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Medical Loss Ratio Rebate
Many carriers experienced favorable claims experience through the third quarter of 2020 due to a deferral of routine or non-emergency care in the first and second quarters of 2020 when the impact of COVID-19 caused some state and local governments to limit medical services as well as the level of social interaction in public areas. This led some carriers to provide early premium credits to their members during 2020. The recent surge in COVID-19 cases during the fourth quarter of 2020 reduces the likelihood and magnitude of state or federal medical loss ratio rebates as of year-end 2020. The net impact of all experience during 2020 needs to be carefully evaluated when determining the appropriate level of rebate liability that needs to be reflected in year-end 2020 financial statements.

Type of Opinion

Depending on the combination of factors impacting a company in a particular state, the level of uncertainty surrounding the estimation of the actuarial assets and liabilities may be sufficient for an appointed actuary to determine that an unqualified opinion may not be appropriate. We recommend that appointed actuaries consider the cumulative impact of the COVID-19 and other market forces identified above when determining the type of opinion to issue for year-end 2020. Depending on the situation, an unqualified opinion may not be appropriate. That is, depending on the level of uncertainty associated with the determination of actuarial assets and liabilities included in the scope of the actuarial opinion, a qualified, inconclusive, or adverse opinion may be indicated.   ASOP No. 28, Statements of Actuarial Opinion Regarding Health Insurance Liabilities and Assets8, provides guidance for health actuaries preparing statements of actuarial opinions with respect to health insurance liabilities and health insurance assets, and it also serves as a blueprint for regulators evaluating financial statements of health carriers.

Minimum Risk-Based Capital Requirements

The establishment of additional reserves, such as a PDR would directly reduce a company’s surplus, which lowers RBC percentage. Companies growing quickly by expanding into other states may be subject to an additional growth charge in the RBC formula, which would lower the RBC percentage.   Companies that are marginally capitalized and face these types of changes to their balance sheet or to the RBC charge, may need additional cash infusions before the end of the year to ensure they meet minimum capital and surplus requirements. Therefore, carriers may want to estimate their year-end RBC percentage and make plans for any needed additional funding as soon as possible to avoid triggering a regulatory event.  It may also be prudent for companies to contact the regulators in their state of domicile to discuss the timing of any additional funding amounts applicable to the 2020 reporting year.

Final Notes

This article provides an overview of some of the considerations that health actuaries working on behalf of carriers and state regulators need to be aware of regarding the preparation and review of Opinions and financial statements for year-end 2020.  Appointed actuaries would be well advised to contact their state regulator to discuss these issues if they are concerned that the combined impact of COVID-19 and market changes in the ACA market may have a significant impact on their year-end actuarial estimates. Regulators should be aware of the interactions of the various market and company-specific factors impacting the calculation of the actuarial assets and liabilities, the variability of the estimates, and the potential impact on the financial health of the carriers under their jurisdiction.   A new actuarial practice note9 provides information relating to the type of documentation that a regulator may expect to be provided in the actuarial memorandum prepared in support of the Opinion, which may help to evaluate the actuarial estimates in the context of financial viability.

Please contact the author at annette@NovaRest.com (775)343-2322 if you want further information about addressing or evaluating any of these issues.

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[8] http://www.actuarialstandardsboard.org/asops/statements-actuarial-opinion-regarding-health-insurance-liabilities-assets/
[9] Actuarial Memorandum Practice Note, American Academy of Actuaries, October 2020 https://www.actuary.org/sites/default/files/2020-10/Academy%20Actuarial%20Memorandum%20Practice%20Note.pdf