Background
Certain contractual obligations of a CCRC or At Home Programs are contingent upon the occurrence, timing, and duration of certain future events. The CCRC contractual resident or At Home Program member typically pays for such future promised services through a combination of advance and periodic fees, typically before the services are provided. Actuarial methods are used to establish the fee structure and to measure the organization’s liabilities for the provision of future promised services.High occupancy, sound pricing, care management, and effective financial management are some of the keys to the successful operation of a CCRC. The ability of a CCRC to attract new contractual residents to fill vacancies will depend on keeping the CCRC competitive with respect to its physical property, its fee schedule, and the general attractiveness of its whole environment. Membership levels, sound pricing, care management, and effective financial management are some of the keys to the successful operation of an At Home Program.
Current Practices
Current actuarial practices for CCRCs are generally now well established. Prior to the release of the first edition of this ASOP and the release of subsequent educational material by various entities, actuaries used differing analytical approaches. These approaches included differing methods to determine closed and open-group contractual resident projections, projected refunds due to refund guarantees, physical property valuations, long-term debt, and other items. While historically differences did exist, these differences have now mostly been eliminated and standardized practices have evolved.Illustrative Capital Expense Charge Development and Physical Property Valuation The physical property, or fixed assets, of a CCRC are a significant asset of the CCRC, and also a significant cost to the contractual residents of the CCRC. In order to provide for equity among generations of contractual residents, it is necessary to allocate an appropriate part of the cost of the use of physical property to current contractual residents as of the valuation date and to the cohort of new contractual residents.
The method described in this appendix for developing and assigning the annual capital expense charge for asset use, determining the asset’s actuarial value, and determining the liability for asset use is one illustrative method designed to provide for equity among generations of contractual residents. (Illustrative formulas for expensing and valuing physical property are presented at the end of this appendix.)
Physical property assets may be valued and depreciated using level, decreasing, or increasing depreciation methodologies based on actuarial principles, the nature of the underlying assets, and other factors.
Capital Expense (Imputed Interest plus Depreciation) Charges
The annual capital expense charge for physical property consists of the imputed interest for the use of the asset, or opportunity cost of using cash resources for purchasing a fixed asset (because it is not an interest-earning investment), plus the change in asset value from one year to the next.b. The annual capital expense charge for the use of an asset is developed for each year using its useful lifetime and is calculated as one of a series of annual amounts. The present value of this series, discounted to the time of acquisition, equals the cost of the asset. This series of annual amounts may be decreasing, level, or increasing.
c. In similar fashion, capital expense charges are developed for physical property assumed to be purchased in future years. It is assumed that each asset will be replaced at the end of its useful lifetime with a new asset. The cost of the new asset is assumed to equal the original cost indexed for inflation. The asset is continually replaced at the end of successive useful lifetimes.
Capital expense charges are developed for the following items:
b. Actuarial Present Value of Future Use of Physical Property Consumed by Current Contractual residents throughout Their Respective Lifetimes—Reflected as a liability on the actuarial balance sheet; and
c. Actuarial Present Value for Future Use of Physical Property Consumed by a Hypothetical Group of Prospective Contractual Residents—Reflected as a liability on the cohort pricing analysis.
Value of Physical Property for Assets Currently in Service
The actuarial value of each asset is the discounted value (without survivorship) of the remaining annual capital expense charges as of the valuation date. The sum of these values for all such assets in service as of the valuation date is reflected as an asset on the actuarial balance sheet.Value of Future Use of Physical Property for Existing Contractual Residents—The actuarial present value of the future use of physical property for existing contractual residents is the discounted value (with survivorship) of the annual capital expense charges for the physical property, and its replacements, allocated to existing contractual residents as of the valuation date.
b. The current actuarial liability for the promised future use of a physical asset (and its replacements) with respect to the existing contractual resident closed group is the sum (for all years) of the part of such capital expense charge in each future year related to the existing closed group, as determined in (a), discounted to the valuation date.
Value of Future Use of Physical Property for the New Entrant Cohort
The actuarial present value of the future use of physical property for the new entrant cohort is the discounted value (with survivorship) of the annual capital expense charges for the physical property, and its replacements, allocated to the new entrant cohort closed group.b. The current actuarial liability for the promised future use of a physical asset (and its replacements) with respect to the new entrant cohort is the sum (for all years) of the part of such capital expense charge in each future year related to the new entrant cohort closed group, as determined in (a), discounted to the valuation date.
Illustrative Formulas for Expensing and Valuing Physical Property
Note: These formulas illustrate allocations on a per contractual resident basis. Other allocation bases such as units, beds, square footage, etc. may be more appropriate for certain assets.A. Relationships of Asset Cost, Asset Value, and Open-Group Annual Expense
| A | = | Actual asset |
| e | = | Expected years of the asset’s useful lifetime. |
| En | = | Annual expense in year n for use of the asset. For simplicity in these illustrations, we assume it is payable at the end of the year. |
| ƒ | = | Assumed annual rate of increase in E. Note that j could be zero. Setting j = k makes it possible to anticipate a smooth progression in annual expense at the time the asset is replaced when its useful lifetime ends. (It is not necessary that En’s form a geometric series. However, in this example the En’s do form such a series.) |
| k | = | Assumed annual rate of increase in replacement cost of A. |
| i | = | Assumed annual discount, or cost of capital, rate. |
| v | = | 1/(1 + i) |
| Ao | = | Acquisition cost of the asset. |
| E1 | Ao * (i – ƒ) | , provided i ≠ j |
| 1 – [v * (1 + ƒ)]e |
Vn = v * En+1 + v2 * En+2 + ..... + ve-n * Ee.
B. Relationship of Closed-Group Liability with Open-Group Expense
| Pn | = | Projected total population at duration n, determined on an open-group basis. Depending on the circumstances, a reasonable approximation for P may be a constant number equaling the current population. |
| Cn | = | Projected surviving population at duration n from a specified closed group. The closed group may be the closed group of current contractual residents or the closed group for a cohort of new contractual residents. If a part of a given CCRC is used for persons not under contract, only the fraction devoted to those under contract should be considered. One way of accomplishing this is to include those not under contract in Pn but not in Cn. |
| Rn+1 | Cn + Cn+1 | , representing the ratio of the projected closed group population to the projected total population. |
| Pn + Pn+1 |
| Ln | = | Liability at duration n for the future use of the asset and its replacements by a specific closed group. |
| Ln | = | v * Rn+1 * En+1 + v2 * Rn+2 * En+2 + ..... + ve-n * Re * Ee + ve-n+1 * Re+1 * Ee+1 + ve-n+2 * Re+2 * Ee+2 + ... + v2e+n * R2e * E2e + ... + until R = 0. |
