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Year-End 2020 Statements of Actuarial Opinion: Considerations for Health Carriers and State Regulators

by: Annette V. James FSA, MAAA, FCA

Estimating and reviewing 2020 year-end accruals to be included in the financial statements of carriers with health business will be challenging for appointed actuaries preparing NAIC1 Statements of Actuarial Opinion (“Opinion”) and for state regulators reviewing these estimates and financial statements. The COVID-19 pandemic has disrupted all aspects of life in the United States and around the world as our social and economic structures have been shaken. The impact on the overall healthcare system and on health insurance is still evolving. Health actuaries preparing year-end financial statement Opinions will need to consider many factors when determining the net impact of the pandemic on the items included in the scope of the Opinion.

Additionally, the ACA market has experienced low premium increases and significant growth over the last two years. A new study2 by the Kaiser Family Foundation indicated that on average, 2021 benchmark premiums in the ACA Marketplace declined by more than 2% across the country compared to 2020 benchmark premiums, and 30 insurers are entering the Marketplace in 2021 across 20 states with another 61 expanding their service area in states that they already serve.

The impact of either one of these events on year-end financials could be significant; the combination may be even more so, and the net impact depends on factors affecting the state, the market, as well as company-specific factors such as business mix and surplus position. To make prudent decisions in the best interest of the consumers of health insurance products in their state, regulators will need to understand the many moving parts of actuarial estimates and their impact on the financial health of the companies under their jurisdiction.

The following provides a high-level discussion of some of the potential impacts on actuarial liabilities and assets included in the Opinion, the type of Opinion issued, and the minimum risk-based capital (“RBC”) requirements.

Impact on Actuarial Liabilities and Assets

Unpaid Claim Reserves
Due to the unusual claim and billing patterns experienced due to the COVID-19 pandemic, appointed actuaries may not be able to rely on historical claims payment patterns to calculate incurred claims.  While the impact of the pandemic in the second quarter of 2020 has generally subsided, the surge in COVID-19 cases and related hospitalizations in many states during the fourth quarter of 2020 will make it particularly difficult to estimate the level of incurred but unreported claims as of the end of the calendar year.  The impact on year-end unpaid claims estimates would depend on the recent incidence of hospitalized COVID-19 cases in the state, the carrier’s mix of business, and the extent to which the state enacted “stay-at home” or other policies, which would tend to suppress utilization of other more routine medical services. Appointed actuaries would be well served to utilize all possible sources of internal data related to claims processing and lags, as well as hospitalization pre-certification and admission data, broken down by ICU/non-ICU admissions to inform their assumptions related to the calculation of unpaid claims.  It may be prudent for the appointed actuary to use different approaches to the calculation of incurred claims, perform sensitivity testing to determine a reasonable range of the estimate, and carefully consider the appropriate provision for adverse deviation or margin that should be used.  The impact of certain risk-sharing arrangements with providers may also need to be considered if the carrier’s obligation is increased in the event of the insolvency of such a provider.  In some cases, COVID-19 has increased the risk of insolvency of certain providers, due to the loss of revenue when medical services were either deferred or forgone, particularly in the second and fourth quarters of 2020.  If the company’s use of provider risk-sharing arrangements is material, the appointed actuary should consider the likelihood of such providers’ insolvency and may establish a separate liability to reflect the additional obligation that may become due or incorporate such additional obligation into the calculation of the carrier’s unpaid claims liability.  ASOP No 5 Incurred Health and Disability Claims3, provides authoritative guidance for actuaries calculating and reviewing incurred health insurance claims.

Additionally, many states saw an increase in the number of health carriers providing coverage, in the individual ACA market. Often, companies entering new states may experience delays in claims payments due to the logistics of establishing new provider networks, expanding, or establishing their claims processing systems, or working with the claims systems of third parties in rental network situations. These issues may be exacerbated with the influx of COVID-19 cases during 2020 and again at the end of 2020.

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[1] National Association of Insurance Commissioners
[2] Kaiser Family Foundation “Insurer Participation on the ACA Marketplaces, 2014-2021”, November 23, 2020.
[3] http://www.actuarialstandardsboard.org/asops/incurred-health-and-disability-claims_186/

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