fees as contra-expense, not as revenue GAAP: Insurer recognizes revenue for the administrative fees it receives from ASO customers 11) Cost containment expenses SAP: Treat all as part of admin expense, and not part of claim expense GAAP: No prescriptive guidance, thus some are included as claims expense 12) Measurement attributes for invested assets SAP: For Blue Blank companies, companies hold special liabilities called the Asset Valuation Reserve and the Interest Maintenance Reserve GAAP: Should not include Asset Valuation Reserve (AVR) and the Interest Maintenance Reserve (IMR)

Question 26

Differences between NAIC SAP and U.S. GAAP for ASO fees relevant to health actuaries (3)

Answer 26

1) Under GAAP, the insurer recognizes revenue for the administrative fees it receives from ASO customers, and it does not recognize revenue or expense for the claim payments it adjudicates 2) However NAIC SAP imposes variations on this model in respect to ASO fees: Insurers are to recognize ASO fees as contra-expense, not as revenue 3) Under this NAIC SAP guidance, an insurer's statutory-basis administrative expenses include the insurer's gain or loss from its ASO contracts, making it difficult to compare statutory-basis administrative expense levels across health insurers

Question 27

Differences between NAIC SAP and U.S. GAAP for cost containment expenses relevant to health actuaries (3)

Answer 27

1) Cost containment expenses are expenses that are not paid directly to providers, but help reduce the frequency and/or severity of members' healthcare benefits. Under NAIC SAP, these expenses include: a) Case management b) Utilization review c) Fraud detection and prevention d) Provider contracting and network development e) Appeals processes and health improvement education (whether performed internally or externally) 2) NAIC SAP imposes a uniform treatment under which insurers are supposed to classify all cost containment expenses as part of admin expense, and not part of claims expense 3) U.S. GAAP has no prescriptive guidance for defining cost containment as claims expense versus administrative expenses

Question 28

Minimum reserve standards under NAIC SAP (4)

Answer 28

1) Policy reserve methodology a) SAP employs a two-year full preliminary term (FPT), 1 year for LTC b) GAAP uses a net level premium methodology and allows a DAC 2) Interest rates - NAIC SAP prescribes maximum interest rates for both policy reserves and DLR 3) Morbidity assumptions - For individual DI, LTD, and group life waiver of premium, SAP minimum standards prescribe morbidity assumptions to be used (industry tables with some credibility blending) 4) Lapse/mortality assumptions for policy reserves calculations a) NAIC SAP minimum standards prescribe mortality assumptions to be used b) Allows voluntary lapse rates to be used in some circumstances, with restrictions on magnitude

Question 29

Accounting approaches used in IFRS 17 (International Financial Reporting Standards) (3)

Answer 29

1) The general model, known colloquially as the building block approach 2) The premium allocation approach (PAA), that is only allowed to be used in certain circumstances 3) The variable fee approach (VFA), a variation of the general model that seems unlikely to ever be applicable to health insurance contracts

Question 30

Conceptual similarities between IFRS 17 general model and the GAAP model for long-duration contracts (5)

Answer 30

1) The use of current estimates rather than the lock-in principle 2) The aggregation of contracts for valuation purposes into groups that do not mix contracts from different issue years 3) The use of interest rates that reflect market information as well as the characteristics of the insurance liability 4) The deferral of expected gains on newly-issued contracts, rather than upfront recognition of expected gains 5) Known differences include the contractual service margin and the explicit risk adjustment

Question 31

Specific requirements from the revised NAIC actuarial opinion instructions (7)

Answer 31

1) The appointment by the company's board of directors or a qualified health actuary. This actuary must report annually to the board or the audit committee. 2) A process to request exemptions from having to file an actuarial opinion 3) The use of a checkbox section to indicate whether the opinion is unqualified, qualified, adverse, or inconclusive 4) Expansion of the scope of the actuarial opinion to include specified actuarial items presented as assets in the annual statement 5) The definition of prescribed language (as opposed to suggested language in the prior instructions) with any modifications or deviations noted within a checkbox section 6) The requirement to reconcile underlying claim lag data to Part 2B of the Underwriting and Investment Exhibit 7) A supporting actuarial memorandum

Question 32

The classifications of an actuarial opinion (4)

Answer 32

1) Qualified - results from a situation where all liabilities are good and sufficient except for specifically defined items 2) Adverse - this opinion arises when the actuary determines that the reserves and liabilities are not good and sufficient 3) Inconclusive - this happens when the actuary is unable to form an opinion due to deficiencies in data, analysis, assumptions, or related information 4) Unqualified - this is when all liabilities are deemed good and sufficient by the actuary

Question 33

Sections to include in the body of the actuarial opinion (6)

Answer 33

1) Table of key indicators - alerts the reader to the opinion, changes in prescribed wording, and deviations from ASOPs 2) Identification section - identifies the actuary 3) Scope section - shows the actuary has checked assumptions and methods used and identifies subjects on which an opinion is to be expressed 4) Reliance section - identifies anyone the actuary relied upon 5) Opinion section - clearly shows the opinion 6) Relevant comments - allows the actuary to further explain any circumstances, concerns, or issues

Question 34

For an actuarial statement of opinion, the following items are required to be included in the actuarial memorandum (4)

Answer 34

1) An exhibit that ties to the annual statement 2) Documentation of the reconciliation from data used for analysis to the Underwriting and Investment Exhibit Part 2B, with explanations of the drivers of the differences 3) Any other follow-up studies documenting the prior years' claim liability and claim reserve run-off as considered necessary by the actuary 4) Documentation of the assumptions used for contract reserves with any changes in assumptions from previous valuations and support or any margin included in the reserves

Question 35

The purpose of contract reserves (3)

Answer 35

1) A reserve held because future claims are greater than the future net premiums 2) Needed to prefund the expected increases in claims in later years 3) These types of reserves are needed for long-term insurance policies

Question 36

GAAP guidance for setting contract reserves (6)

Answer 36

1) Divides insurance into two main categories: short-term and long-term 2) For long-term contracts the insurer will hold a contract (or benefit) reserve 3) Generally prohibits insurers from establishing benefit reserves for short-term contracts 4) Benefit reserves should include a provision for adverse deviation 5) Assumptions used to initially calculate the reserve are locked-in 6) If a deficiency exists, the original assumptions are "unlocked" and updated

Question 37

SAP guidance for setting contract reserves (5)

Answer 37

1) SAP uses four classes: life, accident and health (A+H), property and casualty (P+C), and deposit-type 2) A+H contracts are defined to include unearned premium reserves and contract reserves 3) Reserve required for contracts when the future claims are greater than the future premiums except: a) When contracts cannot be continued after one year from issue b) When a years' worth of premium is intended to cover that year's claims without prefunding of future cash flows 4) Uses prescribed methodologies and assumptions for computing minimum allowable reserves 5) GAAP allows for a greater freedom to select methods and assumptions and must include provisions for adverse deviation

Question 38

Recommendations for determining SAP and GAAP contract reserve assumptions

Answer 38

Under SAP: 1) Determine a liability under moderately adverse, but not excessive, conditions 2) Many actuaries believe that the SAP reserve should be greater than the best estimate 3) At least as great as the amount determined using the state prescribed methodology and assumptions Under GAAP: 1) Include provision for adverse deviation 2) Unlike SAP, there are no prescribed assumptions for GAAP 3) GAAP reserves should be less than SAP but greater than best estimate

Question 39

Methods that are used for contract reserves for SAP versus GAAP (3)

Answer 39

1) Under either method, if the contract reserves are deficient, additional reserves may be required as determined by a gross premium valuation 2) For SAP, the minimum reserve standard is a preliminary term method 3) For GAAP, they use the net level premium method

Question 40

Tax deductibility of health contract reserves and premium deficiency reserves (5)

Answer 40

1) In general, contract reserves are tax deductible for insurance companies if the contract is noncancelable or guaranteed renewable 2) Several assumptions have specific guidelines that must be followed when calculating a tax reserve 3) The method is defined as the two-year preliminary term except for the LTC contracts which are based on the one-year preliminary term 4) Premium deficiency reserves are not tax deductible 5) The tax reserve may never be greater than the statutory reserve actually held

Question 41

Situations for which insurers are allowed to unlock GAAP assumptions (3)

Answer 41

1) When a gross premium valuation reveals a premium deficiency 2) When a future projection by calendar year reveals a patterns of profits followed by losses 3) When internal replacement occurs

Question 42

Important aspects of GAAP loss recognition testing (4)

Answer 42

1) Applies to all business in force 2) Timing is not specified but it should be performed periodically and when experience deviates unfavorably from expected 3) Tests should be performed without provisions for adverse deviation 4) Once testing results in corrective action tests must repeat on future valuation dates

Question 43

Important aspects of GAAP DAC recoverability testing (5)

Answer 43

1) Applies to all new business 2) Occurs in the first contract year 3) Testing excludes non-deferrable and overhead costs 4) Test first with provisions for adverse deviation (PAD), if fail remove PAD and test again 5) If testing after removing the PAD fails then move to unlock GAAP assumptions

Question 44

Important aspects of SAP gross premium valuation (4)

Answer 44

1) Should be done when a company has concern about reserve adequacy 2) The valuations are often performed at aggregated levels of lines of business 3) All expenses should be considered 4) Generally believed to be based on assumptions that would produce an adequate reserve under moderately adverse conditions

Question 45

ASOP #21 - Responding to our Assisting Auditors or Examiners with Financial Audits, Reviews, and Examinations Recommended actuarial practices when working on financial audits, reviews, and examinations (6)

Answer 45

1) Scope and planning - the reviewing actuary should assist with the planning for an audit and should understand the relevant aspects of the scope of the audit 2) Discussion between responding actuary and entity - the responding actuary should discuss their responses with the entity being audited 3) The reviewing actuary should disclose to the auditor any relationships with the entity (or its affiliates) that is being audited 4) Communication from responding actuary - the responding actuary should be appropriately responsive to requests from the auditor, examiner, or reviewing actuary 5) Requests for information - the reviewing actuary and responding actuary should cooperate when compiling the needed information a) The reviewing actuary should communicate, preferably in writing, what information is requested and within what time frame b) The responding actuary should consider whether the information requested is readily available, and if not, what other information that would meet the auditor's needs is available or can reasonably be produced c) The responding actuary should be prepared to discuss the data, assumptions, methods, and models used by the entity d) The responding actuary should be prepared to discuss circumstances that had or may have a significant effect on items being audited (e.g., changes in the operating environment or trends in experience) 6) Documentation - the reviewing actuary's documentation should include a summary of the items subject to the audit and the results of the review. The responding actuary should document what information was provided to the auditor.

Question 46

ASOP #28 - Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets Types of statements of actuarial opinion (4)

Answer 46

1) Unqualified opinion a) For NAIC Health Annual Statement, says the reserve amount makes good and sufficient provision for all unpaid claims and other actuarial liabilities, and that obligations are covered even under moderately adverse conditions b) In other circumstances, says the liability and asset amounts are reasonable for the intended purpose 2) Adverse opinion a) For NAIC Health Annual Statement, says the aggregate amount established is not sufficient for the actuary to provide an unqualified opinion b) In other circumstances, says the liabilities fall outside a reasonable range for the specified purpose 3) Qualified opinion - issued when there are certain liabilities or assets that the actuary believes cannot be reasonably estimated or for which the actuary is unable to render an opinion 4) Inconclusive opinion - issued when the actuary cannot reach a conclusion due to deficiencies or limitations in the data, analyses, assumptions, or related information

Question 47

ASOP #28 - Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets Information to include in a statement of actuarial opinion (7)

Answer 47

1) The words "statement of actuarial opinion" (or alternative required wording) in the title 2) The intended users 3) The intended purpose 4) The liabilities being opined upon 5) The states basis of the amounts presented 6) The scope of the analysis underlying the opinion and the review date if different from the date the opinion is signed 7) The type of opinion