Froogled By:: Elias Makere, FSA, MAAA
Last Froogled:: 8/27/2025

ASOP 5 | TRANSMITTAL MEMORANDUM

TO:	Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Incurred Health and Disability Claims
FROM:	Actuarial Standards Board (ASB)
SUBJECT:	Actuarial Standard of Practice (ASOP) No. 5

This document contains a final revision of ASOP No. 5, Incurred Health and Disability Claims.

Background

ASOP No. 5, then titled Incurred Health Claim Liabilities, was adopted in 1991. Under direction from the ASB and its Health Committee, a task force revised ASOP No. 5, retitled Incurred Health and Disability Claims, which was adopted in 2000 and updated for deviation language in 2011.

This revision of ASOP No. 5 reflects a number of changes to other standards that have been made since the 2000 revision, including updating the ASOP, where appropriate, to incorporate reference to new standards that have been issued since the 2000 revision, eliminate guidance that does not conform to current ASOP practices regarding references to other standards of practice, and make consistent the definitions used in the standard with those of other standards of practice.

In addition, this revision of ASOP No. 5 has been updated to reflect relevant legal, regulatory, and practice developments that have occurred since the 2000 revision.

Exposure Draft

The exposure draft was released in December 2015 with a comment deadline of April 30, 2016.

Eleven letters were received. The task force considered all comments received and made appropriate changes where needed. For a summary of the substantive issues contained in the comment letters on the exposure draft and the responses, please see appendix 2.

Key Changes

The most significant changes from the existing ASOP No. 5 are as follows:

1. revising certain definitions, and adding others for clarity and for consistency with other standards;

2. explicitly addressing certain considerations in estimating and analyzing incurred claims, including behavior of claimants, claim seasonality, credibility, payments and recoveries under government programs, and the purpose and intended use of the unpaid claim estimate;

3. expanding the guidance regarding provider contractual arrangements;

4. including, in section 3.4 regarding methods for estimating incurred claims, explicit discussion of projection methods as well as an updated discussion of other methods commonly in use;

5. making the standard consistent with the revised guidance in ASOP No.1, Introductory Actuarial Standard of Practice, regarding use of the language “should consider”; and

6. adding a requirement to disclose any explicit provision for adverse deviation.

The ASB voted in March 2017 to adopt this standard.

ASOP 5 | INTRO TO THE ASOP COMMENTARY

The exposure draft of this revision of ASOP No. 5, Incurred Health and Disability Claims, was issued in December 2015 with a comment deadline of April 30, 2016. Eleven comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The task force carefully considered all comments received, and the Health Committee and ASB reviewed (and modified, where appropriate) the proposed changes.

Summarized below are the significant issues and questions contained in the comment letters and the responses to each.

The term “reviewers” includes the task force, Health Committee, and the ASB. Unless otherwise noted, the section numbers and titles used below refer to those in the exposure draft.

TRANSMITTAL MEMORANDUM

Question 1: Is it appropriate to change the language in the first sentence of section 3.2 from “should consider” to “should include”?

Comment	Response
Several commentators supported the change, while several other commentators stated that the use of “should include” is inconsistent with the use of “should consider” in the remainder of the section.	The reviewers changed “should include” to “should consider” and added language to clarify the meaning.

Question 2: Is the guidance in section 3.36. on “provider contractual arrangements” too detailed?

Comment	Response
One commentator considered certain provider payments discussed in this standard to be “nonclaim benefit expenses” instead of “claims” and recommended changing the name of the ASOP accordingly. Another commentator believed that the discussion of example provider arrangements is more detail than is necessary. The majority of commentators agreed that the level of detail is appropriate.	The reviewers believe that the payments referenced are consistent with the definition of “incurred claims” in the standard and made no change.

Question 3: Is the required disclosure on “provider insolvency risk,” as discussed in section 3.36., appropriate?

Comment	Response
Several commentators agreed that the required disclosure is appropriate. One commentator suggested that this disclosure is unnecessary because it would result in ubiquitous disclosure.	The reviewers believe the standard of materiality would apply in this situation and made no change.
Two commentators suggested that the actuary is not required to assess the likelihood of provider insolvency.	The reviewers agree and added clarifying language.

Question 4: Which common methods, if any, are appropriate to include in section 3.4?

Comment	Response
Most commentators agreed that the list of common methods is appropriate. One commentator suggested that the following sentence be deleted: “Because no single method is necessarily better in all cases, the actuary should consider the use of more than one method.”	The reviewers believe this sentence sets appropriate context and made no change.
One commentator suggested including the loss ratio method.	The reviewers believe this is covered by the discussion of projection methods and made no change.

Question 5: Are the methods included in section 3.4 described in appropriate detail?

Comment	Response
Several commentators believe the level of detail is appropriate. One commentator suggested changes to the discussion of projecting incurred claims by category of service.	The reviewers agree and deleted this language because it is already discussed in section 3.32..
One commentator suggested clarifying the definition of “long-term claim.”	The reviewers agree and made corresponding changes.
One commentator suggested that long-term disability should not be mentioned without also mentioning long-term care.	The reviewers agree and made corresponding changes.
One commentator suggested that the reference to evaluating ratios in section 3.41. is too specific.	The reviewers added language clarifying that this guidance is appropriate considering the particular drawbacks of the development method.
One commentator suggested focusing on reasonability of results in the discussion of the development method.	The reviewers agree and made corresponding changes.
One commentator suggested that the methods used for estimating incurred claims should be defined in section 3 instead of in section 2.	The reviewers believe it is appropriate to include these definitions in section 2 and made no change.
One commentator suggested using a more specific description of the development method.	The reviewers clarified that the development method is used to estimate incurred claims rather than the unprocessed portion of incurred claims.
One commentator suggested removing language in section 3.41. that is redundant because it is discussed in detail in section 3.2.	The reviewers agree and removed the language.
One commentator suggested moving language regarding morbidity shifts from section 3.43. to section 3.2.	The reviewers believe this language is appropriately specific to the projection method and made no change.
One commentator suggested moving section 3.43., Projection Methods, immediately after section 3.41., Development Method, because they are related.	The reviewers agree and made this change.

Question 6: Is the requirement to disclose explicit provision for adverse deviation (PAD), as discussed in section 4.1, appropriate?

Comment	Response
One commentator questioned the motivation for changing language from “moderately adverse margin for uncertainty” to “provision for adverse deviation.”	The reviewers retained the “provision for adverse deviation” language and revised this section to include a discussion of “moderately adverse” deviation.

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