Official Commentary on ASOP 5
(INCURRED HEALTH AND DISABILITY CLAIMS)
(all-in-one)

Introduction to the Official Commentary on ASOP 5

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.

Official Commentary on Section 1
Purpose, Scope, Cross References, and Effective Date

ASOP 5 | Commentary Section 1.2 | COMMENT ON SECTION 1.2

Section 1.2, Scope

Comment	Response
One commentator suggested identifying “principal” as coming from ASOP No. 41, Actuarial Communications, and as defined in the Code of Professional Conduct.	The reviewers believe the context makes this reference clear and made no change.
One commentator suggested adding “self-funded employer plans” to the list of risk-bearing entities in section 1.2.	The reviewers agree and made the change.
One commentator suggested removing “regulatory agencies” from the list of risk-bearing entities in section 1.2.	The reviewers changed this item to “government agencies” in order to clarify the meaning.
One commentator suggested moving the list of risk-bearing entities to the definition section.	The reviewers believe the list is appropriately included in section 1.2.
One commentator suggested removing the words “insured or non-insured” in section 1.2.	The reviewers agree and made the change.

Official Commentary on Section 2
Definitions

ASOP 5 | Commentary Section 2.3 | COMMENT ON SECTION 2.3

Section 2.3, Carve-Outs

Comment	Response
One commentator suggested moving the definition of “carve-outs” to section 3.29..	The reviewers believe the definition is appropriately included in section 2.3 and made no change.
One commentator suggested that the definition of “carve-outs” implies that dental services are always a carve-out.	The reviewers added the word “contractually” to clarify that carve-outs are defined in the contract and not globally.

ASOP 5 | Commentary Section 2.7 | COMMENT ON SECTION 2.7

Section 2.7, Health Benefit Plan

Comment	Response
One commentator suggested including “insurance policy” in the definition of “health benefit plan” because policies are referred to later on.	The reviewers agree and made the change.

ASOP 5 | Commentary Section 2.8 | COMMENT ON SECTION 2.8

Section 2.8, Incurred Claims (now section 2.9)

Comment	Response
Two commentators suggested clarifying the difference between incurred claims in the two definitions discussed.	The reviewers agree and made clarifying changes.
One commentator was concerned that the definition of “incurred claims” could be interpreted not to apply to the unpaid claim liabilities booked for balance sheet and income statement purposes.	The reviewers agree and made clarifying changes to the definition.

ASOP 5 | Commentary Section 2.11 | COMMENT ON SECTION 2.11

Section 2.11, Providers (now section 2.12)

Comment	Response
Two commentators suggested using the language “including but not limited to.”	The reviewers agree and made the change.
One commentator suggested expanding the list of individuals, groups, or organizations.	The reviewers agree and added two more examples.

ASOP 5 | Commentary Section 2.13 | COMMENT ON SECTION 2.13

Section 2.13, Tabular Method (now section 2.14)

Comment	Response
One commentator suggested clarifying the definition by adding the word “seriatim.”	The reviewers agree and made the change.
One commentator suggested clarifying the meaning of “long-term claims.”	The reviewers agree and added examples.

ASOP 5 | Commentary Section 2.14 | COMMENT ON SECTION 2.14

Section 2.14, Time Value of Money (now section 2.15)

Comment	Response
One commentator suggested changing “different...than” to “different...from.”	The reviewers believe the current language is clearer and made no change.

ASOP 5 | Commentary Section 2.15 | COMMENT ON SECTION 2.15

Section 2.15, Trends (now section 2.16)

Comment	Response
One commentator suggested being more specific about the “elements” affecting incurred claims.	The reviewers agree and added examples.

ASOP 5 | Commentary Section 2.16 | COMMENT ON SECTION 2.16

Section 2.16, Unpaid Claims Liability(now section 2.17)

Comment	Response
One commentator suggested adding a fourth category for future benefits paid on a claim.	The reviewers agree that this category should be included and added it to the definition of “incurred claims” in section 2.9.
One commentator requested clarification of the meaning of “appropriate period.”	The reviewers agree this would be helpful and made clarifying changes.
One commentator observed a conflict related to “processed claims” and “paid claims” between the definitions of the “development method” and “unpaid claims liability.”	The reviewers agree and made changes to both definitions in this section and section 2.5.

Official Commentary on Section 3
Analysis of Issues and Recommended Practices

ASOP 5 | Commentary Section 3.2 | COMMENT ON SECTION 3.2

Section 3.2, Considerations for Estimating Incurred Claims

Comment	Response
One commentator suggested changing “management” to “principal.”	The reviewers agree that reliable sources of information extend beyond management and changed “management” to “another party.”

Section 3.2.1, Health Benefit Plan Provisions and Business Practices

Comment	Response
One commentator suggested clarifying the relationship between “plan provisions” and “business practices.”	The reviewers agree and made a clarifying change by adding the word “related.”
One commentator suggested adding “benefit periods” and “lifetime maximums” to the list.	The reviewers believed these items are generically covered by “maximum allowances” and did not include them.
One commentator suggested that a high standard is being set for the actuary regarding identifying differences between business practices and plan provisions.	The reviewers removed the language related to identifying differences between business practices and plan provisions, and clarified that “reasonable effort” is the appropriate standard to apply to the understanding of changes in business practices.

Section 3.2.3, Behavior of Claimants

Comment	Response
One commentator suggested recognizing the difference between observed behavior and assumed behavior.	The reviewers believe this distinction is covered by “reasonably available information” and made no change.

Section 3.2.4, Organizational Claims Administration

Comment	Response
One commentator suggested changing “electronic submission of claims” to “method of claims submission.”	The reviewers believe the specific example is appropriate and made no change.

Section 3.2.8, Legislative Requirements

Comment	Response
One commentator suggested adding “for example” to the beginning of this list.	The reviewers agree and made the change.
One commentator suggested referring to developing regulatory provisions regarding estimation of incurred claims for certain long-term products.	The reviewers note, as described in section 1.2, that this standard does not address interpretation of statutory or generally accepted accounting principles, and added “methods used to estimate incurred claims” to the list of example influences of government mandates.

Section 3.2.10, Special Considerations for Long-Term Products

Comment	Response
Several commentators suggested reversing the order of the sentences in this section.	The reviewers agree and made the change.

ASOP 5 | Commentary Section 3.3 | COMMENT ON SECTION 3.3

Section 3.3.1, Unpaid Claims Liability

Comment	Response
One commentator suggested removing “purpose or use of the unpaid claim estimate” from the list.	The reviewers believe the current discussion is appropriate and did not make this change because different estimates may be appropriate depending on the intended use.
One commentator suggested adding “as appropriate” after “using incurral and processing dates.”	The reviewers agree this improves clarity and made the change.

Section 3.3.1(f), Consistency of Bases (now titled “Consistency of Assumptions and Methodology”)

Comment	Response
One commentator suggesting adding a caveat to address situations when, for example, a consulting actuary’s review is limited to the unpaid claims liabilities reserve.	The reviewers believe the use of consistent assumptions and methodology are also appropriate in this situation and made no change.
One commentator suggested clarifying the meaning of “bases” and “related liabilities and reserves.”	To improve clarity of meaning, the reviewers changed consistent basis to consistent assumptions and methodology, and included the example of claim settlement expense reserves.

Section 3.3.2, Categories of Incurred Claims

Comment	Response
Several commentators suggested adding detail specific to certain estimation methods, for example considerations regarding categories of incurred claims that would be specific to the development method.	The reviewers note that this section is intentionally broad because of the variety of estimation methods in use, and made changes intended to clarify this point.

Section 3.3.4, Large Claims

Comment	Response
One commentator suggested noting that large claims could result in an understatement.	The reviewers believe overstatement is an appropriate example in this context and did not make this change.

Section 3.3.5, Coordination of Benefits (COB), Subrogation, and Government Programs

Comment	Response
One commentator noted that section 3.21. uses “reasonable effort.”	The reviewers agree that there is not intended to be a difference in the meaning and added “reasonable effort.”

Section 3.3.6, Provider Contractual Arrangements

Comment	Response
Two commentators requested clarity on the definitions of “material” and “disclosure.”	The reviewers note that materiality is defined in ASOP No. 1, Introductory Standard of Practice, and that section 4 of this standard refers to disclosure in an actuarial communication.

ASOP 5 | Commentary Section 3.4 | COMMENT ON SECTION 3.4

Section 3.4, Methods Used for Estimating Incurred Claims

Comment	Response
One commentator expressed concern that this section does not address developing regulatory provisions (for statutory reporting) regarding estimation of incurred claims for certain long-term products.	The reviewers note, as described in section 1.2, that this standard does not address interpretation of statutory or generally accepted accounting principles, and believes that the description of the tabular method is broad enough to include required adjustments, such as required use of company experience.

Section 3.4.2, Tabular Method (now section 3.43.)

Comment	Response
One commentator suggested adding “benefit periods or lifetime maximums” to the list of factors.	The reviewers added language to clarify that this list is not intended to be exhaustive.
One commentator noted that “long-term disability” is mentioned, but not “long-term care,” although they are similar.	The reviewers agree and removed this language.
Response	The reviewers agree and made the change.
One commentator suggested using “reported/unreported” instead of “known/unknown.”	The reviewers agree and made the change.

Section 3.4.3, Projection Method (now section 3.42.)

Comment	Response
One commentator questioned the inclusion of the specific example of pharmacy claims.	The reviewers believe it is common practice to rely on pharmacy claims because, for example, they are believed to complete more quickly than other claims, and they are an indicator of morbidity. The reviewers made no change.

ASOP 5 | Commentary Section 3.5 | COMMENT ON SECTION 3.5

Section 3.5, Follow-Up Studies

Comment	Response
One commentator questioned the removal of the requirement to perform testing of the reserve methodology.	The reviewers believe the language removed was educational only, and does not impact any obligation to perform follow-up studies that may exist.

Official Commentary on Section 4
Communications and Disclosures

ASOP 5 | Commentary Section 4.1 | COMMENT ON SECTION 4.1

Section 4.1, Actuarial Communication

Comment	Response
In subsection (a), one commentator suggested referring to a range of incurral and processing dates.	The reviewers believe the current language is adequate and would include date ranges.
One commentator suggested combining the disclosure items regarding variation of actual results compared to estimates (c) and risk of provider insolvency (f).	The reviewers believe these are distinct types of risks and made no change.
In section (d), one commentator requested clarification of the need for documentation of follow-up studies.	The reviewers changed the wording of this item to improve clarity.

ASOP 5 | Commentary Section 4.2 | COMMENT ON SECTION 4.2

Section 4.2, Changes in Assumptions, Procedures, Methods, or Models (now section 4.1(g))

Comment	Response
One commentator suggested defining “material impact.”	The reviewers note that materiality is defined in ASOP No. 1 and made no change.
One commentator suggested changing the structure of the sentences in this paragraph to improve clarity.	The reviewers agree, moved the section into 4.1(g), and made clarifying changes.