EVERY ACTUARIAL STANDARD OF PRACTICE
(ASOP)
{in one very large webpage}

Introduction

ASOP 1 | TRANSMITTAL MEMORANDUM

TO:	Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in the Introductory Actuarial Standard of Practice
FROM:	Actuarial Standards Board (ASB)
SUBJECT:	Actuarial Standard of Practice No. 1

This document contains the final version of a revision of the Introduction to ASOPs, now titled ASOP No. 1, Introductory Actuarial Standard of Practice.

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Background

This Introductory ASOP is a revision of the Introduction to the Actuarial Standards of Practice. The Introduction was adopted in 2004 to replace a Preface to the standards that was adopted in 1989. The Introduction was intended to offer actuaries guidance on the ASB’s operations, the content and format of standards, and the ASB’s intent with respect to certain terms that appear frequently in the text of the standards themselves.

The Introduction was updated in October 2008 to make clear that the ASB, in promulgating ASOPs, seeks to define an appropriate level of practice (rather than simply codifying current practices), to remove references to “prescribed statements of actuarial opinion” in light of revisions made to the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States and to conform the provisions on deviations from the ASOPs to the deviation provisions of ASOP No. 41, Actuarial Communications, in accordance with the ASB’s project to standardize the “deviation” provisions in all ASOPs. The ASB received a number of comments on the Introduction at the time of this 2008 revision and concluded that further review would be appropriate. The revision is a result of that review.

In addition, to reinforce that the Introductory ASOP contains guidance, it has been numbered as ASOP No. 1. The previous ASOP No. 1, Nonguaranteed Charges or Benefits for Life Insurance Policies and Annuity Contracts, has been renumbered as ASOP No. 2. The previous ASOP No. 2, Recommendations for Actuarial Communications Related to Statements of Financial Accounting Standards Nos. 87 and 88, was repealed in March 2011. The sole reference to ASOP No. 1, which appears in ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation, has been updated to reflect this change.

Exposure Draft

The exposure draft of this ASOP was approved for exposure in December 2011 with a comment deadline of May 31, 2012. Thirteen comment letters were received and considered in making clarifications that were reflected in this final ASOP. For a summary of the issues contained in these comment letters, please see appendix 2. In general, the suggestions helped improve the clarity of the standard but did not result in substantive changes to the standard.

Key Changes

Many comments were received with respect to the terms “must,” “should,” and “should consider.” Some commentators objected to the concept that failure to comply with a “should” statement constitutes a deviation from the guidance in the ASOP and hence triggers disclosures. These commentators indicated that failure to follow a “should” statement had not previously been understood to be a deviation requiring disclosure, so that ASOPs were in effect being retroactively changed. Other commentators indicated the distinction between the two terms “must” and “should” was not clear.

To assist in reviewing these and other comments, the General Committee analyzed the use of the terms “should,” “should consider,” and “must” in the various ASOPs. The General Committee concluded that the use of these terms in this ASOP No. 1 would not retroactively change the intended meaning of the terms as used in the various ASOPs, and so the Introductory ASOP reaffirms that a failure to follow a “should” statement constitutes a deviation from the guidance.

In order to better contrast and clarify the meaning of “must” vs. “should,” the definitions have been combined into a single “must/should” discussion that defines each term and highlights the distinction between the terms.

The General Committee concluded that a definition of “should consider” is not needed. The terms “must” and “should” are generally followed by an action (for example, “disclose” or “document”). When the term “should consider” is used, the action required to be performed (or to be disclosed as a deviation if not performed) is to consider something. Thus, there is no need to separately define “should consider.” The revised ASOP makes clear that if the actuary considers something the ASOP indicates he or she should consider, but determines that the item being considered is inappropriate or impractical, the actuary has complied with the guidance and there is no deviation to be disclosed.

The final version of this Introductory ASOP contains several other clarifications but none are considered substantial. Notable changes are the addition of a definition of “deviation” and clarifying changes to the definitions of a number of other items, largely as a result of comments received.

The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure draft.



The ASB voted in March 2013 to adopt this standard.

ASOP 1 | §0.1 | AUTHORS

General Committee of the ASB

Michael S. Abroe, Chairperson

Maria M. Sarli, Vice-Chairperson

Albert J. Beer

Paul Braithwaite

Raymond Brouillette

Charles Cook

Mary Simmons

Martin M. Simons

Thomas D. Snook

Barbara L. Snyder

James E. Turpin

Actuarial Standards Board

Robert G. Meilander, Chairperson

Beth E. Fitzgerald

Alan D. Ford

Patrick J. Grannan

Stephen G. Kellison

Thomas D. Levy

Patricia E. Matson

James J. Murphy

James F. Verlautz

The ASB establishes and improves standards of actuarial practice. These ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASB’s goal is to set standards for appropriate practice for the U.S.

Section 1
Purpose, Scope, Cross References, and Effective Date

ASOP 1 | §1.0 | OVERVIEW

The Actuarial Standards Board (ASB) promulgates actuarial standards of practice (ASOPs) for use by actuaries when rendering actuarial services in the United States. The ASB is vested by the U.S.-based actuarial organizations¹ with the responsibility for promulgating ASOPs for actuaries rendering actuarial services in the United States. Each of these organizations requires its members, through its Code of Professional Conduct² (Code), to satisfy applicable ASOPs when rendering actuarial services in the United States.

This Introductory ASOP sets forth principles that have been broadly applicable to the work of the ASB since its inception, and carries the same weight and authority as other ASOPs. Any Actuarial Compliance Guidelines promulgated or republished by the ASB that have not been repealed or superseded carry the same weight as ASOPs.

The ASB establishes and improves standards of actuarial practice. These ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASB’s goal is to set standards for appropriate practice for the U.S. The ASB promulgates ASOPs through a notice and comment process described in the ASB Procedures Manual. The ASB has exclusive authority in the United States to determine whether an ASOP is needed in a particular actuarial practice area, to promulgate ASOPs, and to amend or repeal ASOPs. The ASB is the final authority for determining the content of ASOPs.

ASOPs are binding on members of the U.S.-based actuarial organizations when rendering actuarial services in the U.S. While these ASOPs are binding, they are not the only considerations that affect an actuary’s work. Other considerations may include legal and regulatory requirements, professional requirements promulgated by employers or actuarial organizations, evolving actuarial practice, and the actuary’s own professional judgment informed by the nature of the engagement. The ASOPs provide a basic framework that is intended to accommodate these additional considerations.

This introductory standard is effective for all actuarial services performed on or after June 1, 2013.

Notes

¹ The American Academy of Actuaries (Academy), the American Society of Pension Professionals and Actuaries, the Casualty Actuarial Society, the Conference of Consulting Actuaries, and the Society of Actuaries.

² These organizations adopted the Code of Professional Conduct effective January 1, 2001.

Section 2
Definitions

ASOP 1 | §2.0 | INTRO TO SECTION 2

Each ASOP includes a list of definitions of certain terms used within it. With the exception of this Introductory ASOP, those terms are defined only for use in that particular ASOP, and the definitions can and do differ among ASOPs, reflecting different uses of language in various segments of the profession. Definitions and discussions included in this Introductory ASOP are intended to apply to all other ASOPs if the term is used in such ASOPs, unless the ASOP includes a specific definition of the term.

ASOPs frequently use terms that, while not defined within them, are integral to an informed reading of the ASOPs. Where terms are not defined or discussed within the ASOPs, the actuary is expected to interpret a term in a straight-forward manner, consistent with the common usage of the term. If an actuary has any questions about the meaning of a specific term, the actuary should consult the Actuarial Board for Counseling and Discipline (ABCD) for guidance.

Following are some common terms used in the ASOPs:

ASOP 1 | §2.1 | TERMS OF CONSTRUCTION

a. Must/Should —

The words “must” and “should” are used to provide guidance in the ASOPs. “Must” as used in the ASOPs means that the ASB does not anticipate that the actuary will have any reasonable alternative but to follow a particular course of action. In contrast, the word “should” indicates what is normally the appropriate practice for an actuary to follow when rendering actuarial services. Situations may arise where the actuary applies professional judgment and concludes that complying with this practice would be inappropriate, given the nature and purpose of the assignment and the principal’s needs, or that under the circumstances it would not be reasonable or practical to follow the practice.

Failure to follow a course of action denoted by either the term “must” or “should” constitutes a deviation from the guidance of the ASOP. In either event, the actuary is directed to ASOP No. 41, Actuarial Communications.

The terms “must” and “should” are generally followed by a verb or phrase denoting action(s), such as “disclose,” “document,” “consider,” or “take into account.” For example, the phrase “should consider” is often used to suggest potential courses of action. If, after consideration, in the actuary’s professional judgment an action is not appropriate, the action is not required and failure to take this action is not a deviation from the guidance in the standard.

b. May —

“May” as used in the ASOPs means that the course of action described is one that would be considered reasonable and appropriate in many circumstances. “May” in ASOPs is often used when providing examples (for example, factors the actuary may consider; methods that may be appropriate). It is not intended to indicate that a course of action is reasonable and appropriate in all circumstances, nor to imply that alternative courses of action are impermissible.

ASOP 1 | §2.2 | ACTUARIAL SERVICES

Professional services provided to a principal by an individual acting in the capacity of an actuary. Such services include the rendering of advice, recommendations, findings or opinions based on actuarial considerations.

ASOP 1 | §2.3 | ACTUARIAL SOUNDNESS

The phrase “actuarial soundness” has different meanings in different contexts and might be dictated or imposed by an outside entity. In rendering actuarial services, if the actuary identifies the process or result as “actuarially sound,” the actuary should define the meaning of “actuarially sound” in that context.

ASOP 1 | §2.4 | DEVIATION

The act of departing from the guidance of an ASOP.

ASOP 1 | §2.5 | KNOWN

ASOPs frequently refer to circumstances, factors, practices of the principal, or other items that are known to the actuary. In many cases, the actuary must rely upon the principal and others acting on the principal’s behalf to supply relevant information. Unless an ASOP clearly indicates otherwise, “known” means that the actuary had actual knowledge of the item in question at the time the actuary rendered actuarial services.

ASOP 1 | §2.6 | MATERIALITY

“Materiality” is a consideration in many aspects of the actuary’s work. An item or a combination of related items is material if its omission or misstatement could influence a decision of an intended user. When evaluating materiality, the actuary should consider the purposes of the actuary’s work and how the actuary anticipates it will be used by intended users. The actuary should evaluate materiality of the various aspects of the task using professional judgment and any applicable law (statutes, regulations, and other legally binding authority), standard, or guideline. In some circumstances, materiality will be determined by an external user, such as an auditor, based on information not known to the actuary. The guidance in ASOPs need not be applied to immaterial items.

ASOP 1 | §2.7 | PRACTICAL OR PRACTICABLE

ASOPs frequently call upon actuaries to undertake certain inquiries, perform certain analytical tests, or make disclosures if it is “practical” or “practicable” to do so. These terms are intended to suggest that all possible steps need not always be taken to complete an assignment. A professional assignment frequently requires the actuary to adopt a course of action that is likely to yield an appropriate result without being unnecessarily time-consuming, elaborate, or costly relative to the principal’s needs. Thus, it is appropriate for the actuary, exercising professional judgment, to decide that the circumstances surrounding a particular assignment are such that it would not be necessary to undertake a particular task.

Notes

(Note: ASOPs commonly use “practical” and “practicable” interchangeably.)

ASOP 1 | §2.8 | PRINCIPAL

A client or employer of the actuary.

ASOP 1 | §2.9 | PROFESSIONAL JUDGMENT

Actuaries bring to their assignments not only highly specialized training, but also the broader knowledge and understanding that come from experience. For example, the ASOPs frequently call upon actuaries to apply both training and experience to their professional assignments, recognizing that reasonable differences may arise when actuaries project the effect of uncertain events.

ASOP 1 | §2.10 | REASONABLE

In many instances, the ASOPs call for the actuary to take “reasonable” steps, make “reasonable” inquiries, select “reasonable” assumptions or methods, or otherwise exercise professional judgment to produce a “reasonable” result when rendering actuarial services. The intent is to call upon the actuary to exercise the level of care and diligence that, in the actuary’s professional judgment, is necessary to complete the assignment in an appropriate manner. Because actuarial practice commonly involves the estimation of uncertain events, there will often be a range of reasonable methods and assumptions, and two actuaries could follow a particular ASOP, both using reasonable methods and assumptions, and reach different but reasonable results.

ASOP 1 | §2.11 | RELIANCE

Actuaries frequently rely upon others for information and professional judgments that are pertinent to an assignment. Similarly, actuaries often rely upon others to perform some component of an actuarial analysis. Accordingly, some ASOPs permit the actuary to rely in good faith upon such individuals, subject to appropriate disclosure of such reliance, if required by applicable ASOPs (for example, ASOP Nos. 23, Data Quality, and 41).

ASOP 1 | §2.12 | SIGNIFICANCE/SIGNIFICANT

Significance can have different meanings. A result may be deemed to be statistically significant if it is determined that the probability that the result was produced by random chance is small. An event may be described as significant if the likelihood of its occurrence is more than remote. In addition, a result may be significant because it is of consequence. Other uses may be encountered in actuarial practice. The actuary should exercise care in interpreting or using these words.

Section 3
Analysis of Issues and Recommended Practices

ASOP 1 | §3.1 | THE PURPOSE OF ASOPS

ASOPs identify what should be considered, done, documented, and disclosed when rendering actuarial services.

3.1.1 The ASB promulgates standards for appropriate actuarial practice. In the course of developing or revising an ASOP, the ASB seeks the input of the actuarial profession and other interested parties. This process of exposure is intended to seek input on the effect that the proposed ASOP would have on the level of practice.

3.1.2 The ASOPs are not intended to shift the burden of proof or the burden of production during litigation, and deviation from one or more provisions of an ASOP should not, in and of itself, be presumed to be malpractice. ASOPs are intended for use by actuaries who are qualified to make use of them by virtue of having the necessary education and experience to understand and apply them (see Precept 2, Qualification Standards, of the Code). Other individuals should consider obtaining the advice of a qualified actuary before making use of, or otherwise relying upon, ASOPs.

3.1.3 The ASOPs are intended to provide guidance for dealing with commonly encountered situations. Actuaries in professional practice may also have to handle new or non-routine situations not anticipated by the ASOPs. In all situations, the actuary should exercise professional judgment in rendering actuarial services.

3.1.4 The ASOPs are principles-based and do not attempt to dictate every step and decision in an actuarial assignment. Generally, ASOPs are not narrowly prescriptive and neither dictate a single approach nor mandate a particular outcome. Rather, ASOPs provide the actuary with an analytical framework for exercising professional judgment, and identify factors that the actuary typically should consider when rendering a particular type of actuarial service. The ASOPs allow for the actuary to use professional judgment when selecting methods and assumptions, conducting an analysis, and reaching a conclusion, and recognize that actuaries can reasonably reach different conclusions when faced with the same facts.

3.1.5 There are situations where applicable law (statutes, regulations, and other legally binding authority) may require the actuary to deviate from the guidance of an ASOP. Where requirements of law conflict with the guidance of an ASOP, the requirements of law shall govern. The ASOPs provide guidance on this and other situations where the actuary deviates from the guidance of an ASOP (see section 4.5).

3.1.6 Unlike the ASOPs, which are binding upon actuaries, other actuarial literature provides information that an actuary may choose, but is not required, to consider when rendering actuarial services. For example, practice notes published by the Academy describe various methods actuaries may use, but do not establish standards of practice and are not binding upon actuaries. Similarly, research papers, learned treatises, study notes, actuarial textbooks, journal articles, and presentations at actuarial meetings can be informative, keeping the actuary abreast of developments as actuarial science evolves, but do not establish binding requirements upon the actuary.

3.1.7 Each ASOP has a specified effective date. Prior to that date, exposure drafts of the ASOP, and the ASOP itself from the date of its publication to its effective date, form part of the literature of the actuarial profession; actuaries may look to them at their discretion for advisory guidance. An ASOP is not binding until the effective date of the ASOP. Unless specified otherwise, in the case of a revision to an existing ASOP, the existing ASOP is binding until the effective date of the revised ASOP.

ASOP 1 | §3.2 | THE FORMAT OF ASOPS

Each ASOP document includes

(1) a transmittal memorandum,

(2) the ASOP itself, and

(3) one or more supporting appendices.³

The transmittal memorandum and the appendices are not part of the ASOP and are nonbinding, but may be useful to the actuary in interpreting the standard.

Notes

³ With respect to how the ASOP document is organized, the current ASOP format differs from that of some earlier ASOPs, but all ASOP documents contain similar content, as described in the appendix 1 to this Introductory ASOP.

Section 4
Communications and Disclosures

ASOP 1 | §4.1 | ASOPS ARE BINDING

ASOPs are binding upon actuaries.

Failure to comply with an applicable ASOP results in a breach of the Code. Such breaches subject the actuary to the profession’s counseling and discipline processes.

ASOP 1 | §4.2 | GOOD FAITH APPROACH

Actuaries should take a good faith approach in complying with ASOPs, exercising good judgment and professional integrity.

It is not appropriate for users of ASOPs to make a strained interpretation of the provisions of an ASOP.

ASOP 1 | §4.3 | APPLICATION

Actuaries should comply with those ASOPs that are applicable to the task at hand.

However, not all ASOPs will apply. An ASOP should not be interpreted as having applicability beyond its stated scope and purpose. Actuaries are responsible for determining which ASOPs apply to the task at hand. If no ASOPs specific to the task are applicable, the actuary may, but is not required to, consider the guidance in related ASOPs. Most, but not all, ASOPs are task-specific, dealing with particular kinds of actuarial services. A few ASOPs, however, deal more broadly with particular aspects of many types of actuarial services (such as ASOP Nos. 23 and 41, and this Introductory ASOP).

ASOP 1 | §4.4 | CONFLICTING PROVISIONS

When an actuary believes that multiple ASOPs have conflicting provisions when applied to a specific situation and none provide explicit guidance concerning which governs, the actuary should apply professional judgment and may wish to contact the ABCD for confidential guidance on appropriate practice.

ASOP 1 | §4.5 | PROVISIONS FOR DEVIATION

The ASOPs make specific provision for those situations where the actuary is required to or deems it appropriate to deviate from one or more provisions of an ASOP. It is not a breach of an ASOP to deviate from one or more of its provisions if the actuary does so in the manner described in the ASOP, including making the disclosures related to the deviation as required in such ASOP and in ASOP No. 41.

Appendix 1
Background and Additional Information

ASOP 1 | Appendix 1 | BACKGROUND AND ADDITIONAL INFORMATION

Note: This appendix is provided for informational purposes, but is not part of the standard of practice and is nonbinding.

Clarification of Language

As the ASB revises ASOPs, it strives to improve clarity and consistency in language. For example, the 2010 update to ASOP No. 41, Actuarial Communications, included changes in definitions to be more consistent with those found in the Code of Professional Conduct (Code) and in the recently revised Qualification Standards, and also incorporated language to help create consistency in the treatment of deviation language within all ASOPs. Similarly, in this Introductory ASOP, a number of definitions and discussions of terms used in many of the ASOPs have been added and, where the terms added also appear in the Code, they have been made consistent. In addition, an effort has been made to replace undefined terms or phrases with phrases that include terms that are defined, discussed, or used in the Code.

Role and Scope of ASOPs

The Introductory ASOP has been revised to clarify the role and scope of ASOPs. While ASOPs are binding on actuaries rendering actuarial services in the U.S., the Introductory ASOP now more directly acknowledges that actuaries are subject to a range of requirements and considerations that may affect how they do their work. These include legal and regulatory requirements, their employer’s peer review or other quality assurance processes and policies, continuing education requirements, the Code, and the actuary’s own professional and ethical standards. Because the ASOPs are not overly prescriptive and allow for disclosed deviations, the ASOP framework is designed to accommodate the actuary’s judgment in providing high-quality actuarial services and acting with integrity. The Academy’s Council on Professionalism publishes advisory Applicability Guidelines to assist actuaries in identifying the ASOPs that may be relevant.

Development of ASOPs

Proposals for developing new ASOPs and revising existing ones come from a variety of sources, such as individual actuaries, actuarial firms, professional committees, the ABCD, the ASB committees, and the ASB itself. If it accepts a proposal, the ASB assigns it to the appropriate committee or task force to begin the project.

The process of developing a new ASOP or revising an existing ASOP usually begins with the identification of practices that the ASB believes are appropriate to the proper performance of a particular type of actuarial service. After reviewing the current range of practices, the ASB determines whether it is appropriate under the circumstances to develop a new or revise an existing ASOP to reflect emerging issues in actuarial practice, recent advancements in actuarial science, or for other reasons.

Organization of ASOPs

The ASB strives to organize all ASOPs in a similar fashion to the extent feasible. The ASOP document includes a transmittal memorandum, the ASOP itself, and appendices. The transmittal memorandum provides brief background information and a description of the key issues related to the development or revision of the ASOP. The appendices

(1) provide additional background and historical issues,

(2) describe current or alternative practices, and

(3) summarize the major issues raised in the exposure process and their disposition by the drafting committee.

Additional appendices may also contain supporting documents, bibliographies, or illustrative examples.

Each ASOP contains four sections. Except for this Introductory ASOP, the sections are organized as follows:

• The first section summarizes the scope, cross references, and effective date of the ASOP.

• The second section defines or discusses certain terms used within the ASOP.

• The third section provides an analysis of issues and recommended practices.

• The fourth section addresses communications and disclosures.

The scope identifies the intended application of the ASOP to the work of the actuary. In some instances, the actuary serves as an advisor to a principal and does not actually make decisions or take actions on the principal’s behalf. In those instances, the ASOP may indicate in its scope to what extent the ASOP addresses the actuary’s role in advising the principal. However, the ASOPs are not intended to make the actuary responsible if the principal acts contrary to the actuary’s advice.

The Analysis of Issues and Recommended Practices section is organized into major topics or issues, or major tasks involved in rendering actuarial services within the ASOP’s scope. Emphasis is placed on providing the actuary with an appropriate analytical framework for completing an assignment that is within the scope of the ASOP.

Communications or disclosures pertinent to the subject of the ASOP and applicable limitations are identified in the Communications and Disclosures section and in ASOP No. 41. Where appropriate, reference may be made to applicable provisions of the Code. This section also includes a description of what an actuary should do when, in the actuary’s professional judgment, a deviation from the guidance in the ASOP is deemed to be appropriate.

Appendix 2
Comments on the Exposure Draft and Responses

ASOP 1 | Commentary Section | INTRO TO THE ASOP COMMENTARY

The exposure draft of the Introductory ASOP was issued in December 2011 with a comment deadline of May 31, 2012. Thirteen 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 General Committee of the Actuarial Standards Board carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the changes proposed by the General Committee.

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

The term “reviewers” in appendix 2 includes the General Committee and the ASB. Also, unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the exposure draft.

GENERAL COMMENTS

Comment	Response
A number of commentators indicated that the Introductory ASOP needs a number (for example, ASOP No. 0 or ASOP No. 1) so that actuaries understand that it is an ASOP that contains guidance.	The reviewers agree and numbered the Introductory ASOP as ASOP No. 1. The previous ASOP No. 1, Nonguaranteed Charges or Benefits for Life Insurance Policies and Annuity Contracts, has been renumbered as No. 2, since ASOP No. 2, Recommendations for Actuarial Communications Related to Statements of Financial Accounting Standards Nos. 87 and 88, was repealed in March 2011.
One commentator suggested moving the general deviation language from ASOP No. 41, Actuarial Communications, to the Introductory ASOP, and having ASOP No. 41 deal only with deviations related to communication of results.	The reviewers believe ASOP No. 41 is an appropriate vehicle for guidance on communicating deviation from any ASOP, because ASOP No. 41 applies to actuaries issuing actuarial communications within any practice area. As a result, no change was made.

ASOP 1 | Commentary Section | COMMENT ON SECTION 1.1

Comment	Response
Some commentators believed that the sentence “Each of these organizations requires its members, through its Code of Professional Conduct4 (Code), to observe ASOPs when rendering actuarial services in the United States,” contradicts the Code because it is incomplete (i.e. the sentence doesn’t mention that actuaries must also under the Code satisfy standards of practice in a non-U.S. jurisdiction where they render services).	The reviewers disagree and made no change. The reviewers believe the statement is accurate as written, and is not inaccurate merely because it does not also describe Code requirements that relate to actuarial standards of practice that exist in other jurisdictions in which the actuary may render actuarial services.
One commentator suggested revising the sentence “Each of these organizations requires its members, through its Code5, to observe ASOPs when rendering actuarial services in the United States,” to match the wording in the Code by replacing “observe” with “satisfy applicable.”	The reviewers made the suggested change but note that the Code uses both terms in the discussion of this topic.
One commentator indicated that the sentence “The ASOPs provide a basic framework that will typically accommodate these additional considerations.” should be revised to read “The ASOPs provide a basic framework that should accommodate these additional considerations.”	The reviewers agree and made the following change: “The ASOPs provide a basic framework that is intended to accommodate these additional considerations.”

Notes

⁴ These organizations adopted the Code of Professional Conduct effective January 1, 2001.

⁵ These organizations adopted the Code of Professional Conduct effective January 1, 2001.

ASOP 1 | Commentary Section | GENERAL COMMENT ON SECTION 2

Comment	Response
One commentator suggested that the definition of Deviation (“The act of departing from the guidance of an ASOP.”) in ASOP No. 41 also be included here.	The reviewers agree and added the definition.

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.1

Comment	Response
One commentator asked whether the Committee meant “under ordinary circumstances” rather than “under the circumstances” in “Must—“Must” as used in the ASOPs means that, under the circumstances, the actuary has no reasonable alternative but to follow a particular course of action.”	The reviewers disagree that “under ordinary circumstances” was intended, but note that changes made to the section should eliminate potential confusion.
Many comments were received with respect to the terms “must,” “should,” and “should consider,” as follows: • Commentators indicated that, because failure to follow a “must” or a “should” statement both constitute a deviation requiring disclosure, the distinction between the two terms was not clear. • Commentators objected to the concept that failure to comply with a “should” statement constitutes a deviation that must be disclosed under ASOP No. 41. These commentators indicated that failure to follow a “should” statement had not previously been understood to be a deviation requiring disclosure, so that ASOPs were in effect being retroactively changed, and actuaries should be afforded an opportunity to comment on the use of the word should in the various ASOPs in that light. • A commentator questioned whether a definition of “should consider” was needed. • A commentator requested that the ASOP specifically indicate that it does not create a duty to document actions considered but not taken and the reasons therefor.	To assist in reviewing the comments, the reviewers analyzed the use of the terms “should,” “should consider,” and “must” in the various ASOPs, and reached the following conclusions: • In order to better contrast the meaning of “must” versus “should,” the definitions have been combined into a single “Must/Should” discussion that defines each term and highlights the distinction between the terms. • The Introductory ASOP reaffirms that a failure to follow a “should” statement constitutes a deviation. • The reviewers agree that a definition of “should consider” is not needed. The terms “must” and “should” are generally followed by an action (for example, “disclose” or “document”). When the term “should consider” is used, the action to be performed (or to be disclosed as a deviation if not performed) is to consider something. Thus, there is no need to separately define “should consider.” The revised ASOP makes clear that if the actuary considers something the ASOP indicates he or she should consider, but determines that the item being considered is inappropriate or impractical, the actuary has complied with the guidance and there is no deviation to be disclosed. • Because the ASOP does not indicate that actions considered but not taken (and the reasons therefor) must be disclosed, the reviewers do not believe it is necessary for the ASOP to indicate that they need not be disclosed. Thus, no changes have been made in response to this comment.
A commentator requested that a statement “Failure to follow the course of action which follows ‘may’ does not constitute a deviation” be added.	Because the ASOP does not suggest that failure to follow the course of action that follows “may” constitutes a deviation, the reviewers do not believe it is necessary for the ASOP to indicate that it would not be a deviation. Therefore, no change was made in response to this comment.

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.2

Comment

Response

A commentator indicated that “actuarial services” is defined in ASOP No. 41 and questioned whether the definition should be in two ASOPs. In addition, a commentator suggested a small change in the definition in the Introductory ASOP to match the definition in the Code (i.e., change “on” to “upon” in “Such services include the rendering of advice, recommendations, findings or opinions based on actuarial considerations.”). Other commentators suggested adding “but are not limited to” after “Such services include” in the sentence above.

Because the term actuarial services is applicable to all ASOPs and used in nearly all of them, the reviewers decided that including the definition in the Introductory ASOP is appropriate. The reviewers also made the indicated change (i.e. “on” to “upon”) to match the definition in the Code (which also appears in ASOP No. 41). The reviewers decided not to add “but are not limited to” to the definition. The revised definition matches the definition in the Code. In addition, the reviewers believe the list of services in the definition to be illustrative rather than comprehensive.

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.3

Comment

Response

A commentator suggested that a statement be added indicating that “actuarial soundness” is not an actuarial concept, but is a concept imposed by outside entities. In addition, another commentator requested that the ASOP indicate that the term “actuarial soundness” only needs to be defined once in an actuarial communication. A third commentator indicated that in property and casualty ratemaking the term “actuarial soundness” is well defined by the Casualty Actuarial Society’s ratemaking principles, and should not need to be defined in an actuarial communication.

The reviewers agree that the concept of actuarial soundness might be imposed by an outside entity and added a statement to that effect. However, the reviewers do not believe it is necessary to explicitly state that actuarial soundness need not be defined multiple times in a single actuarial communication, and no change has been made in this regard. With respect to the third comment, no change was made. The reviewers note that ASOP No. 41 already provides that an actuarial communication can direct the reader to information provided in other documents and thus an actuary can direct the reader to the “actuarial soundness” definition intended.

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.4

Comment	Response
One commentator indicated that the third sentence in this discussion, which reads “The actuary cannot reasonably be expected to act based on information that was not provided” could be interpreted to excuse an actuary from making reasonable inquiries to try to obtain information.	The reviewers do not believe the sentence added anything to the discussion and deleted the sentence. This should avoid the potential misinterpretation.

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.5

Comment

Response

There were a number of comments on this section: • A commentator suggested that the ASOP not define material since “materiality” standards are normally imposed by others, and where they aren’t there isn’t a difference between significance and materiality. The commentator suggested using the materiality definition to define significant instead. • A commentator indicated that the statement “The provisions of ASOPs need not be applied to immaterial items” was somewhat circular, because an actuary would need to apply the ASOP to determine that an item is immaterial and that the ASOP allows it to be disregarded. • A commentator indicated that information should be required to be disclosed to allow others to make an assessment of the reasonability of the decision to exclude items as immaterial.

The reviewers note that the words “material” and “materiality” are used in a number of ASOPs and, therefore, retaining the discussion is appropriate. The reviewers disagree with the other two comments.

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.6

Comment

Response

One commentator wanted to add the statement “No ASOP requires the actuary to perform a task that in the actuary’s professional judgment is impractical based on the needs of and contractual relationship with the principal.” Another commentator wanted the terms “practical” and “reasonable” and the difference between them clarified further.

The reviewers consider the proposed statement overly broad and note that deviation from the guidance in an ASOP is permitted when appropriate, with disclosure in accordance with ASOP No. 41. Therefore, no changes were made in response to the first comment. In general, the reviewers believe that the term “practical” applies to a process while “reasonable” applies to a result, and changes were made in the discussion of “reasonable” to make that clear.

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.8

Comment	Response
A commentator suggested that the phrase “recognizing that reasonable differences may arise when actuaries project the effect of uncertain events” in this discussion also belonged in the discussion of reasonable.	The reviewers agree and added the sentence “Because actuarial practice commonly involves the estimation of uncertain events, there will often be a range of reasonable methods and assumptions, and two actuaries could follow a particular ASOP, both using reasonable methods and assumptions, and reach different but reasonable results” to the discussion of reasonable.

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.9

Comment	Response
A commentator felt that the discussion should focus on “the act of reasoning or reaching conclusions based on supported evidence, logical argument and actuarial judgment,” which the commentator believes would better parallel the usage in other ASOPs. Another commentator suggested avoiding the use of the stem “reason” or “reasonable” in the discussion.	The reviewers do not agree. As mentioned above, the reviewers believe that the discussion of reasonable should focus on producing a reasonable result, and the discussion was modified to accomplish this by adding to the discussion “to produce a ‘reasonable’ result when rendering actuarial services.”

ASOP 1 | Commentary Section | COMMENT ON SECTION 2.11

Comment

Response

There were several comments on this discussion, primarily indicating that there was not a clear distinction between the terms material and significant.

The reviewers note that there are several different common uses of the word significant, and different usages are used in different ASOPs. Section 2.11 was intended as a discussion of the various ways in which the term is used, rather than a definition. The discussion was expanded to include an additional common usage (“An event may be described as significant if the likelihood of its occurrence is more than remote.”). With the changes to the wording for both “materiality” and “significance/significant,” the reviewers believe there is a clearer distinction between the two terms.

ASOP 1 | Commentary Section | GENERAL COMMENT ON SECTION 3

Comment	Response
A commentator indicated that the placement of this section within the body of the Introductory ASOP is inconsistent with the Introductory ASOP itself being an ASOP, because there is nothing in this section that an actuary must understand or do. The commentator suggested moving this section to the appendix or another document.	The reviewers note that the Introductory ASOP is unique and can have a different structure from the other ASOPs. The reviewers decided to leave this within the body of the Introductory ASOP to ensure it received appropriate visibility.

ASOP 1 | Commentary Section | COMMENT ON SECTION 3.1

Section 3.1.2

Comment	Response
A commentator believed the term “production in litigation” should have been “results in litigation” in the sentence “ASOPs are not intended to shift the burden of proof or production in litigation, and failure to satisfy one or more provisions of an ASOP should not, in and of itself, be presumed to be malpractice.”	The reviewers changed the wording to clarify that a deviation from a standard should not result in the presumption of malpractice.
A commentator believed that the sentence “Other individuals should consider obtaining the advice of a qualified actuary before making use of, or otherwise relying upon, ASOPs” should be replaced with “ASOPs should not be used or relied upon by those who are not actuaries.”	The reviewers disagree and made no change.

Section 3.1.4

Comment	Response
A commentator wanted to add “generally” before “not narrowly prescriptive,” and “typically” before “neither dictate” in the following sentence “The ASOPs are not narrowly prescriptive and neither dictate a single approach nor mandate a particular outcome.” Another commentator noted that some sections of ASOPs are prescriptive.	The reviewers agree that adding “generally” to the sentence is appropriate and made the change but do not believe the addition of “typically” would enhance the understanding.
A commentator suggested that the sentence “For example, because actuarial practice commonly involves the measurement of uncertain events, there will often be a range of reasonable assumptions, and two actuaries could follow a particular ASOP, both using reasonable methods and assumptions, and reach different but reasonable results” be moved into the discussion of reasonable.	The reviewers agree and moved the sentence (with minor wording changes).

Section 3.1.5

Comment	Response
A commentator thought that this point (that an actuary may deviate from an ASOP to comply with applicable statutes, regulations or other binding authority) was better explained in other ASOPs and that the language should be modified.	The reviewers believe the language is clear and consistent with the Code, and therefore made no change.

Section 3.1.6

Comment	Response
A commentator suggested that the word “might” be changed to “may” in the sentence “Unlike the ASOPs, which are binding upon actuaries, other actuarial literature provides information that an actuary might choose, but is not required, to consider when rendering actuarial services.”	The reviewers agree and made the change.

Section 3.1.7

Comment	Response
A commentator suggested this section be revised to indicate that early adoption of the revised Introductory ASOP is permitted.	The reviewers believe that there is nothing in this revised Introductory ASOP that would result in noncompliance with the current Introduction to the ASOPs. Therefore, no change was made.

ASOP 1 | Commentary Section | COMMENT ON SECTION 4.1

Comment	Response
A commentator found this confusing, saying that you can deviate from an ASOP if you disclose the deviation, so failure to comply with an ASOP is not a breach of the Code. Another commentator suggested adding information to further clarify that deviations, with appropriate disclosures, are permitted.	The reviewers note that the deviation from the guidance in an ASOP and disclosing the deviation is not a failure to comply with the ASOP, as discussed in section 4.5. Accordingly, no substantive changes were made in response to these comments, although the second sentence in this section was simplified.
Some commentators believe this section belongs in the appendix, not the body of the ASOP, because it doesn’t tell the actuary to do anything.	Failure to comply with the ASOPs results in a breach of the Code. The reviewers believe this is an important point that belongs in the body of the Introductory ASOP. Therefore, no change was made.
A commentator suggested adding “may” before “subject the actuary” in the sentence “Such breaches subject the actuary to the profession’s counseling and discipline processes.”	The reviewers note that a breach subjects the actuary to ABCD processes, even though it may not result in ABCD action. Therefore, no changes were made.

ASOP 1 | Commentary Section | COMMENT ON SECTION 4.2

Comment	Response
A commentator believes that the sentence “It is not appropriate for users of ASOPs to make a strained interpretation of the provisions of an ASOP “ is not needed because the point is covered by the first sentence, and also indicated that an undefined term like “strained” should not be used.	The reviewers believe the second sentence differs from the first and decided against deleting it.

ASOP 1 | Commentary Section | COMMENT ON SECTION 4.3

Comment	Response
A commentator questioned whether the actuary has unfettered discretion to come to a conclusion about which ASOPs apply, even though the ASOPs may seem to suggest otherwise, and whether the actuary’s determination was open to challenge.	The reviewers do not agree that the section suggests that the actuary has unfettered discretion and, therefore, made no change.
A commentator suggested that the following sentence be deleted: “An ASOP should not be interpreted as having applicability beyond its stated scope and purpose” because the commentator believes it discourages an actuary from looking at ASOPs applicable to similar issues when there is no ASOP directly applicable, which the commentator believes to be a good practice that should not be discouraged.	The reviewers believe that clearly defined applicability is important and does not discourage other uses. Therefore, the sentence was not deleted.
A commentator suggested that the word “relevant” be replaced with “applicable” in the sentence “Actuaries should comply with those ASOPs that are relevant to the task at hand; not all ASOPs will apply.” because the Code doesn’t use the word “relevant,” it uses “applicable.”	The reviewers agree with replacing “relevant” with “applicable” and made that change.

ASOP 1 | Commentary Section | COMMENT ON APPENDIX 1

Comment	Response
A commentator objected to the use of the phrase “to better define” in the first sentence.	The reviewers agree and replaced the phrase “to better define” with “to clarify” in the first sentence.
A commentator indicated that the sentence below belongs in the body of the ASOP, not in appendix 1, because the commentator believes it is requiring the actuary to do something. “Because the ASOPs are not overly prescriptive, and allow for disclosed deviations, the ASOP framework is designed to accommodate the actuary’s providing high quality actuarial services and acting with integrity, taking all appropriate considerations into account.”	The reviewers do not believe this sentence adds any guidance and, therefore, made no change.

Introduction

ASOP 2 | TRANSMITTAL MEMORANDUM

TO:	Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Nonguaranteed Elements for Life Insurance and Annuity Products
FROM:	Actuarial Standards Board (ASB)
SUBJECT:	Revision of Actuarial Standard of Practice (ASOP) No. 2

This document contains the revision of ASOP No. 2, now titled Nonguaranteed Elements for Life Insurance and Annuity Products.

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History of the Standard

In 1986, the Interim Actuarial Standards Board adopted the original version of ASOP No. 2, which was titled The Redetermination (or Initial Determination) of Non-Guaranteed Charges and/or Benefits for Life Insurance and Annuity Contracts. In 1990, the ASB adopted a reformatted version of ASOP No. 2. (Prior to 2013, ASOP No. 2 was numbered ASOP No. 1.)

In 1995, the ASB adopted ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation, which was created in conjunction with the National Association of Insurance Commissioners’ (NAIC) Life Insurance Illustrations Model Regulation (the Model). Not all illustrated life insurance and annuity policies are subject to the Model. The 2004 revision of ASOP No. 2 imposed new obligations on the actuary for policy illustrations not subject to the Model.

Since ASOP No. 2 was last updated in 2004, there has been increased attention to the practices insurers use to determine and manage NGEs within individual life insurance and annuity products. The ASOP is being updated to reflect current practices and provide additional guidance on the determination of NGEs. In developing this revision, the task force reviewed and incorporated concepts from documents that supported the development of the original version of this ASOP in 1986.

First Exposure Draft

The first exposure draft was issued in March 2019 with a comment deadline of July 15, 2019.

Sixteen comment letters were received and considered in making changes that were reflected in the second exposure draft.

Second Exposure Draft

The second exposure draft was issued in July 2020 with a comment deadline of November 13, 2020. Seven comment letters were received and considered in making changes that are reflected in the final standard.

For a summary of issues contained in these comment letters, please see appendix 2.

Notable Changes from the Second Exposure Draft

Notable changes made to the second exposure draft are summarized below. Additional changes were made to improve readability, clarity, or consistency.

1. Section 1.2 was clarified to specify that actuarial services with respect to in-force policies performed after the effective date of this standard are in scope.

2. In section 2.5, the definition of NGE framework was clarified.

3. In section 2.6, the definition of NGE scales was clarified to include NGE scales that may vary by one or more parameters or may not vary by any parameter, and additional examples were provided.

4. Section 3.1 was updated to eliminate duplication with the definition of NGE framework in section 2.5.

5. In section 3.3.1, language was clarified to recognize that policy classes could be defined at various levels and to include methodology reflecting policy duration, and an example was added.

6. In section 3.4, changes were made to clarify the guidance in instances when following the determination policy would be inconsistent with section 3.2 and to clarify the language to improve alignment with section 3.2.

7. The language in section 3.4.1(g) was clarified to reference the determination policy rather than section 3.4.2.4.

8. In section 3.4.2.4, changes were made to improve consistency with section 3.4.2.3 and to clarify reliance on prior analysis.

9. In section 3.4.2.5, language was added to address circumstances where the insurer allocates past losses or gains.

10. In section 3.5, the language was changed to be consistent with the language in the existing ASOP.

11. In section 4.1, disclosure 4.1(q) was added to reflect changes in section 3.4.2.5.

Notable Changes to the Existing ASOP

A cumulative summary of the notable changes from the existing ASOP are summarized below. Notable changes do not include additional changes made to improve readability, clarity, or consistency.

1. In section 1.2, the scope was clarified to exclude actuarial services with respect to the determination of any reinsurance contract elements the are not guaranteed.

2. In section 2, the definitions were expanded and clarified.

3. In sections 2.5 and 3.1, the concept of an insurer’s NGE framework was defined and introduced.

4. In section 3.2, guidance was expanded for advising on the actuarial aspects of the determination policy, including advice that is consistent with the following:

a. NGE scales are determined with the expectation that they will be revised only if anticipated experience factors have changed since issue or, alternatively, since the previous revision; and

b. NGE scales are determined based on reasonable expectations of future experience and are not determined with the objective of recouping past losses or distributing past gains.

5. In section 3.3, guidance for establishing or making changes to policy classes was expanded.

6. In section 3.4, guidance for determining NGE scales was expanded to align with sections 3.2 and 3.3 and to include guidance on additional considerations that were not part of the previous determination of NGE scales.

7. In section 3.5, guidance for recommending NGE scales used in illustrations not subject to ASOP No. 24 was updated.

8. In section 3.6, guidance for providing opinions and disclosures to meet regulatory requirements was added.

9. In sections 3.7, 3.8, and 3.9, guidance for relying on data, projections, and supporting analysis supplied by others, relying on assumptions or methods selected by another party, and reliance on another actuary was added.

10. In section 3.10, documentation requirements were added.

11. In section 4, disclosure requirements were added, mostly to address expanded guidance throughout section 3.

The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure drafts.

The ASB voted in September 2021 to adopt this standard.

ASOP 2 | §0.1 | AUTHORS

Task Force to Revise ASOP No. 2

Gabriel R. Schiminovich, Chairperson

David J. Hippen

Brian R. Lessing

Donna C. Megregian

Linda D. Rodway

Lance E. Schulz

Life Committee of the ASB

Linda M. Lankowski, Chairperson

Janice A. Duff

Lisa S. Kuklinski

Donna C. Megregian

Gabriel R. Schiminovich

Jeremy Starr

Actuarial Standards Board

Darrell D. Knapp, Chairperson

Elizabeth K. Brill

Robert M. Damler

Kevin M. Dyke

David E. Neve

Cande J. Olsen

Kathleen A. Riley

Judy K. Stromback

Patrick B. Woods

The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.

Section 1
Purpose, Scope, Cross References, and Effective Date

ASOP 2 | §1.1 | PURPOSE

This actuarial standard of practice (ASOP or standard) provides guidance to actuaries when performing actuarial services with respect to the determination of nonguaranteed elements (NGEs) for life insurance and annuity products, including riders attached to such products.

ASOP 2 | §1.2 | SCOPE

This standard applies to actuaries when performing actuarial services with respect to the determination and, if applicable, illustration of NGEs for life insurance and annuity policies written on individual policy forms where NGEs may vary at the discretion of the insurer, except as provided below. Actuarial services performed on or after the effective date of this standard also include determinations and illustrations for policies in force on the effective date of this standard.

Throughout this standard, the term “determination” includes both the initial determination at policy issue and subsequent determinations for in-force policies.

The standard also applies to actuaries when performing similar actuarial services for group master contracts with individual certificates where NGEs are determined in a similar manner to products written on individual life and annuity policy forms. Examples of products within the scope of this standard include universal life, indeterminate premium life, and deferred annuity products. Such products may be fixed, variable, or indexed.

Actuarial services for group products with NGEs that are not determined in a similar manner to those written on individual life and annuity policy forms are not in scope. Two examples are traditional group term life insurance and certain retirement funding products (for example, synthetic guaranteed interest contracts). To the extent that actuarial services for a product do not clearly fall into the scope, the actuary should use professional judgment to determine whether the services are in scope.

This standard does not apply to actuaries when performing actuarial services with respect to policyholder dividends, which are covered by ASOP No. 15, Dividends for Individual Participating Life Insurance, Annuities, and Disability Insurance. To the extent that a product involves both NGEs and policyholder dividends, this standard applies to actuaries when performing actuarial services with respect to NGEs, and ASOP No. 15 applies to actuaries when performing actuarial services with respect to policyholder dividends.

This standard does not apply to actuaries when performing actuarial services with respect to the determination of any reinsurance contract elements that are not guaranteed in a reinsurance contract.

This standard does not apply to actuaries when performing actuarial services with respect to illustrations of NGEs subject to ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation.

If the actuary departs from the guidance set forth in this standard in order to comply with law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4. If a conflict exists between this standard and applicable law, the actuary should comply with applicable law.

ASOP 2 | §1.3 | CROSS REFERENCES

When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.

ASOP 2 | §1.4 | EFFECTIVE DATE

This standard is effective for actuarial services performed on or after June 1, 2022.

Section 2
Definitions

ASOP 2 | §2.0 | INTRO TO SECTION 2

The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP.

ASOP 2 | §2.1 | ANTICIPATED EXPERIENCE FACTOR

An assumption of future experience used in the determination of NGEs. Examples of anticipated experience factors include rates of investment income, mortality, morbidity, policy persistency, and expense.

ASOP 2 | §2.2 | DETERMINATION POLICY

The insurer’s principles or objectives for determining NGEs. For example, the determination policy could include the insurer’s governing principles and requirements, profitability objectives, capital objectives, guidelines for drafting policy provisions related to NGEs, principles for addressing illustration requirements, and requirements for and frequency of reviews of NGEs on in-force products.

ASOP 2 | §2.3 | GUARANTEED ELEMENT

A premium, value, charge, or benefit that limits an NGE. Guaranteed elements are specified in the policy. Examples of guaranteed elements include maximum premium charges, maximum expense charges, minimum credited interest rates, maximum cost of insurance charges, maximum gross premiums, minimum index parameters, maximum mortality and expense (M&E) risk charges, and maximum policy loan interest rates.

ASOP 2 | §2.4 | NONGUARANTEED ELEMENT (NGE)

Any premium, charge, or benefit within an insurance policy that 1) affects policy costs or values, 2) is not guaranteed in the policy, and 3) can be changed at the discretion of the insurer. An NGE may provide a more favorable value to the policyholder than a guaranteed element. For the purpose of this ASOP, an NGE reflects expectations of future experience as opposed to, for example, a dividend, which reflects participation in past experience. Examples of premiums, charges, or benefits that can be changed at the discretion of the insurer may include credited interest, cost of insurance (COI) charges, bonuses, indeterminate premiums, index parameters used to determine credited interest, and expense charges.

ASOP 2 | §2.5 | NGE FRAMEWORK

The determination policy, methodology for establishing policy classes, and any additional practices, methods, and criteria used by the insurer to determine NGE scales that might not be part of the determination policy or methodology for establishing policy classes.

ASOP 2 | §2.6 | NGE SCALE

For each NGE, a series of one or more rates or values as determined by the insurer at a point in time. The elements of an NGE scale may vary by one or more parameters or may not vary by any parameter. Examples include the following:

a. COI rates that could vary based on issue age, underwriting class, and duration;

b. an expense load that could vary by duration and be applicable over a limited number of policy years; and

c. an interest rate that does not vary by any parameter.

ASOP 2 | §2.7 | POLICY

An individual life insurance policy, an individual annuity contract, or a group certificate that has NGEs that operate in substantially the same manner as NGEs in an individual life insurance policy or an individual annuity contract. A policy includes any attached rider or endorsement.

ASOP 2 | §2.8 | POLICY CLASS

Policies that are grouped together for the purposes of determining an NGE.

ASOP 2 | §2.9 | PROFITABILITY METRIC

A measurement used to assess a product’s projected level of financial results.

Section 3
Analysis of Issues and Recommended Practices

ASOP 2 | §3.1 | NGE FRAMEWORK

The actuary should understand the insurer’s NGE framework in relation to the actuarial services requested. The actuary should understand how the NGE framework has been applied in the past in relation to the actuarial services requested, if available. The actuary should take into account the elements of the NGE framework that are relevant to the actuarial services requested. Examples of elements of the NGE framework include the following:

a. the methodology for evaluating experience and developing anticipated experience factors;

b. the source or sources of data used in developing anticipated experience factors;

c. the frequency of review of anticipated experience factors and policy classes;

d. the methodologies for allocating expenses and investment income;

e. the models or methods used;

f. the marketing objectives, such as distribution channels, target markets, and competitive objectives;

g. the objectives used in setting profitability metrics;

h. the methodology for determining reserves and capital objectives; and

i. the insurer’s governance process, including the decision and approval process.

If the NGE framework is absent, or in the actuary’s professional judgment, is incomplete or needs to be updated to reflect the current environment, the actuary should recommend that the NGE framework be created, completed, or updated.

ASOP 2 | §3.2 | PROVIDING ADVICE ON THE ACTUARIAL ASPECTS OF THE DETERMINATION POLICY

The actuary may provide advice on

1) developing or modifying the determination policy, or

2) applying the determination policy.

When providing advice on the actuarial aspects of the determination policy, the actuary should provide advice consistent with the following:

a. NGE scales are determined with the expectation that they will be revised only if anticipated experience factors have changed since issue, or alternatively, since the previous revision.

b. NGE scales are determined based on reasonable expectations of future experience and are not determined with the objective of recouping past losses or distributing past gains.

3.2.1 Providing Advice on Developing or Modifying the Determination Policy

When advising an insurer on developing or modifying its determination policy, the actuary should take into account the following, if applicable:

a. the policy provisions and applicable law;

b. how anticipated experience factors reflect expectations of future experience;

c. how the variability and credibility of each anticipated experience factor may impact the determination of the NGE scales;

d. the insurer’s reserve, profitability, capital, surplus, and marketing objectives;

e. reinsurance and taxes; and

f. periodic review of NGEs in in-force policies, such as the maximum time period between successive insurer reviews of NGEs.

The actuary may take into account other items relevant to the determination policy.

The actuary should document the sources of the determination policy used in developing the advice and how (a)–(f) above and any additional relevant items were taken into account. For example, portions of the determination policy may be found in the insurer’s governance processes, corporate policies, or operating practices.

3.2.2 Providing Advice on Applying the Determination Policy

When advising on applying the determination policy for determining initial NGE scales, evaluating whether to revise existing NGE scales, or revising existing NGE scales, the actuary should take into account the following, if applicable:

a. the need to make additional assumptions about how the determination policy applies to the assignment;

b. guaranteed elements, policyholder options including the likelihood of antiselection, and other relevant provisions of the policy;

c. impacts on or from reserve, profitability, capital, surplus, and marketing objectives, or changes in such objectives;

d. impact on or from reinsurance and taxation;

e. applicable law (including, for example, for variable products, any constraints or other requirements imposed by applicable securities law); and

f. resources available.

If, in the actuary’s professional judgment, the actuary believes that the determination policy may be inconsistent with the guidance in sections 3.2 and 3.2.1, the actuary should recommend that the determination policy be revised.

ASOP 2 | §3.3 | ESTABLISHMENT OF OR CHANGES TO POLICY CLASSES

When preparing for an assignment, the actuary should review the existing policy classes for the product or similar products within the insurer’s NGE framework.

3.3.1 For Future Sales of a New or Existing Product

If the policy classes for future sales have not been defined in the NGE framework, or if they have been defined, but in the actuary’s professional judgment are incomplete, do not reflect changing circumstances (for example, new underwriting practices, or new profit or marketing objectives), or are inconsistent with the items below, the actuary should recommend the establishment of or changes to the policy classes that are

a. consistent with the guidance in ASOP No. 12, Risk Classification;

b. appropriate for each NGE (a particular policy may be assigned to one or more policy classes at issue based on anticipated experience factors and NGEs, for example, one policy class for credited interest and a different policy class for COI charges);

c. appropriately reflective of differences within anticipated experience factors (for example, smoker versus nonsmoker mortality);

d. refined appropriately to mitigate antiselection; and

e. not expected to be redefined after issue.

Policy classes may be defined by grouping policies at various levels, for example, at a product level, across multiple products, or within a product or products.

The actuary may recommend policy classes that use different grouping methodologies based on policy duration. For example, a policy class may be defined in terms of a select and ultimate mortality method, or a policy class may be defined in terms of an investment year interest crediting method that uses a new money method in the early durations and a portfolio method in the later durations.

When recommending policy classes for future sales, the actuary should take into account the policy provisions, the structure of guaranteed elements and NGEs, the date on which the recommended policy classes would take effect (for example, policies issued before or after a particular date could be in different policy classes), and the underwriting characteristics and marketing objectives for the product. The actuary may also take into account any additional relevant factors.

3.3.2 For In-Force Policies

The actuary should recommend that in-force policies remain assigned to their policy classes, unless there is new information that is material to the anticipated experience factors and supports reassigning the policies to different policy classes. For example, a change in one state’s premium tax that affects some policies within a policy class differently than it affects others could justify reassigning such policies to a different policy class.

In addition, the actuary may recommend combining or redefining policy classes if, in the actuary’s professional judgment, such combinations or redefinitions would be appropriate. For example, if the experience for a policy class is not credible, the policy class could be combined with other policy classes for the purposes of determining anticipated experience factors.

When recommending a change in the assignment of policies to policy classes, or combining or redefining policy classes, the actuary should follow the guidance in section 3.3.1.

ASOP 2 | §3.4 | DETERMINATION PROCESS FOR NGE SCALES

When determining NGE scales for future sales of a new or existing product and for in-force policies in accordance with the NGE framework, the actuary should take into account the determination policy and the following:

a. the appropriateness of the models, methods, and profitability metrics;

b. how the anticipated experience factors relate to NGE scales;

c. the consistency of NGE scales with policy provisions;

d. any limits on NGE scales due to regulatory constraints;

e. any limits on NGE scales due to guaranteed elements; and

f. the impact on or from reserve, profitability, capital, surplus, and marketing objectives.

The actuary may take into account practical constraints and any other relevant circumstances.

The actuary may use approximation methods, such as smoothing and interpolation, when determining NGE scales.

If, in the actuary’s professional judgment, the actuary believes that following the determination policy when determining NGE scales would be inconsistent with the guidance in section 3.2, the actuary should consider discussing these inconsistencies with the insurer. The actuary should document any unresolved inconsistencies and should consider providing advice consistent with section 3.2.2. 3.4.1 Determination Process for Future Sales of a New or Existing Product When determining NGE scales for future sales of a new or existing product, the actuary should take into account the following:

a. how anticipated experience factors were developed and whether they reflect the product’s features, intended markets, distribution methods, underwriting procedures, and policy classes (see section 3.3.1);

b. how NGE scales are structured to cover costs under the product design, as well as the potential impact on profitability if policyholder behavior varies from expectations;

c. that NGE scales are determined with the expectation that they will not be revised unless the anticipated experience factors change;

d. whether the NGE scales are consistent with the language of the policy;

e. projected profitability;

f. constraints on the ability to revise NGE scales to reflect future changes in anticipated experience factors (for example, guaranteed elements, contractual limitations, development and implementation cost, systems constraints); and

g. how elements of the determination policy affect the ability to revise NGE scales after issue.

The actuary may use prior analysis in the determination of the NGE scales, if appropriate. For example, changes in credited interest may be based on a previously established interest rate spread.

The actuary should document the NGE determination process and results, including how items (a)–(g) and any prior analysis were taken into account.

The actuary should consider conducting sensitivity analyses to evaluate the impact of future deviations from the anticipated experience. The actuary should consider recommending how often such anticipated experience factors be reviewed.

3.4.2 Determination Process for In-Force Policies

The determination process for inforce policies consists of reviewing prior determinations, analyzing emerging experience relative to anticipated experience factors, considering whether to recommend a revision in the NGE scales, and, if a revision is to be made, determining the revised NGE scales.

3.4.2.1 Reviewing Prior Determinations

The actuary should review prior determinations, including the original determination in effect at the time of policy issue. This may include information such as previous anticipated experience factors, profitability metrics, pattern of profits, NGE scales, and other assumptions.

If the information related to prior determinations is not available or incomplete, the actuary should reconstruct prior determinations to the extent practicable and necessary for the determination process, and document the methods and assumptions used. If reconstructing the prior determinations is not practicable due to incomplete information or other limitations, the actuary should select and document a reasonable approach to gain an understanding of the prior determination.

3.4.2.2 Analyzing Experience

When analyzing how experience is emerging relative to anticipated experience factors, the actuary should take into account the following, if applicable:

a. the time elapsed since the last analysis of experience;

b. the credibility of experience;

c. the size of the relevant group of policies or policy classes, such as number of policies, premium volume, insurance amount, or account value;

d. the materiality of any change in the experience relative to the existing anticipated experience factors;

e. whether existing anticipated experience factors, including any projected trends, are supported by actual experience; and

f. whether profitability was particularly sensitive to changes in any anticipated experience factors, as disclosed in previous actuarial reports.

The actuary should recommend that the anticipated experience factors be updated, if warranted by the results of the analysis.

The actuary should document how (a)–(f) above and any additional relevant items were taken into account.

3.4.2.3 Considering Whether to Recommend a Revision to NGE Scales

When considering whether to recommend a revision to NGE scales, the actuary should take into account the following, if applicable:

a. time elapsed since NGE scales were last reviewed;

b. the anticipated experience factors that are used for revising NGE scales under the terms of the policy and applicable law;

c. deviations in emerging experience from what was assumed in the prior determination of NGE scales;

d. how any recommended revision could affect reserves, capital, reinsurance, and taxation;

e. the appropriateness of the profitability metrics and objectives. For example, an internal rate of return metric may have been used at policy issue, but a different metric may be appropriate when applied to in-force policies;

f. the change in the prospective profitability due to the change in anticipated experience factors and any additional factors for which a change may be reflected in the determination of NGEs under section 3.2(b), the terms of the policy, and applicable law;

g. the complexity of the analysis needed. For example, when changing credited interest rates, the actuary may limit the analysis to changes in investment income, while other changes, such as COIs, may require more complex analysis and modeling, which could reflect multiple anticipated experience factors and require consideration of other NGEs;

h. whether other analyses, such as sensitivity analysis, are needed;

i. costs, practical implementation difficulties, and materiality of making revisions to the NGE scale; and

j. potential impacts on the policyholder (for example, policyholder behavior or policyholder equity) or the insurer of revising or not revising NGE scales to reflect changes in anticipated experience factors.

The actuary should document the results of the analysis, including how (a)-(j) above and any additional relevant items were taken into account, whether the actuary recommends a revision or not.

3.4.2.4 Determining the Revised NGE Scales

When determining revised NGE scales, the actuary should take into account the provisions of section 3.4.1(a)-(g) and should

a. identify the anticipated experience factors to be used when revising NGE scales, taking into account the terms of the policy and applicable law;

b. base the revision of the NGE scales on changes in the anticipated experience factors identified in (a) above; and

c. determine new NGE scales using a method that is consistent with sections 3.2(a) and 3.2(b). For example, it might be appropriate to use a method to determine the revised NGE scales such that the prospective profitability from the time of revision, taking into account the prospective pattern of profits by duration, is not materially greater than that using the original NGE scales and original anticipated experience factors, holding all other assumptions constant between the projections.

The actuary may use approximation and smoothing methods that are reasonable in relation to the costs and benefits provided.

The actuary should perform an appropriate level of analysis based on the anticipated experience factors and the type of revision being considered. The actuary may use relevant prior analysis in making the determination. For example, as discussed in section 3.4.2.3(g), changing COIs may require more complex analysis and modeling than routine changes in credited interest rates, which may rely on prior interest rate spread analysis. The actuary should ensure that the method and results of any analysis used to support the determination of the revised NGE scales, including how the provisions of section 3.4.1(a)-(g) and any additional relevant items as noted above were taken into account, are documented or addressed in prior documentation.

3.4.2.5 Additional Considerations

When recommending or determining a revision to NGE scales, the actuary may consider using additional anticipated experience factors that were not part of the previous determination of NGE scales, such as a new tax-related expense.

If circumstances arise under which the insurer allocates past losses or gains by making adjustments to the NGE scales, for example, due to regulatory requirements, the actuary should document the circumstances and should consider recommending a methodology to separately account for such adjustments when considering future determinations of the NGE scales.

ASOP 2 | §3.5 | NGES USED IN ILLUSTRATIONS NOT SUBJECT TO ASOP NO. 24

The actuary should recommend NGE scales to be used in illustrations not subject to ASOP No. 24 that have been determined consistently with section 3.4. The actuary should also follow applicable regulations, guidelines, and standards for illustrations, such as those that are based upon the following:

a. Annuity Disclosure Model Regulation (Model 245); and

b. Variable Life Insurance Model Regulation (Model 270) and NAIC Actuarial Guideline 15.

The actuary should consider conducting tests of illustrated NGE scales to ascertain whether those illustrated NGE scales could be supported by anticipated experience factors and other reasonable assumptions.

ASOP 2 | §3.6 | PROVIDING OPINIONS AND DISCLOSURES TO MEET REGULATORY REQUIREMENTS

When providing opinions and disclosures to meet regulatory requirements relating to NGEs (for example, a response to an NAIC annual statement interrogatory) or actuarial services in support of such opinions and disclosures, the actuary should be knowledgeable about the requirements and information necessary to support the opinion or disclosure. Such information may include some or all of the following for the relevant products:

a. the insurer’s NGE framework;

b. the requirements of applicable law;

c. the determination process, including how experience and financial results are emerging; and

d. previous regulatory filings.

ASOP 2 | §3.7 | RELIANCE ON OTHERS FOR DATA, PROJECTIONS, AND SUPPORTING ANALYSIS

The actuary may rely on data, projections, and supporting analysis supplied by others. When practicable, the actuary should review the data, projections, and supporting analysis for reasonableness and consistency. For further guidance, the actuary should refer to ASOP No. 23, ASOP No. 41, Actuarial Communications, and ASOP No. 56, Modeling. The actuary should disclose the extent of any such reliance.

ASOP 2 | §3.8 | RELIANCE ON ASSUMPTIONS OR METHODS SELECTED BY ANOTHER PARTY

When relying on assumptions or methods selected by another party, the actuary should refer to ASOP No. 41 for guidance. The actuary should disclose the extent of any such reliance.

ASOP 2 | §3.9 | RELIANCE ON ANOTHER ACTUARY

The actuary may rely on another actuary who has performed actuarial services related to the determination of NGEs. However, the relying actuary should be reasonably satisfied that the other actuary is qualified to perform the actuarial service, the actuarial service was performed in accordance with applicable ASOPs, and the actuarial service performed is appropriate for the objective of the assignment. The actuary should disclose the extent of any such reliance.

ASOP 2 | §3.10 | DOCUMENTATION

In addition to the documentation requirements throughout the rest of section 3, the actuary should consider preparing and retaining documentation to support compliance with the remaining requirements of section 3 and the disclosure requirements of section 4. When preparing documentation, the actuary should prepare it in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work. The degree of documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4.

Section 4
Communications and Disclosures

ASOP 2 | §4.1 | REQUIRED DISCLOSURES IN AN ACTUARIAL REPORT

When issuing an actuarial report to which this standard applies, the actuary should refer to ASOP Nos. 12, 23, 41, and 56. In addition, the actuary should disclose the following (if applicable):

a. any recommendations that were made with respect to developing, completing, or updating the NGE framework (see section 3.1);

b. advice the actuary provided on developing or modifying the determination policy (see sections 3.2 and 3.2.1);

c. advice the actuary provided on how to apply the determination policy, including any advice that was inconsistent with the determination policy in order to follow the guidance in sections 3.2 or that was inconsistent with the guidance in sections 3.2 in order to comply with the determination policy, and the rationale for such inconsistencies (see section 3.2);

d. recommendations made by the actuary to establish or change policy classes for future sales of a new or existing product (see sections 3.3.1 and 3.4.1[a]);

e. recommendations made by the actuary for reassignment of in-force policies to different policy classes (see section 3.3.2);

f. any inconsistency with the determination policy and the guidance in section 3.2 when determining NGE scales (see section 3.4);

g. a description of the anticipated experience factors used in the determination of NGEs and any changes to such factors since any prior determination (see sections 3.4.1 and 3.4.2);

h. a description of any material constraints on the ability to revise NGE scales (see sections 3.4.1[f] and [g] and 3.4.2.4);

i. results, observations, or recommendations from the determination process for NGE scales for future sales of a new or existing product, including results and observations from any profitability analysis or sensitivity analysis (see section 3.4.1);

j. observations from the analysis that indicate that the profitability is particularly sensitive to changes in certain anticipated experience factors (see sections 3.4.1 and 3.4.2.3[h]);

k. any use of prior analysis (see section 3.4.1 and 3.4.2.4);

l. any reconstructed prior determinations or reasonable approaches used when reconstructing the prior determinations was not possible (see section 3.4.2.1); m. any recommendation that anticipated experience factors be updated and how these updated factors were taken into account when recommending changes to NGE scales (see section 3.4.2.2);

n. observations or recommendations to revise or not revise in-force NGE scales, including results from any profitability or sensitivity analysis (see section 3.4.2.3);

o. results, observations, or recommendations from the determination process used to support any revisions to NGE scales for in-force policies, including results and observations from any analysis (see section 3.4.2.4);

p. the circumstances and rationale for using any additional anticipated experience factors that were not part of the previous determination of NGE scales (see section 3.4.2.5);

q. the circumstances under which the insurer allocates past losses or gains by making adjustments to the NGE scales and any recommendations for a methodology to separately account for such adjustments when considering future determinations of the NGE scales (see section 3.4.2.5); and

r. results from any tests of illustrated NGE scales not subject to ASOP No. 24 to ascertain whether those illustrated NGE scales could be supported by anticipated experience factors and other reasonable assumptions (see section 3.5).

s. extent of any reliance on the data, projections, and supporting analysis of others (see section 3.7);

t. extent of any reliance on assumptions or methods selected by another party (see section 3.8); and

u. extent of any reliance on another actuary (see section 3.9).

ASOP 2 | §4.2 | ADDITIONAL DISCLOSURES IN AN ACTUARIAL REPORT

The actuary also should include disclosures in accordance with ASOP No. 41 in an actuarial report for the following circumstances:

a. if any material assumption or method was prescribed by applicable law;

b. if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and

c. if in the actuary’s professional judgment, the actuary has deviated materially from the guidance of this ASOP.

Appendix 1
Background and Current Practices

ASOP 2 | Appendix 1 | BACKGROUND AND CURRENT PRACTICES

Note: This appendix is provided for informational purposes and is not part of the standard of practice.

Background

In the mid-1970s, activity increased with respect to individual life and annuity products with nonguaranteed elements (NGEs) as opposed to dividends under traditional participating policies.

Because of the increased activity on these products, they came to represent significant market share and financial significance, and it was deemed necessary to develop an actuarial standard of practice in this area. Thus, the Interim Actuarial Standards Board adopted the original version of this ASOP as ASOP No. 1 in October 1986. (Prior to 2013, ASOP No. 2 was known as ASOP No. 1.) The Actuarial Standards Board adopted a reformatted version of ASOP No. 1 in 1990.

In 1986, the policies in question were still evolving, and there was little standardization in areas such as benefit design, pricing structure, marketing practices, and investment philosophies. It was therefore impossible for the standard to offer guidance on these issues. Rather, the standard reflected that the actuary’s essential obligations were

(1) to assure the completion of all activities required to advise the client professionally, and

(2) to prepare an actuarial communication for the client presenting this advice.

By the early 2000s, the volume of these products sold had continued to grow, and considerable product innovation had taken place. ASOP No. 1 was revised to reflect this new environment. It was also revised to be consistent, where appropriate, with ASOP No. 15, Dividend Determination for Participating Individual Life Insurance Policies and Annuity Contracts, and ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation. The resulting revision of ASOP No. 1 was adopted in March 2004.

In May 2011, ASOP No. 1 was updated for deviation language, and in March 2013, it was renumbered ASOP No. 2.

In recent years, further developments affecting products with NGEs have taken place, such as the following:

• continued increase in the sales of products with NGEs;

• continued product evolution, including index features, persistency bonuses, living benefit riders, secondary guarantees, and new ancillary benefits;

• advances in actuarial techniques for modeling, stochastic testing, and sensitivity analysis;

• changes in life insurance company taxation, reserve valuation, and capital objectives;

• enhancement of insurer governance procedures with respect to the determination of NGEs;

• increased public awareness of changes to NGEs for in-force policies; and

• increased regulation of NGEs, such as the promulgation of New York Regulation 210 in March 2018.

In response to such developments, actuarial practices have evolved, and ASOP No. 2 has been updated to reflect these changes.

Current Practices

The actuary may provide professional services in three principal areas with respect to NGEs. The actuary is normally involved in the determination of NGE scales in accordance with insurer determination policy. The actuary may also be involved in advising the insurer on setting the determination policy or the establishment of or changes to policy classes. When determining NGEs, the actuary considers corporate governance practices, policy administration, regulation, marketing objectives, and consumer expectations, among other factors.

The actuary may be called upon to determine NGE scales for future sales of a new or existing product and for in-force policies. Although the steps needed to complete these two broad categories of assignments have many common elements, there are significant differences with respect to the principles, methodologies, and criteria that are commonly followed.

Appendix 2
Comments on the Second Exposure Draft and Responses

ASOP 2 | | INTRO TO THE ASOP COMMENTARY

The second exposure draft of this ASOP, Nonguaranteed Elements for Life Insurance and Annuity Products, was issued in July 2020 with a comment deadline of November 13, 2020. Seven 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 ASOP No. 2 Task Force carefully considered all comments received, reviewed the exposure draft, and proposed changes. The ASB Life Committee and the ASB reviewed the proposed changes and made modifications where appropriate.

Summarized below are the significant issues and questions contained in the comment letters and the responses. Minor wording or punctuation changes that were suggested but not significant are not reflected in this appendix, although they may have been adopted.

The term “reviewers” in appendix 2 includes the ASOP No. 2 Task Force, the ASB Life Committee, and the ASB. Also, unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the second exposure draft.

GENERAL COMMENTS

Comment	Response
One commentator suggested defining “take into account” because it is unclear how it differs from “consider” or “reflect.”	The reviewers do not believe “take into account” or “reflect” require definitions that differ from the ordinary English definitions. Note that the term “should consider” is discussed in ASOP No. 1, Introductory Standard of Practice. ASOP No. 1 states, The terms “must” and “should” are generally followed by a verb or phrase denoting action(s), such as “disclose,” “document,” “consider,” or “take into account.” For example, the phrase “should consider” is often used to suggest potential courses of action. If, after consideration, in the actuary’s professional judgment an action is not appropriate, the action is not required and failure to take this action is not a deviation from the guidance in the standard. Therefore, the reviewers made no change in response to this comment.
One commentator requested that the ASOP be reviewed for applicability to annuities.	The reviewers note that section 1.2 describes which annuities are in scope and added examples applicable to both life and annuities throughout the ASOP.
One commentator suggested differentiating between routine NGE changes and more complex NGE changes.	The reviewers clarified the language in section 3.4.2.4 in response to this comment.
One commentator requested more guidance on the initial determination.	The reviewers believe the guidance is appropriate and made no change in response to this comment.
One commentator said that it is unclear whether the actuary can improve an NGE or reverse an increase without the full analysis described in the ASOP.	The reviewers believe the guidance is appropriate and made no change in response to this comment.
One commentator was concerned that the ASOP poses limitations on alternative rate-setting processes, such as following an established plan (such as tracking an index or market rates).	The reviewers disagree and made no change in response to this comment.
One commentator said that the ASOP was written for a consultant and not a company actuary.	The reviewers believe the guidance is appropriate and made no change in response to this comment.

ASOP 2 | Commentary Section 1.2 | COMMENT ON SECTION 1.2

Section 1.2, Scope

Comment	Response
One commentator suggested adding language to clarify that the ASOP is not retroactively applicable to prior determinations before the effective date of the ASOP.	The reviewers clarified the language.
One commentator suggested moving the sentence “Throughout this standard, the term determination includes both initial determination and subsequent redeterminations” to section 1.1.	The reviewers disagree and made no change in response to this comment.
One commentator suggested adding “to the extent possible” when referring to future determinations of in-force products after the effective date to provide sufficient flexibility.	The reviewers believe the guidance is appropriate and made no change in response to this comment.
One commentator noted that ASOP No. 15, Dividends for Individual Participating Life Insurance, Annuities, and Disability Insurance, does not appear to define “dividend” and suggested adding a definition to ASOP No. 2.	The reviewers disagree with the suggestion and made no change in response to this comment. The reviewers note that section 2.4 states “For the purpose of this ASOP, an NGE reflects expectations of future experience as opposed to, for example, a dividend, which reflects participation in past experience.”

ASOP 2 | Commentary Section 1.4 | COMMENT ON SECTION 1.4

Section 1.4, Effective Date

Comment	Response
One commentator suggested an effective date six months after approval by the ASB.	The reviewers note the effective date is June 1, 2022.

ASOP 2 | Commentary Section 2.1 | COMMENT ON SECTION 2.1

Section 2.1, Anticipated Experience Factor

Comment	Response
One commentator suggested adding “may include but are not limited to” before the list of examples.	The reviewers note that examples are illustrative, not exhaustive, and made no change.
One commentator suggested clarifying whether “rates of” applies to investment income only or the entire list.	The reviewers believe the language is appropriate and made no change.
One commentator suggested modifying the example to reference policyholder elections.	The reviewers disagree and made no change.

ASOP 2 | Commentary Section 2.3 | COMMENT ON SECTION 2.3

Section 2.3, Guaranteed Element

Comment	Response
One commentator suggested adding “typically” before “specified in the policy” and in the example sentence.	The reviewers believe the language is appropriate and made no change.

ASOP 2 | Commentary Section 2.4 | COMMENT ON SECTION 2.4

Section 2.4, Nonguaranteed Element

Comment	Response
One commentator suggested rewording the second sentence for clarity.	The reviewers agree and clarified the language accordingly.
One commentator suggested changing “can be changed at the discretion of the insurer” to “may be changed...”	The reviewers disagree and made no change.

ASOP 2 | Commentary Section 2.6 | COMMENT ON SECTION 2.6

Section 2.6, NGE Scale

Comment	Response
One commentator suggested either deleting NGE scale as a defined term or referencing anticipated experience factors in the definition.	The reviewers disagree with the suggestion but clarified the language and added examples.

ASOP 2 | Commentary Section 2.9 | COMMENT ON SECTION 2.9

Section 2.9, Profitability Metric

Comment	Response
One commentator suggested revising the language to replace “a product’s expected level of financial results” with “projected profitability.”	The reviewers changed “expected” to “projected” based on this comment.

ASOP 2 | Commentary Section 3.1 | COMMENT ON SECTION 3.1

Section 3.1, NGE Framework

Comment	Response
Two commentators suggested the difference between the determination policy and the NGE framework is unclear and suggested incorporating the concept of the NGE framework into the determination policy.	The reviewers disagree with the suggestion to incorporate the concept of the NGE framework into the determination policy but clarified the language in sections 2.5 and 3.1.
One commentator suggested deleting the examples and moving them to the definition of NGE framework, because it is unclear whether the list is intended to be a documentation requirement.	The reviewers disagree with moving the examples and refer the commentator to sections 3.10 and 4.1(a) with respect to documentation and disclosure.

Section 3.1(e) (now section 3.1[d])

Comment	Response
One commentator suggested deleting 3.1(e), methodology for allocating income and costs.	The reviewers clarified the language.

Section 3.1(g) (now section 3.1[f])

Comment	Response
Response	The reviewers changed “distribution strategy” to “distribution channels” (now 3.1[f]).

ASOP 2 | Commentary Section 3.2 | COMMENT ON SECTION 3.2

Section 3.2, Providing Advice on the Actuarial Aspects of the Determination Policy

Comment	Response
One commentator suggested combining sections 3.2 and 3.4.	The reviewers believe the guidance is appropriate and made no change.

Section 3.2(a)

Comment	Response
Several commentators suggested deleting or modifying sections 3.2(a), 3.4.1(c), and 3.4.2.4 because the language is too prescriptive and best left to regulation.	The reviewers believe the guidance is appropriate and made no change in response to these comments.

Section 3.2(b)

Comment	Response
Several commentators expressed concern about the phrase “recouping past losses or distributing past gains” being too prescriptive or ambiguous and suggested either deleting that language or inserting “if required by statute or regulation” as a condition.	The reviewers disagree but added clarifying language to section 3.4.2.5 to address this comment.
One commentator suggested adding back the guidance from the first exposure draft regarding prospective pattern of profits by duration in sections 3.2(b), 3.4.1(g), and 3.4.2.4(c).	The reviewers believe the guidance is appropriate and therefore made no change.

Section 3.2.1, Providing Advice on Developing or Modifying the Determination Policy

Comment	Response
One commentator suggested replacing the list (a)-(f) with a reference to section 3.1.	The reviewers clarified the language in section 3.1 and the definition of NGE framework in section 2.5, but made no change to this section in response to this comment.

Section 3.2.2, Providing Advice on Applying the Determination Policy

Comment	Response
One commentator suggested combining this section with section 3.2.1.	The reviewers disagree and made no change.

Section 3.2.2(b)

Comment	Response
One commentator suggested coordinating the reference to options with language in ASOP No. 7, Analysis of Life, Health, or Property/Casualty Insurer Cash Flows, on materiality, likelihood of antiselection, and impact on profitability metrics (“cash flows”).	The reviewers added clarifying language to section 3.2.2(b).

Section 3.2.2(d)

Comment	Response
One commentator stated that the reference to reinsurance may be misconstrued as a requirement for post-reinsurance pricing.	The reviewers disagree and made no change.

ASOP 2 | Commentary Section 3.3 | COMMENT ON SECTION 3.3

Section 3.3, Establishment of or Changes to Policy Classes

Comment	Response
One commentator suggested providing more guidance on the term “review.”	The reviewers believe the guidance is appropriate and therefore made no change.
One commentator suggested adding consideration of contractual provisions before establishing or changing policy classes.	The reviewers believe the guidance is appropriate and note that section 3.3.1 states that “the actuary should take into account the policy provisions.”

Section 3.3.1, For Future Sales of a New or Existing Product

Section 3.3.1(b)

Comment	Response
One commentator disagreed that policies can be assigned to more than one policy class.	The reviewers believe the guidance is appropriate and made no change.

Comment	Response
One commentator suggested deleting the item that says that the actuary should not expect to redefine policy classes after issue.	The reviewers added clarifying language and examples to section 3.3.1.
One commentator suggested adding “unless changes in anticipated experiences support changes to policy classes.”	The reviewers made no change in this section but added clarifying language to address redefinition of policy classes after issue in section 3.3.2.

Section 3.3.2, For In-Force Policies

Comment	Response
One commentator stated that this section should recognize that some policies cannot be reassigned if the actuary is limited by contract language.	The reviewers believe this is covered in the requirement to follow the guidance in section 3.3.1 and made no change in response to this comment.
One commentator suggested identifying and using a different example.	The reviewers believe the example is appropriate and made no change.

ASOP 2 | Commentary Section 3.4 | COMMENT ON SECTION 3.4

Section 3.4, Determination Process for NGE Scales

Comment	Response
One commentator suggested adding “the actuary should consider discussing these differences with management” in the last paragraph of section 3.4.	The reviewers added clarifying language to section 3.4.
One commentator questioned using the word “relationship” in (b) and (f).	The reviewers clarified the language in sections 3.4(b) and (f) in response to this comment.
One commentator suggested combining sections 3.2 and 3.4.	The reviewers disagree with combining sections 3.2 and 3.4 but clarified the language in section 3.4 to reference section 3.2 in its entirety.
One commentator suggested that sections 3.4(f), 3.2.2(c), and 3.2.1(e) are inconsistent.	The reviewers clarified the language in these sections to improve consistency.

Section 3.4.1, Determination Process for Future Sales of a New or Existing Product

Comment	Response
Two commentators suggested adding “if applicable” after “following.”	The reviewers disagree and made no change in response to this comment.
One commentator questioned whether the section works for rates based on the market or based on an index.	The reviewers added clarifying language to the definition of Nonguaranteed Element (NGE) in section 2.4 in response to this comment.
One commentator suggested that there is a bias in this section toward negative NGE changes and toward changes that are made infrequently, such as COI.	The reviewers disagree that the language is biased toward negative NGE changes. The reviewers added an example of a change that could be made more frequently.

Section 3.4.1(d)

Comment	Response
One commentator suggested (d) was redundant with (f) and suggested deleting (d).	The reviewers disagree and made no change.

Section 3.4.1(g)

Comment	Response
One commentator found the reference to section 3.4.2.4, which then refers to section 3.2, circular and confusing and suggested deleting (g).	The reviewers deleted the reference to section 3.4.2.4 and clarified the language in response to this comment.

Section 3.4.2, Determination Process for In-Force Policies

Comment	Response
One commentator said that it is unclear whether the anticipated experience factors being referenced are those that were identified in the past, those that are currently experienced, or those that are expected in the future.	The reviewers believe the language of this section, as well as the definition of anticipated experience factor in section 2.1, is clear and made no change.

Section 3.4.2.1, Reviewing Prior Determinations

Comment	Response
One commentator suggested adding “may” in the second sentence of the first paragraph.	The reviewers agree and made the change.

Section 3.4.2.2, Analyzing Experience

Comment	Response
One commentator said that this section could be interpreted as saying that favorable past experience must be reflected in future anticipated experience factors and asked for clarification.	The reviewers disagree and made no change.
One commentator noted that experience can come from a variety of sources.	The reviewers added item (b) to the list of examples in section 3.1 in response to this comment.
One commentator said this section should not be limited to the determination of in-force policies.	The reviewers note section 3.4.1(a) addresses consideration of how experience factors were developed for future sales of a new or existing product and therefore made no change in response to this comment.

Section 3.4.2.3, Considering Whether to Recommend a Revision to NGE Scales

Section 3.4.2.3(e)

Comment	Response
One commentator suggested replacing “at issue” and “in force” with “determination” and “redetermination,” respectively.	The reviewers disagreed with the suggestion but clarified the use of the term “determination” in section 1.2 in response to this comment.

Section 3.4.2.3(j)

Comment	Response
One commentator suggested replacing “policyholder” with “policyholder behavior.”	The reviewers clarified the language.

Section 3.4.2.4, Determining the Revised NGE Scales

Comment	Response
One commentator questioned whether the reference to section 3.2 in this section conflicts with the reference to section 3.2 in the last paragraph of section 3.4.	The reviewers clarified the language in the last paragraph of section 3.4.
One commentator suggested replacing “appropriate level of analysis” with language more similar to 3.4.2.3(g).	The reviewers believe the guidance is appropriate and made no change.
One commentator suggested combining sections 3.4.2.4 and 3.4.2.3.	The reviewers believe the guidance is appropriate and made no change.

Section 3.4.2.4(a)

Comment	Response
Two commentators suggested deleting section 3.4.2.4(a) because “the reference to ‘under the terms of the policy and applicable law’ makes this a legal question, not an actuarial one.”	The reviewers clarified the language.

Section 3.4.2.4(c)

Comment	Response
Two commentators suggested deleting the “prospective pattern of profits by duration” from the example because it was too prescriptive.	The reviewers clarified the language.
One commentator suggested deleting the entire example because this method may not be required by regulation.	The reviewers kept the example but clarified the language.

Section 3.4.2.5, Additional Considerations

Comment	Response
One commentator suggested adding an example.	The reviewers added an example.

ASOP 2 | Commentary Section 3.5 | COMMENT ON SECTION 3.5

Comment	Response
One commentator suggested deleting this section, the related disclosure in section 4.1(q), and language related to ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation, in section 1.2.	The reviewers disagree but clarified language related to illustrations not subject to ASOP No. 24.

ASOP 2 | Commentary Section 3.6 | COMMENT ON SECTION 3.6

Comment	Response
One commentator suggested clarifying the meaning of “regulatory opinion.”	The reviewers clarified the language.

ASOP 2 | Commentary Section 4.1 | COMMENT ON SECTION 4.1

4.1, Required Disclosures in an Actuarial Report 4.1 (p)

Comment	Response
One commentator suggested combining sections 4.1(p) and (g) because new anticipated experience factors don’t need special documentation.	The reviewers disagree and made no change.

Introduction

ASOP 3 | TRANSMITTAL MEMORANDUM

TO:	Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Continuing Care Retirement Communities and At Home Programs
FROM:	Actuarial Standards Board (ASB)
SUBJECT:	Actuarial Standard of Practice (ASOP) No. 3

This document contains the revision of ASOP No. 3, Continuing Care Retirement Communities and At Home Programs.

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History of the Standard

In 1987, the Interim Actuarial Standards Board adopted a document titled Relating to Continuing Care Retirement Communities (CCRCs). In 1990, the ASB revised and reformatted ASOP No. 3, Relating to Continuing Care Retirement Communities. In 1994, the ASB adopted another revision titled Practices Relating to Continuing Care Retirement Communities. In 2008, the standard was revised to reflect current, generally accepted actuarial practice and to adopt the updated format for standards. The industry also refers to Continuing Care Retirement Communities (CCRCs) as Life Plan Communities (LPCs), and for the purpose of this standard CCRCs refers to both CCRCs and LPCs.

Within CCRCs, the provision of benefits through At Home Programs has emerged as a new area of practice. Various terms are used in the industry to describe At Home Programs, which are most commonly known as Continuing Care At Home and Lifecare At Home Programs. This ASOP addresses actuarial practice for both CCRCs and At Home Programs. For the purposes of this ASOP, the term “CCRC” reflects the traditional industry product and the term “At Home Program” reflects benefits offered to members who are not residents.

CCRCs arose from a desire of individuals to have both housing and long-term care provided by the same organization. Over time, the CCRC model has evolved, with contracts providing for individuals who have delayed entry to a CCRC as well as individuals who may have never intended to move into a CCRC. At Home Programs cover members who do not intend to move into the CCRC. Many states have developed regulations to address both traditional CCRCs and At Home Programs under the CCRC umbrella. Several states limit At Home Programs to the confines of an existing CCRC.

Exposure Draft

The exposure draft was issued in November 2020 with a comment deadline of February 1, 2021. Five comment letters were received and considered in making changes that are reflected in the final ASOP.

Notable Changes from Exposure Draft

Notable changes made to the exposure draft are summarized below. Notable changes do not include changes made to improve readability, clarity, or consistency.

1. The terms “resident” and “non-resident” were replaced with “contractual resident” and “non-contractual resident” throughout the ASOP.

2. Examples of services covered by the ASOP proposed to be deleted in the exposure draft were restored in section 1.2, Scope.

3. A definition for “occupancy rate” was added in section 2.20, and the occupancy rate assumption was included in section 3.7.1, Actuarial Assumptions.

4. Guidance was clarified regarding the consistency among related assumptions in section 3.7.6, Reasonableness of Assumptions.

5. Guidance was clarified to state that the combined effect of financial and demographic assumptions is expected to have no significant bias except for margins for uncertainty in section 3.7.6, Reasonableness of Assumptions.

Notable Changes from the Existing ASOP

A cumulative summary of the notable changes from the existing ASOP is summarized below. Notable changes do not include additional changes made to improve readability, clarity, or consistency.

1. The ASOP was revised to address actuarial practice for At Home Programs that are not regulated as an insurance entity.

2. The ASOP was revised to include new disclosure requirements that the ASB believes are appropriate and are intended to enhance the quality of actuarial communications regarding CCRCs and At Home Programs.

The ASB thanks everyone who took the time to contribute comments and suggestions on the exposure draft.

The ASB would like to posthumously thank Matthew P. Chamblee for his contribution to the ASB Health Committee.

The ASB voted in September 2021 to adopt this standard.

ASOP 3 | §0.1 | AUTHORS

ASOP No. 3 Task Force

Dave Bond, Chairperson

Christopher J. Borcik

John C. Lloyd

Lisa M. Parker

Molly J. Shaw

Darryl G. Wagner

Gregory T. Zebolsky

Health Committee of the ASB

Rick Lassow, Chairperson

Jinn-Feng Lin

Daniel S. Pribe

D. Todd Sherman

David T. Stefanski

Jennifer L. Stevenson

Alisa L. Swann

Timothy J. Wilder

Actuarial Standards Board

Darrell D. Knapp, Chairperson

Elizabeth K. Brill

Robert M. Damler

Kevin M. Dyke

David E. Neve

Cande J. Olsen

Kathleen A. Riley

Judy K. Stromback

Patrick B. Woods

The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.

Section 1
Purpose, Scope, Cross References, and Effective Date

ASOP 3 | §1.1 | PURPOSE

This actuarial standard of practice (ASOP or standard) provides guidance to actuaries when performing actuarial services with respect to Continuing Care Retirement Communities (CCRCs), also known as Life Plan Communities (LPCs), or At Home Programs that are not regulated as insurance entities.

ASOP 3 | §1.2 | SCOPE

This standard applies to actuaries when performing actuarial services, including giving advice, in connection with CCRCs (including nonprofit and for-profit entities) or At Home Programs that are not regulated as insurance entities. These actuarial services may be performed for owners, operators, financing entities, or current or prospective contractual residents or members, as well as for other professionals or regulatory bodies.

Examples of the services covered by this ASOP include the following:

a. testing the financial condition for satisfactory actuarial balance;

b. estimating actuarial values of assets and liabilities;

c. evaluating the fee structure for existing contractual residents or members, or a cohort of new contractual residents or members;

d. developing population projections, including contractual resident or member movements, independent living unit turnover, and health center utilization;

e. projecting future cash flows and cash and investment balances;

f. designing and pricing new residency agreements or membership agreements;

g. estimating the future services obligation under GAAP;

h. assisting in developing financial feasibility studies;

i. performing mortality, morbidity, and withdrawal experience studies; and

j. providing appropriate rates of mortality, morbidity, or life expectancies.

This standard does not apply to actuaries when performing actuarial services with respect to At Home Programs regulated as insurance entities. When performing actuarial services with respect to such organizations, the actuary should review ASOP No. 18, Long-Term Care Insurance, for applicability.

If the actuary determines that the guidance in this ASOP conflicts with a cross-practice ASOP (applies to all practice areas), this ASOP governs.

If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4. If a conflict exists between this standard and applicable law, the actuary should comply with applicable law.

ASOP 3 | §1.3 | CROSS REFERENCES

When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.

ASOP 3 | §1.4 | EFFECTIVE DATE

This standard is effective for work performed on or after June 1, 2022.

Section 2
Definitions

ASOP 3 | §2.0 | INTRO TO SECTION 2

The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP.

ASOP 3 | §2.1 | ACTUARIAL BALANCE SHEET

A measure of the assets and liabilities, as of the valuation date, associated with current contractual residents or current members.

ASOP 3 | §2.2 | ACTUARIAL PRESENT VALUE

The value of an amount or series of amounts payable or receivable at various times, determined as of a given date by the application of a particular set of actuarial assumptions with regard to future events, observations of market or other valuation data, or a combination of assumptions and observations.

ASOP 3 | §2.3 | ADDITIONAL FEE

An amount that may be payable by a contractual resident or member, in accordance with a residency agreement or membership agreement, for services made available but not covered by the advance fee and the periodic fees. Examples of additional fees include fees for guest meals, additional meals, barber/beauty shop, use of a carport, and non-covered health care services.

ASOP 3 | §2.4 | ADVANCE FEE

An amount payable by a contractual resident at the inception of a residency agreement or by a member at the inception of a membership agreement. The advance fee is usually specified in the residency agreement or membership agreement and is usually payable prior to occupancy of the residence or receipt of benefits.

ASOP 3 | §2.5 | AT HOME PROGRAM

An organization that provides social and health care services in return for some combination of an advance fee, periodic fees, and additional fees. At Home Programs differ from CCRCs in that they do not provide a direct independent living unit for members.

ASOP 3 | §2.6 | CASH AND INVESTMENT BALANCE

The value of cash, cash equivalents, and marketable securities (historically referred to as “cash balance” by industry organizations). This excludes the value of the physical property assets.

ASOP 3 | §2.7 | COHORT OF NEW CONTRACTUAL RESIDENTS OR NEW MEMBERS

A hypothetical group of new contractual residents or members assumed to enter a CCRC or At Home Program over a specified period of time and assumed to have certain demographic characteristics.

ASOP 3 | §2.8 | CONTINUING CARE RETIREMENT COMMUNITY \(CCRC\)

An organization that provides contractual residential housing and stated housekeeping, social, and health care services in return for some combination of an advance fee, periodic fees, and additional fees. CCRCs are also known as Life Plan Communities (LPCs).

ASOP 3 | §2.9 | CONTRACTUAL RESIDENT

A person who has signed a residency agreement.

ASOP 3 | §2.10 | FEE STRUCTURE

A combination of fees that includes advance fees and periodic fees, and that may include additional fees.

ASOP 3 | §2.11 | HEALTH CARE GUARANTEE

A clause in a residency agreement or membership agreement guaranteeing access to health care and defining the type of health care services to be provided to the contractual resident or member. These health care services may be offered with or without adjustments to the periodic fees.

ASOP 3 | §2.12 | HEALTH CENTER

A facility associated with a CCRC or At Home Program where health care is provided to contractual residents or members in accordance with the residency agreement or membership agreement. The facility typically includes some combination of assisted living, memory care, and nursing care units. Non-contractual residents may also live in the facility.

ASOP 3 | §2.13 | INDEPENDENT LIVING UNIT

Living quarters designed for contractual residents capable of living independently. A contractual resident could receive home health care in the independent living unit, but a contractual resident who needs full-time health care on either a temporary or permanent basis is normally transferred to the health center.

ASOP 3 | §2.14 | LEVEL(S) OF CARE

Varying degrees of care based on a contractual resident’s or member’s health status. Typical levels of care include independent living, assisted living, nursing care, and memory care. The levels of care may be dictated by state licensure.

ASOP 3 | §2.15 | LIVING UNIT

The various living quarters of a CCRC, including independent living units and health center units.

ASOP 3 | §2.16 | MEMBER

A person who has signed a membership agreement with an At Home Program.

ASOP 3 | §2.17 | MEMBERSHIP AGREEMENT

A contract between one or more members and an At Home Program that describes the services to be provided, the obligations of the parties, the health care guarantee, and any refund guarantee. The contract is usually of long duration and may be for the life of each member.

ASOP 3 | §2.18 | MORBIDITY

The incurral of an illness or disability requiring the transfer to a different level of care. The permanent transfer rates and the temporary transfer rates together comprise the rate of morbidity.

ASOP 3 | §2.19 | NON-CONTRACTUAL RESIDENT

A person living in the CCRC without a health care guarantee and without a refund guarantee. Non-contractual residents normally pay for all health care services received on a fee for service basis. Examples of non-contractual residents are rental or lease residents, and direct admissions to the health center.

ASOP 3 | §2.20 | OCCUPANCY RATE

The number of occupied units at each level of care by contractual and non-contractual residents, relative to available units.

ASOP 3 | §2.21 | PERIODIC FEE

Amounts payable periodically (usually monthly) by a contractual resident or member. The amounts are typically adjusted from time to time to reflect changes in operating costs.

ASOP 3 | §2.22 | PERMANENT TRANSFER

A move from one level of care to another level of care without expectation of returning to the former level of care.

ASOP 3 | §2.23 | PHYSICAL PROPERTY

Physical assets, such as land, building, furniture, fixtures, or equipment. These assets, excluding land, are assumed to depreciate over their respective lifetimes. These assets are also referred to as the fixed assets.

ASOP 3 | §2.24 | POPULATION PROJECTION

An estimate of the expected number of contractual residents or members at various future times.

ASOP 3 | §2.25 | REFUND GUARANTEE

A clause in a residency agreement or membership agreement that provides for a refund of any portion of the advance fee upon termination of the agreement.

ASOP 3 | §2.26 | RESIDENCY AGREEMENT

A contract between one or more residents and a CCRC that includes a health care guarantee or a refund guarantee, and describes the services to be provided and the obligations of the parties. The contract is usually of long duration and may be for the life of each contractual resident.

ASOP 3 | §2.27 | TEMPORARY TRANSFER

A move from one level of care to another level of care with the expectation of returning to the former level of care.

ASOP 3 | §2.28 | TREND

Measure of rates of change, over time, that affects revenues, costs, or actuarial assumptions.

ASOP 3 | §2.29 | VALUATION DATE

The date as of which the assets and liabilities of the CCRC or At Home Program are estimated.

ASOP 3 | §2.30 | WITHDRAWAL

The termination of a residency agreement or membership agreement by the contractual resident or member for reasons other than death.

Section 3
Analysis of Issues and Recommended Practices

ASOP 3 | §3.1 | INTRODUCTION

When providing actuarial services related to CCRCs or At Home Programs, the actuary should take into account the relevant financial items associated with the organizations, current contractual residents or members, new contractual residents or members, and levels of care provided, as well as relevant residency agreement or membership agreement provisions and applicable law. The actuary should use methods and assumptions that are, in the actuary’s professional judgment, appropriate considering the scope and purpose of the assignment.

ASOP 3 | §3.2 | DETERMINATION OF SATISFACTORY ACTUARIAL BALANCE

In determining whether the CCRC or At Home Program is in satisfactory actuarial balance as of the valuation date, the actuary should evaluate whether the CCRC or At Home Program meets all of the following three conditions:

3.2.1 Condition 1: Adequate Resources for Current Contractual Residents or Members

The resources available to current contractual residents or members include any existing net assets plus the actuarial present value of future revenues, such as periodic fees, additional fees, and third-party payments (for example, Medicare, Medicaid, and long-term care insurance).

Condition 1 would be met if the resources are greater than or equal to any existing liabilities for the current contractual residents or members plus the actuarial present value of the expected costs associated with the contractual obligations to current contractual residents or members. The actuary should determine if this condition is satisfied using the actuarial balance sheet (see section 3.3).

3.2.2 Condition 2: Adequate Fee Structure for a Cohort of New Contractual Residents or New Members

For a cohort of new contractual residents or new members, the expected fees are the sum of the advance fees paid plus the actuarial present value of the new contractual residents’ or new members’ expected future revenues, such as periodic fees, additional fees, and third-party payments (for example, Medicare, Medicaid, and long-term care insurance).

Condition 2 would be met if the expected fees are greater than or equal to the actuarial present value of the costs associated with the contractual obligations determined at an appropriate occupancy or membership date for the cohort. The actuary should determine if this condition is satisfied using the cohort pricing analysis (see section 3.4).

3.2.3 Condition 3: Positive Projected Cash and Investment Balances

The projection of cash and investment balances over the projection period should include revenue and expenses from all known sources, including current contractual residents or members, new contractual residents or members, and any non-contractual residents. The actuary should choose a projection period that extends to a point at which, in the actuary’s professional judgment, the use of a longer period would not materially affect the results and conclusions.

Condition 3 would be met if the cash and investment balances are positive in each projection year. The actuary should determine whether this condition is satisfied using the cash flow projection (see section 3.5).

In the event the CCRC or At Home Program fails to meet any of the three conditions as specified above, the actuary should consult with the organization to address possible corrective actions to achieve satisfactory actuarial balance.

For a proposed or start-up CCRC or At Home Program, the actuary should evaluate conditions 1 and 2 using a future valuation date and should begin evaluating condition 3 as of a future date. The actuary should select such future dates that are consistent with the end of the start-up period. For example, the actuary may evaluate these conditions using the earlier of a short-term period (such as three to five years) after opening or when the CCRC or At Home Program reaches the targeted number of contractual residents or members.

ASOP 3 | §3.3 | ACTUARIAL BALANCE SHEET

The actuary should develop the actuarial balance sheet according to the following:

3.3.1 Closed-Group Projection of Current Contractual Residents or Members

The actuary should use a population projection that is performed solely with respect to current contractual residents or members on the valuation date. The actuary should project the surviving contractual residents’ or members’ movements through various levels of care until contract termination. This projection excludes new contractual residents, new members, and any non-contractual residents.

3.3.2 Assets

The actuary should estimate the actuarial present value of each of the following: the future periodic fees (described in section 3.6.1), the future additional fees and third-party payments (described in section 3.6.2), and the physical property for assets currently in service (described in section 3.6.3).

The actuary should reflect in the actuarial balance sheet other assets from the accounting balance sheet as appropriate, in the actuary’s professional judgment. These assets generally include such items as cash and investment balances, current receivables, and other items not specifically reflected in the above guidance.

3.3.3 Liabilities

The actuary should estimate the actuarial present value of each of the following: the future use of physical property (described in section 3.6.4), the future operating expenses (described in section 3.6.5), the future refunds due to refund guarantees (described in section 3.6.6), and the long-term debt (described in section 3.6.7).

The actuary should reflect in the actuarial balance sheet other liabilities from the accounting balance sheet as appropriate, in the actuary’s professional judgment. These liabilities generally include such items as current payables, prepaid contractual resident or member deposits, fees paid in advance, short-term debt obligations, and other items not specifically reflected in the above guidance.

ASOP 3 | §3.4 | COHORT PRICING ANALYSIS

The actuary should develop the cohort pricing analysis based on the actuarial present value of revenues and expenses associated with a cohort of new contractual residents or new members.

The actuary should use a population projection that is performed solely with respect to a cohort of new contractual residents or new members. The actuary should project surviving contractual resident or member movements through various levels of care until contract termination. This population projection excludes any non-contractual residents.

The revenues include the advance fees, the actuarial present value of future periodic fees (described in section 3.6.1), and the actuarial present value of future additional fees and third-party payments (described in section 3.6.2).

The expenses include the actuarial present value of each of the following: the future use of physical property (described in section 3.6.4), the future operating expenses (described in section 3.6.5), and the future refunds due to refund guarantees (described in section 3.6.6).

The actuary may consider, subject to disclosure, the use of expense levels consistent with the targeted number of contractual residents or members when a material change in the population, such as growth resulting from new construction or expansion, is expected.

ASOP 3 | §3.5 | CASH FLOW PROJECTIONS

The actuary should perform cash flow projections using an open group population projection that includes existing contractual residents or members on the valuation date together with expected future contractual residents or members consistent with assumed occupancy rates and membership levels. For CCRCs, the actuary should include non-contractual residents in this population projection that use unoccupied units or beds in various levels of care consistent with assumed occupancy rates.

The actuary should select assumptions in the cash flow projections that are consistent with those used in the development of the actuarial balance sheet and cohort pricing analysis (see sections 3.3 and 3.4).

The actuary should reflect revenues from all known sources (such as advance fees, periodic fees, additional fees, payments from non-contractual residents, third-party payments, and investment income). The actuary should reflect expenses from all known sources (such as operating expenses, capital expenditures, debt interest and principal payments, any cost of using an offsite health facility, and refunds due to refund guarantees).

In the cash flow projection, the actuary should develop the cash and investment balances at the beginning and end of each projection year.

ASOP 3 | §3.6 | ACTUARIAL ASSET AND LIABILITY VALUES

When developing the actuarial balance sheet or the cohort pricing analysis, the actuary should develop the following actuarial present value items.

3.6.1 Future Periodic Fees

The actuary should estimate the actuarial present value of future periodic fees by projecting the fees payable by the surviving contractual residents or members of the appropriate closed-group population in each level of care in each future year, and discounted to the valuation date. In the estimate of future fees, the actuary should reflect current rates adjusted for projected future fee increases.

3.6.2 Future Additional Fees and Third-Party Payments

The actuary should estimate the actuarial present value of future additional fees (such as guest meals and additional meals) and third-party payments. When projecting future payments, the actuary should project the additional revenue payable by, or on behalf of, the surviving contractual residents or members attributable to the appropriate closed-group population in each level of care in each future year. In the estimate of these future payments, the actuary should reflect current experience adjusted for projected future increases.

3.6.3 Physical Property for Assets Currently in Service

The actuary should estimate the actuarial present value of physical property for assets currently in service as the actuarial present value of the projected remaining annual capital expense charges associated with assets in service as of the valuation date.

The actuary should estimate the annual capital expense charge for the use of an asset for each year using its useful lifetime. The projected annual capital expense charge consists of the imputed interest charge for the use of the asset plus the change in asset value from one year to the next. In calculating the capital expense charges, the actuary should use a rate consistent with the cost of capital at the time the asset was originally put into service or the cost of capital in the current economic environment.

3.6.4 Future Use of Physical Property

The actuary should estimate the actuarial present value of the future use of physical property by taking the projected annual capital expense charges for both the current and replacement fixed assets allocated to the surviving contractual residents of the appropriate closed-group population in each future year and discounting the result back to the valuation date. The actuary should consider developing the actuarial present value estimates for each level of care.

The actuary should use a methodology to estimate the annual capital expense charges that is consistent with the methodology used to estimate the annual capital expense charges of physical property for assets currently in service (see section 3.6.3).

3.6.5 Future Operating Expenses

The actuary should estimate the actuarial present value of future operating expenses by taking the operating expenses allocated to the contractual residents or members of the appropriate closed-group population in each future year and discounting the result back to the valuation date. The actuary should exclude from future operating expenses

(a) future capital expenditures, which are discussed in section 3.6.4; and

(b) the future long-term debt interest and principal payments, which are discussed in section 3.6.7.

When estimating future operating expenses, the actuary should reflect future cost trends and reflect underlying expense consumption patterns in the allocation. The actuary should allocate expenses across the various levels of care and within each level of care on an appropriate basis such as per person, per unit, or per square foot.

3.6.6 Future Refunds Due to Refund Guarantees

The actuary should estimate the actuarial present value of future refunds due to refund guarantees by estimating the amount of refund due to each terminating contractual resident or member of the appropriate closed-group population in each future year and discounting the amounts back to the valuation date. The refund calculation is for the contractual amount of the advance fee refund. The actuary should calculate the estimate of the advance fee refund based on the contractual liability for each future year on the terms of the residency agreement or membership agreement assumed to be applicable to that contractual resident or member and the organization’s actual practice, if any, with regard to payment of refunds.

3.6.7 Long-Term Debt

The actuary should estimate the present value of long-term debt as the discounted value of the projected remaining principal and interest payments as of the valuation date. The present value of long-term debt may be different than the amount on the accounting balance sheet depending on the relationship between the discount rate and the actual or expected interest rate on the debt.

ASOP 3 | §3.7 | SELECTION OF ACTUARIAL ASSUMPTIONS

The actuary should take into account the following when selecting assumptions.

3.7.1 Actuarial Assumptions

In selecting actuarial assumptions for mortality, morbidity, withdrawal, and occupancy rates, the actuary should reflect each of the following as appropriate:

a. age and gender;

b. health characteristics;

c. permanent transfer and temporary transfer patterns;

d. level of care status and expected differences in experience between contractual residents or members in different levels of care;

e. time elapsed since the last change in the level of care;

f. single or joint contracts;

g. demographic profile and number of new contractual residents or members;

h. time elapsed since the contractual resident or member entered the CCRC or At Home Program;

i. actual experience of the CCRC or At Home Program, and the credibility of the experience;

j. contractual guarantees, such as health care guarantees and refund guarantees; and

k. operational policies and practices of the organization, such as transfer policies.

The actuary should select trend assumptions to project mortality (sometimes referred to as “mortality improvement,” which can be positive or negative), morbidity, withdrawal, and occupancy rates that are reasonable, in the actuary’s professional judgment. In selecting trend assumptions, the actuary should consider and review appropriate data. The data may include trend experience studies, appropriate industry studies, and management occupancy rate projections.

3.7.2 Trend Assumptions for Fees and Expenses

The actuary should set trend assumptions for periodic fees, advance fees, additional fees, and other revenue items. The actuary should also set trend assumptions for operating expenses, capital expenditures, and other expense items. The actuary may use different trend assumptions, as appropriate, for various categories of revenues and expenses. In setting trend assumptions for periodic fees, the actuary should also take into account practical, competitive, and contractual considerations.

The actuary should select assumptions for future trends in periodic fees that are consistent with the trend assumptions that are used in projecting future expenses. If the actuary uses different trend assumptions for periodic fees and operating expenses, the actuary should disclose this difference.

3.7.3 Investment Rate and Discount Rate Assumptions

The actuary should select investment rate and discount rate assumptions that are individually reasonable, mutually consistent, and reflective of the long-term nature of the residency agreement or membership agreement as follows:

a. short- and long-term market expectations, and the future investment strategy of the organization to estimate investment income for the cash flow projection; and

b. a discount rate to estimate actuarial present values that, in the actuary’s professional judgment, is reasonable and appropriate, and is consistent with the investment rate.

3.7.4 Revenue and Expense Allocation Assumptions

The actuary should assume an allocation of general revenues and expenses to the various levels of care, and to current and new contractual residents or members. The actuary should determine whether the sum of all allocated expenses reconciles to the total projected expenses of the CCRC or At Home Program.

3.7.5 Going-Concern Assumption

The actuarial balance sheet, the cohort pricing analysis, and the cash flow projection rely on assumptions predicated on the ongoing financial viability and continuation of the CCRC or At Home Program. This implies that the organization will be able to maintain appropriate occupancy rates or membership levels by attracting new contractual residents or members to replace existing contractual residents or members. The actuary should assess the ability of the organization to attract new contractual residents or members or any other known, significant circumstances that, in the actuary’s professional judgment, may affect the organization’s ability to remain a going concern.

3.7.6 Reasonableness of Assumptions

The actuary should review the assumptions for reasonableness. The assumptions should be reasonable, in the actuary’s professional judgment, in the aggregate and for each assumption individually. The actuary should identify material changes in assumptions, and methods relating to the use of those assumptions, compared to the most recent prior analysis if applicable.

In reviewing the assumptions for reasonableness, the actuary should take into account the following:

a. the intended purpose of the measurement;

b. the frequency with which the projections are expected to be updated;

c. the length of the projection period;

d. the sensitivity of the projections to the effect of variations in key actuarial assumptions;

e. the potential variability of the assumption;

f. consistency among related assumptions;

g. the size of the CCRC’s contractual resident population or At Home Program membership;

h. the ability to increase fees or decrease expenses in future periods;

i. the level of capital available to provide for adverse fluctuation;

j. any significant margins for uncertainty that have been included in the actuarial assumptions; and

k. the expectation of no material bias (i.e., it is not materially optimistic or pessimistic) relative to the purpose of the measurement, excluding the effect of a margin.

ASOP 3 | §3.8 | BENEVOLENCE FUNDS AND FINANCIAL ASSISTANCE SUBSIDIES

The actuary should determine the benevolence funds or financial assistance subsidies available as well as the potential future liabilities for contractual residents or members who do not pay the contractual fees. For example, some organizations may set aside assets or funds from charitable contributions to assist contractual residents or members, while other organizations may include the costs of any assistance in the basic fee structure.

ASOP 3 | §3.9 | FOR-PROFIT CCRCS OR AT HOME PROGRAMS

When performing actuarial services with respect to for-profit organizations, the actuary should determine the nature and financial implications of the ownership arrangement, including owner’s equity, past and possible future equity distributions, potential income tax liability, and historical and future capital expenditures funded by the owner.

ASOP 3 | §3.10 | EQUITY OR COOPERATIVE CCRCS OR AT HOME PROGRAMS

When performing actuarial services with respect to equity or cooperative CCRCs or At Home Programs, the actuary should determine the nature and financial implications of any contractual resident or member ownership arrangement, including advance fee payments and refunds due to refund guarantees, and the value of assets invested in the physical property and the replacement costs of these fixed assets.

ASOP 3 | §3.11 | ADDITIONAL CONSIDERATIONS AFFECTING CCRC OR AT HOME PROGRAM FINANCES

The actuary should determine the scope of the organization’s commitments to current and prospective contractual residents or members and the nature of its fee structure. The actuary may obtain this information from the applicable residency agreements or membership agreements and any other reasonable source of information about the organization. When interpreting these documents, the actuary should determine the following:

a. the admission and underwriting criteria and how they are applied;

b. the terms of the residency agreement or membership agreement and any limitations on the period for which commitments are made;

c. any known, significant limitations on the organization’s ability to change future periodic fees;

d. any refund guarantees;

e. any limitation on the services provided and any collectability risk for services limited under the contract or requiring additional payment;

f. any contract provisions for prepaid health care or for additional charges if a contractual resident or member receives health care;

g. any affiliation with another entity and the extent to which any such entity would assume responsibility for the organization’s obligations; and

h. any other matter that, in the actuary’s professional judgment, is expected to have a material effect on the organization’s current or future financial statements.

ASOP 3 | §3.12 | EXTERNAL RESTRICTIONS

The actuary should take into account restrictions on the CCRC or At Home Program from external sources, such as applicable law, regulation, or other binding authority. Examples include a state’s Medicaid reimbursement policy, regulations restricting the use of health center beds by non-contractual residents, and any relevant lender-imposed restrictions.

ASOP 3 | §3.13 | RELIANCE ON DATA OR OTHER INFORMATION SUPPLIED BY OTHERS

When relying on data or other information supplied by others, the actuary should refer to ASOP No. 23, Data Quality, and ASOP No. 41, Actuarial Communications, for guidance.

ASOP 3 | §3.14 | DOCUMENTATION

The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. When preparing documentation, the actuary should prepare documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work. The degree of such documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4.

Section 4
Communications and Disclosures

ASOP 3 | §4.1 | REQUIRED DISCLOSURES IN AN ACTUARIAL REPORT

When issuing an actuarial report to which this standard applies, the actuary should refer to ASOP Nos. 23 and 41. In addition, the actuary should disclose the following in such actuarial reports, if applicable:

a. historical and current financial data used to produce the actuarial balance sheet, cohort pricing analysis, and cash flow projections, in accordance with sections 3.3, 3.4, and 3.5;

b. summary of historical contractual resident or member data and population statistics for contractual residents or members as of the valuation date, in accordance with sections 3.3, 3.4, and 3.5;

c. assumptions and methodology used in performing the population projections, in accordance with sections 3.3, 3.4, and 3.5;

d. assumed expense levels consistent with the targeted number of contractual residents or members when a material change in the population is expected, in accordance with section 3.4;

e. assumptions and methodology used to estimate each actuarial present value, in accordance with section 3.6;

f. assumptions and methodology used to value and depreciate the physical property, in accordance with sections 3.6.3 and 3.6.4;

g. mortality, morbidity, withdrawal, and occupancy rate assumptions (including trend assumptions, if any), and methodology used in selecting such assumptions, in accordance with sections 3.7.1;

h. trend rates for revenues and expenses, and the relationship between the two, in accordance with section 3.7.2;

i. investment rate and discount rate, in accordance with section 3.7.3;

j. assumptions and methodology used to allocate general revenue and expenses, in accordance with section 3.7.4;

k. any known significant circumstances that may affect the organization’s ability to remain a going concern, in accordance with section 3.7.5;

l. assumptions and methodology used for any significant margin for uncertainty, or a similar adjustment or provision, included in the actuarial valuation, including any significant assumptions affecting the valuation regarding surplus available to provide for adverse fluctuations, in accordance with section 3.7.6;

m. any material changes in assumptions or methods from the most recent prior analysis, in accordance with section 3.7.6;

n. the results of any sensitivity tests performed, in accordance with section 3.7.6; and

o. any assistance assumed to be derived from dedicated benevolence funds or financial assistance subsidies, in accordance with section 3.8.

ASOP 3 | §4.2 | ASSIGNMENTS INVOLVING AN OPINION ON SATISFACTORY ACTUARIAL BALANCE

The actuarial report should disclose the actuarial balance sheet, the cohort pricing analysis, and the cash and investment balances at the beginning and end of each projection year, which were prepared to test the three conditions, in accordance with sections 3.3, 3.4, and 3.5 and state whether or not each condition is met.

If one or more of the three conditions is not met, the actuary should disclose the implications of the deficiency and, if known, a description of management’s plans to address the deficiency for each unmet condition.

If the actuary is unable to form the needed opinion regarding whether the organization is in satisfactory actuarial balance, or if the opinion is adverse (due to failing one or more of the conditions) or otherwise qualified, then the actuary should disclose why the actuary is unable to form an unqualified favorable opinion.

ASOP 3 | §4.3 | ADDITIONAL DISCLOSURES IN AN ACTUARIAL REPORT

The actuary also should include disclosures in accordance with ASOP No. 41 in an actuarial report for the following circumstances:

a. if any material assumption or method was prescribed by applicable law;

b. if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and

c. if in the actuary’s professional judgment, the actuary has deviated materially from the guidance of this ASOP.

Appendix 1
Background and Current Practices

ASOP 3 | Appendix 1 | BACKGROUND AND CURRENT PRACTICES

Note: This appendix is provided for informational purposes and is not part of the standard of practice.

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.

a. Each item of physical property is assigned an assumed useful lifetime and an appropriate rate of inflation. While GAAP expected lifetimes might be available, alternative lifetimes may be available from other sources such as engineering studies performed by the client. In the case of land, the expected useful lifetime may be perpetual.

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.

An approximation of these replacement costs that better reflects the expected magnitude and timing of future capital expenditures may also be used. These approximations reflect a sufficient level of future capital expenditures necessary to maintain the physical property for future use.

Capital expense charges are developed for the following items:

a. Actuarial Value of Physical Property for Assets Currently in Service—Reflected as an asset on the actuarial balance sheet;

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.

a. The part of each future year’s capital expense charge that relates to the existing contractual residents as of the valuation date is determined by estimating the ratio of the existing contractual resident survivorship group use to total CCRC use. The ratio may be in proportion to population, number of CCRC occupied beds or units, square footage, or some other appropriate measure. For years during fill-up or material change in population, it may be appropriate to substitute a target or ultimate level of use for the actual estimated level of total use.

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.

a. The part of each future year’s capital expense charge that relates to the new entrant cohort is determined by estimating the ratio of the new entrant cohort survivorship group use to total CCRC use.

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.

A_o = v * E₁ + v² * E₂ + ..... + ve * E_e.

From this we obtain

E1	Ao * (i – ƒ)	, provided i ≠ j
	1 – [v * (1 + ƒ)]e

V_n = Value of the current asset at duration n, where n < e.

V_n = v * E_n+1 + v² * E_n+2 + ..... + v^e-n * E_e.

From this we obtain

E_n+1 = i * V_n + (V_n – V_n+1).

This shows that the annual expense for a physical asset consists of the interest that is forgone (because it is not an interest-earning investment), plus the change in asset value from one year to the next. In the case of land, the annual expense consists of only the interest that is forgone, since there is no assumed change in asset value (lifetime is perpetual).

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.

Appendix 2
Comments on the Exposure Draft and Responses

ASOP 3 | | INTRO TO THE ASOP COMMENTARY

The exposure draft of the proposed revision of ASOP No. 3, Continuing Care Retirement Communities and At Home Programs, was issued in November 2020 with a comment deadline of February 1, 2021. Five 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 ASOP No. 3 Task Force carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the changes proposed by the ASOP No. 3 Task Force and the ASB Health Committee.

Summarized below are the significant issues and questions contained in the comment letters and the responses. Minor wording or punctuation changes that were suggested but not significant are not reflected in the appendix, although they may have been adopted.

The term “reviewers” in appendix 2 includes the ASOP No. 3 Task Force, the ASB Health Committee, and the ASB. Also, the section numbers and titles used in appendix 2 refer to those in the exposure draft, which are then cross referenced with those in the final ASOP.

GENERAL COMMENTS

Comment	Response
One commentator felt itemized paragraph 1 on page vi, announcing the applicability of the ASOP to “At Home Programs that are not regulated as an insurance entity” raises numerous questions among them including: 1) why aren’t [At Home Programs] regulated as long term care insurance? and 2) Is it wise for the Academy to participate in encouraging long term care insurance programs by unlicensed entities?	The reviewers believe ASOP No. 3 is intended to provide guidance to actuaries within the context of the existing regulatory environment.
One commentator felt that Continuing Care Retirement Communities (CCRCs) residents should have been represented on the ASOP No. 3 task force. The commentator also felt actuarial studies should be prepared for an audience that includes state regulators and residents. Lastly, the commentator also felt that actuarial studies should meet the needs of residents.	The reviewers note the purpose of ASOPs is to provide guidance to actuaries practicing in this area and not to advocate for the interest of a particular stakeholder. The ASOP No. 3 task force is composed of actuaries with experience in the field. Any interested party, including non-actuaries, has an opportunity to offer comments through the exposure process prior to finalization of a standard.
One commentator felt the drafters missed the strategic opportunity to educate stakeholders on the difference between GAAP requirements and ASOPs.	The reviewers disagree and believe the guidance regarding CCRCs is appropriate. The reviewers note the education of stakeholders is beyond the scope of this ASOP. The reviewers also note that ASOP No. 1, Introductory Actuarial Standard of Practice, provides guidance for situations where regulatory guidance conflicts with ASOPs. Therefore, the reviewers made no change in response to this comment.
One commentator felt the exposure draft fell short of providing additional definitions and guidance for the differences between At Home Programs and Continuing Care Retirement Communities.	The reviewers believe CCRCs and At Home Programs are currently regulated in a similar manner state-by-state and, therefore, believe both are appropriately addressed in the revision of ASOP No. 3. Therefore, the reviewers made no change in response to this comment.

ASOP 3 | Commentary Section 1.1 | COMMENT ON SECTION 1.1

Section 1.1, Purpose

Comment	Response
One commentator felt that the limitation to “At Home Programs that are not regulated as insurance entities” is repeated in sections 1.1 and 1.2, and felt one would infer that [At Home Programs] offered by licensed insurers are subject to different standards though it’s hard to understand why the actuarial characteristics would be differentiated.	The reviewers believe that this language is necessary to distinguish At Home Programs from long-term care insurance, which would be covered under ASOP No. 18, Long-Term Care Insurance, and made no change.

ASOP 3 | Commentary Section 1.2 | COMMENT ON SECTION 1.2

Section 1.2, Scope

Comment	Response
One commentator stated examples of services covered in the existing ASOP were removed but should have been retained.	The reviewers agree and modified the language.

ASOP 3 | Commentary Section 2.4 | COMMENT ON SECTION 2.4

Section 2.4, Advance Fee

Comment	Response
One commentator felt the definition in section 2.4 departs from the terms that are commonly used for single-premium-life-annuity-type prepayments of fees that would otherwise be paid on a recurrent basis over the insured’s (“resident” or “member” in the terminology of the ASOP) lifetime.	The reviewers disagree and made no change in response to this comment.

ASOP 3 | Commentary Section 2.11 | COMMENT ON SECTION 2.11

Section 2.11, Health Center (now section 2.12)

Comment	Response
One commentator felt that the definition of “non-resident” (a term used in section 2.11) was confusing. Furthermore, the commentator felt clarity was needed regarding the difference between “residents” and “non-residents.”	The reviewers agree and modified the terms “resident” to “contractual resident” and “nonresident” to “non-contractual resident.”

ASOP 3 | Commentary Section 2.24 | COMMENT ON SECTION 2.24

Section 2.24, Residency Agreement (now section 2.26)

Comment	Response
One commentator felt the sentence in section 2.24 reading, “The contract is usually of long duration and may be for the life of each resident,” is at odds with the AICPA Guidance that CCRC contracts are month-to-month because the resident may cease paying.	The reviewers disagree and do not believe AICPA Guidance is relevant to this definition, and made no change in response to this comment.

ASOP 3 | Commentary Section 3.0 | GENERAL COMMENT ON SECTION 3

Comment	Response
One commentator felt specific guidance should be included in section 3 to assist actuaries in understanding the interaction between ASOP No. 3 and ASOP No. 56, Modeling.	The reviewers note that the Code of Professional Conduct (Code) directs the actuary to consider all applicable ASOPs.

ASOP 3 | Commentary Section 3.2 | COMMENT ON SECTION 3.2

Section 3.2, Determination of Satisfactory Actuarial Balance

Comment

Response

One commentator felt the second to the last paragraph in section 3.2 that reads, “In the event the CCRC or At Home Program fails to meet any of three conditions as specified above, the actuary should consult with the organization to address possible corrective actions to achieve satisfactory actuarial balance,” raises the question of what the responsibility of the actuary is if the “organization” refuses to follow the advice.

The reviewers believe this question is outside the scope of ASOP No. 3. Therefore, the reviewers made no change.

ASOP 3 | Commentary Section 3.3 | COMMENT ON SECTION 3.3

Section 3.3.2, Assets

Comment	Response
One commentator stated that additional disclosures are needed in section 3.3.2 regarding actuarial present value.	The reviewers disagree and believe this topic is adequately addressed in section 3.6 and 4.1(e). Therefore, the reviewers made no change.

ASOP 3 | Commentary Section 3.4 | COMMENT ON SECTION 3.4

Section 3.4, Cohort Pricing Analysis

Comment	Response
One commentator suggested that the ASOP should provide an example of the methodology regarding temporary transfers among levels of care.	The reviewers noted that the concept of temporary transfers is discussed in sections 2.27 and 3.7.1. The reviewers also note ASOPs are principles based and are not educational in nature, and made no change in response to this comment.

ASOP 3 | Commentary Section 3.5 | COMMENT ON SECTION 3.5

Section 3.5, Cash Flow Projections

Comment	Response
Two commentators suggested the cross reference to ASOP No. 7, Analysis of Life, Health, or Property/Casualty Insurer Cash Flows, is not appropriate.	The reviewers agree and removed the cross reference.

ASOP 3 | Commentary Section 3.6 | COMMENT ON SECTION 3.6

Section 3.6.4, Future Use of Physical Property

Comment	Response
One commentator noted that in developing the present value of physical property and operating expenses both involve allocation of expenses to level of care.	The committee agreed and modified section 3.6.4 to reflect the allocation of physical property expenses to level of care.

Section 3.6.6, Future Refunds Due to Refund Guarantees

Comment	Response
One commentator suggested changing “refund guarantee” terminology due to the uncertain nature of the contractual provision.	The reviewers disagree and made no change in response to this comment.

ASOP 3 | Commentary Section 3.7 | COMMENT ON SECTION 3.7

Section 3.7, Selection of Actuarial Assumptions

Comment	Response
One commentator felt there should be a requirement that the combined effect of the assumptions is expected to have no significant bias except for margins for uncertainty.	The reviewers agree and modified the language in section 3.7.6.

Section 3.7.1, Mortality, Morbidity, and Withdrawal Assumptions (now Actuarial Assumptions)

Comment	Response
One commentator suggested that documentation should be provided regarding the development of reasonable assumptions as discussed in section 3.7.1 and 3.7.6.	The reviewers disagree and made no change in response to this comment.
One commentator felt that that it should be explicitly stated that the actuary should consider future mortality improvement.	The reviewers agree and modified the language in response to this comment.

Section 3.7.2, Trend Assumptions for Fees and Expenses

Comment	Response
One commentator expressed the need to document and communicate the development of revenue and expense assumptions, as identified in section 3.7.2.	The reviewers note that the standard addresses this issue in sections 3.7.2 and 4.1(h), and made no change.

Section 3.7.5, Going-Concern Assumption

Comment	Response
One commentator suggested the ASOP require an actuary to perform a capital adequacy analysis and develop actuarial reserves.	The reviewers disagree and made no change.

Section 3.7.6, Reasonableness of Assumptions

Comment	Response
One commentator suggested that section 3.7.6 should indicate that there should be consistency among the assumptions.	The reviewers agree and modified the language in response to this comment.

ASOP 3 | Commentary Section 3.8 | COMMENT ON SECTION 3.8

Section 3.8, Benevolence Funds and Financial Assistance Subsidies

Comment	Response
One commentator suggested addressing the situation where the benevolence funds are being used for something other than residential financial assistance.	The reviewers believe that section 3.8 appropriately addresses this situation and note that it states “the actuary should determine the benevolence funds or financial assistance subsidies available as well as the potential future liabilities for contractual residents or members who do not pay the contractual fees.” Therefore, the reviewers made no change in response to this comment.

ASOP 3 | Commentary Section 3.10 | COMMENT ON SECTION 3.10

Section 3.10, Equity or Cooperative CCRCs or At Home Programs

Comment	Response
One commentator believes the ownership structure of the organization is not material to the actuarial valuation.	The reviewers disagree and made no change in response to this comment.

ASOP 3 | Commentary Section 3.11 | COMMENT ON SECTION 3.11

Section 3.11, Additional Considerations Affecting CCRC or At Home Program Finances

Comment	Response
One commentator suggested adding more objective guidance to the actuary when analyzing residency contracts and membership agreements.	The reviewers disagree and made no change in response to this comment. The reviewers note that section 3.11 provides an objective list of contractual items for the actuary to consider.

ASOP 3 | Commentary Section 3.14 | COMMENT ON SECTION 3.14

Section 3.14, Documentation

Comment	Response
One commentator suggested more specific guidance regarding documentation of assumptions and methodology, as well as retention of documentation.	The reviewers disagree and note the language is consistent with standard language found in current ASOPs. Therefore, the reviewers made no change.

ASOP 3 | Commentary Section 4.1 | COMMENT ON SECTION 4.1

Section 4.1, Required Disclosures in an Actuarial Report

Comment	Response
One commentator suggested more specific guidance regarding disclosure of demographic assumptions.	The reviewers agree and modified section 4.1(g) to reflect this comment.
One commentator suggested that there should be a requirement to show sufficient detail to permit another qualified actuary to assess the level and pattern of each assumption.	The reviewers note that ASOP No. 41, Actuarial Communications, contains these requirements and applies to all actuarial reports issued. Therefore, the reviewers made no change in response to this comment.

ASOP 3 | Commentary Section 4.2 | COMMENT ON SECTION 4.2

Section 4.2, Assignments Involving an Opinion on Satisfactory Actuarial Balance

Comment	Response
One commentator suggested that the actuary may not know management's plan to address deficiencies for each unmet condition. Therefore, the actuary would be unable to disclose such information.	The reviewers agree and modified section 4.2.

Introduction

ASOP 4 | TRANSMITTAL MEMORANDUM

TO:	Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Measuring Pension Obligations and Determining Pension Plan Costs or Contributions
FROM:	Actuarial Standards Board (ASB)
SUBJECT:	Actuarial Standard of Practice (ASOP) No. 4

This document contains a revision of ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions.

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History of the Standard

The ASB provides guidance for measuring pension and retiree group benefit obligations through the series of ASOPs listed below.

1. ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions;

2. ASOP No. 6, Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions;

3. ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations;

4. ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations;

5. ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations; and

6. ASOP No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions.

The last revision of ASOP No. 4 was issued in December 2013.

In response to specific requests for changes in the ASOPs and other activity related to public pension plans, in July 2014 the ASB issued a Request for Comments on the topic of ASOPs and Public Pension Plan Funding and Accounting. Over 50 comment letters were received covering a wide variety of potential ASB actions. In December 2014, the ASB formed the Pension Task Force and charged it with reviewing these comments and other relevant reports and input to develop recommendations for ASB next steps. In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. The Pension Task Force provided its report to the ASB in February 2016. The report included suggestions for changes to the ASOPs that would apply to all areas of pension practice. In June 2016, the ASB directed its Pension Committee to draft appropriate modifications to the actuarial standards of practice, in accordance with ASB procedures, to implement the suggestions of the Pension Task Force.

One of the suggestions made by the Pension Task Force was the calculation and disclosure of a solvency value for all valuations of pension plans done for funding purposes. In response to this suggestion, calculation and disclosure of an investment risk defeasement measure was added in the first exposure draft, and a low-default-risk obligation measure was added in the second and third exposure drafts as well as in this final version. The ASB believes that the calculation and disclosure of this measure provides appropriate, useful information for the intended user regarding the funded status of a pension plan. The calculation and disclosure of this additional measure is not intended to suggest that this is the “right” liability measure for a pension plan. However, the ASB does believe that this additional disclosure provides a more complete assessment of a plan’s funded status and provides additional information regarding the security of benefits that members have earned as of the measurement date.

First Exposure Draft

The first exposure draft was approved in March 2018 with a comment deadline of July 31, 2018. Sixty-seven comment letters were received and considered in making changes that were reflected in the second exposure draft.

Second Exposure Draft

The second exposure draft was approved in December 2019 with a comment deadline of July 31, 2020. Nineteen comment letters were received and considered in making changes that were reflected in the third exposure draft.

Third Exposure Draft

The third exposure draft was approved in June 2021 with a comment deadline of October 15, 2021. Seven comment letters were received and considered in making changes that are reflected in the final ASOP.

Notable Changes from the Third Exposure Draft

Notable changes made to the third exposure draft are summarized below. Additional changes were made to improve readability, clarity, or consistency.

1. Section 3.2, General Procedures, added language directing the actuary to refer to ASOP No. 56, Modeling, for guidance on models when measuring pension obligations, determining periodic costs, or determining actuarially determined contributions. In addition, the list of ASOPs in section 4.1 now includes ASOP No. 56.

2. Section 3.11, Low-Default-Risk Obligation Measure, was clarified to state that, for purposes of the obligation measure, the actuary should consider reflecting the impact, if any, of investing plan assets in low-default-risk fixed income securities on the pattern of benefits expected to be paid in the future, such as in a variable annuity plan.

Notable Changes from the Existing ASOP

Notable changes from the version of ASOP No. 4 adopted December 2013 include the following:

1. All references to “plan obligations” were changed to “pension obligations” for consistency.

2. All references to “actuarial assumptions” were changed to “assumptions” for consistency.

3. Section 1.2, Scope, was expanded to clarify the application of the standard when the actuary selects an output smoothing method and when an assumption or method is not selected by the actuary.

4. Section 2.8, Definition of Contribution Allocation Procedure, was clarified to state a contribution allocation procedure is one that determines one or more actuarially determined contributions for a plan.

5. Section 2.12, Funding Valuation, was added in conjunction with added guidance in section 3.

6. Section 2.13, Gain and Loss Analysis, was added in conjunction with added guidance in section 3.22.

7. Section 2.18, Output Smoothing Method, was clarified to state that for the purposes of this standard, an asset valuation method is not an output smoothing method.

8. Section 3.2, General Procedures, was revised to include specific references to sections 3.11, Low-Default-Risk Obligation Measure; 3.14, Amortization Methods; 3.16, Output Smoothing Method; 3.19, Implications of Contribution Allocation Procedure or Funding Policy; 3.20, Contribution Lag; 3.21, Reasonable Actuarially Determined Contribution; 3.22, Gain and Loss Analysis; 3.24, Assessment of Assumptions and Methods Not Selected by the Actuary; 3.25, Approximations and Estimates; and 3.26, Documentation. In addition, subsections of section 3 were reordered and renumbered.

9. The guidance in section 3.3.2, Uncertainty or Risk, was revised to refer only to the relevant ASOPs.

10. The title of section 3.8 was changed from “Actuarial Assumptions” to “Assumptions.” This section was expanded to provide additional guidance regarding selection of assumptions. In addition, exceptions to significant bias now include when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. 51. Section 3.8 also was revised for clarity.

11. Section 3.11, Low-Default-Risk Obligation Measure, was added to provide guidance regarding the calculation of this measure when the actuary is performing a funding valuation.

12. Section 3.14, Amortization Methods, was added to provide guidance on the selection of amortization methods.

13. Section 3.16, Output Smoothing Methods, was added to provide guidance on the selection of output smoothing methods.

14. Section 3.17 (previously 3.14), Allocation Procedure, was expanded to provide additional guidance regarding the selection of a cost allocation procedure or contribution allocation procedure.

15. Section 3.14.2 (now 3.19), Implications of Contribution Allocation Procedure or Funding Policy, was modified to eliminate exceptions to the requirement that the actuary should assess such implications whenever the actuary is performing a funding valuation.

16. Section 3.20, Contribution Lag, was added to provide guidance on calculating an actuarially determined contribution, and the passage of time between the measurement date and the expected timing of actual contributions.

17. Section 3.21, Reasonable Actuarially Determined Contribution, was added to provide further guidance on performing a funding valuation that does not include a prescribed assumption or method set by law.

18. Section 3.22, Gain and Loss Analysis, was added to provide guidance regarding the performance of a gain and loss analysis when performing a funding valuation.

19. Section 3.16 (now section 3.23), Volatility, was modified to direct an actuary analyzing potential economic and demographic volatility to refer to ASOP No. 51 for additional guidance.

20. Section 3.26, Documentation, was added to provide guidance on documenting work within the scope of this ASOP.

21. Section 4.1, Communication Requirements, was renamed “Required Disclosures in an Actuarial Report,” was expanded to provide additional guidance concerning disclosures, and was reordered to follow the order of the guidance in section 3.

The ASB voted in December 2021 to adopt this standard.

ASOP 4 | §0.1 | AUTHORS

Pension Committee of the ASB

David T. Kausch, Chairperson

Benjamin P. Ablin

Sarah E. Dam

Stacey A. Day

Mark T. Dungan

Julie M. Ferguson

Howard A. Freidin

Stephen T. McElhaney

Keith L. Nichols

Matthew M. Smith

Actuarial Standards Board

Darrell D. Knapp, Chairperson

Elizabeth K. Brill

Robert M. Damler

Kevin M. Dyke

David E. Neve

Cande J. Olsen

Kathleen A. Riley

Judy K. Stromback

Patrick B. Woods

The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.

Section 1
Purpose, Scope, Cross References, and Effective Date

ASOP 4 | §1.1 | PURPOSE

This actuarial standard of practice (ASOP or standard) provides guidance to actuaries when performing actuarial services with respect to measuring obligations under a defined benefit pension plan (also referred to as “plan” or “pension plan” throughout this standard) and determining periodic costs or actuarially determined contributions for such plans. Other actuarial standards of practice address assumptions, asset valuation methods, and assessment of risk. This standard addresses broader measurement issues, including cost allocation procedures and contribution allocation procedures. This standard provides guidance for coordinating and integrating all of the elements of an actuarial valuation of a pension plan.

ASOP 4 | §1.2 | SCOPE

This standard applies to actuaries when performing actuarial services with respect to the following tasks in connection with a pension plan:

a. measurement of pension obligations, such as determinations of funded status, assessments of solvency upon plan termination, market measurements, and measurements for use in pricing benefit provisions;

b. assignment of the value of pension obligations to time periods, such as actuarially determined contributions, periodic costs, and actuarially determined contribution or periodic cost estimates for potential plan changes;

c. development of a cost allocation procedure used to determine periodic costs for a plan;

d. development of a contribution allocation procedure used to determine actuarially determined contributions for a plan;

e. determination of the types and levels of benefits supportable by specified cost or contribution levels; and

f. projection of pension obligations, periodic costs or actuarially determined contributions, and other related measurements, such as cash flow projections and projections of a plan’s funded status.

Throughout this standard, any reference to selecting assumptions, actuarial cost methods, asset valuation methods, amortization methods, and output smoothing methods also includes giving advice on selecting assumptions, actuarial cost methods, asset valuation methods, amortization methods, and output smoothing methods. In addition, any reference to developing or modifying a cost allocation procedure or contribution allocation procedure includes giving advice on developing or modifying a cost allocation procedure or contribution allocation procedure.

ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations, and ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations, provide guidance concerning assumptions. ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations, provides guidance concerning asset valuation methods. In the event of a conflict between the guidance provided in this ASOP and the guidance in any of the aforementioned ASOPs, this standard governs.

This standard does not apply to actuaries when performing services with respect to individual benefit calculations, individual benefit statement estimates, annuity pricing, nondiscrimination testing, and social insurance programs as described in section 1.2, Scope, of ASOP No. 32, Social Insurance (unless an ASOP on social insurance explicitly calls for application of this standard).

As discussed in ASOP No. 41, Actuarial Communications, an assumption or method may be selected by the actuary or selected by another party. Nothing in this standard is intended to require the actuary to select an assumption or method that has otherwise been selected by another party. When performing actuarial services using an assumption or method not selected by the actuary, the guidance in section 3 and section 4 concerning assessment and disclosure applies.

This standard does not require the actuary to evaluate the ability or willingness of the plan sponsor or other contributing entity to make contributions to the plan when due. If a conflict exists between this standard and applicable law (statutes, regulations, and other legally binding authority), the actuary should comply with applicable law. If the actuary departs from the guidance set forth in this standard in order to comply with applicable law or for any other reason the actuary deems appropriate, the actuary should refer to section 4.

ASOP 4 | §1.3 | CROSS REFERENCES

When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.

ASOP 4 | §1.4 | EFFECTIVE DATE

This standard is effective for any actuarial report that meets the following criteria:

(a) the actuarial report is issued on or after February 15, 2023; and

(b) the measurement date in the actuarial report is on or after February 15, 2023.

Section 2
Definitions

ASOP 4 | §2.0 | INTRO TO SECTION 2

The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP.

ASOP 4 | §2.1 | ACTUARIAL ACCRUED LIABILITY

The portion of the actuarial present value of projected benefits (and expenses, if applicable), as determined under a particular actuarial cost method that is not provided for by future normal costs. Under certain actuarial cost methods, the actuarial accrued liability is dependent upon the actuarial value of assets.

ASOP 4 | §2.2 | ACTUARIAL COST METHOD

A procedure for allocating the actuarial present value of projected benefits (and expenses, if applicable) to time periods, usually in the form of a normal cost and an actuarial accrued liability. For purposes of this standard, a pay-as-you-go method is not considered to be an actuarial cost method.

ASOP 4 | §2.3 | ACTUARIAL PRESENT VALUE

The discounted value of an amount or series of amounts payable or receivable at various times, determined as of a given date by the application of a particular set of assumptions with regard to future events, observations of market or other valuation data, or a combination of assumptions and observations.

ASOP 4 | §2.4 | ACTUARIAL PRESENT VALUE OF PROJECTED BENEFITS

The actuarial present value of benefits that are expected to be paid in the future, taking into account the effect of such items as future service, advancement in age, and anticipated future compensation (sometimes referred to as the “present value of future benefits”).

ASOP 4 | §2.5 | ACTUARIAL VALUATION

The measurement of relevant pension obligations and, when applicable, the determination of periodic costs or actuarially determined contributions.

ASOP 4 | §2.6 | ACTUARIALLY DETERMINED CONTRIBUTION

A potential payment to the plan as determined by the actuary using a contribution allocation procedure. It may or may not be the amount actually paid by the plan sponsor or other contributing entity.

ASOP 4 | §2.7 | AMORTIZATION METHOD

A method under a contribution allocation procedure or cost allocation procedure for determining the amount, timing, and pattern of recognition of the unfunded actuarial accrued liability.

ASOP 4 | §2.8 | CONTRIBUTION ALLOCATION PROCEDURE

A procedure that determines one or more actuarially determined contributions for a plan. The procedure uses an actuarial cost method and may use an asset valuation method, an amortization method, or an output smoothing method. The procedure may produce a single value, such as normal cost plus an amortization payment of the unfunded actuarial accrued liability, or a range of values, such as the range from the ERISA minimum required contribution to the maximum taxdeductible amount.

ASOP 4 | §2.9 | COST ALLOCATION PROCEDURE

A procedure that determines the periodic cost for a plan (for example, the procedure to determine the net periodic pension cost under accounting standards). The procedure uses an actuarial cost method, and may use an asset valuation method or an amortization method.

ASOP 4 | §2.10 | EXPENSES

Administrative or investment fees or other payments borne or expected to be borne by the plan.

ASOP 4 | §2.11 | FUNDED STATUS

Any comparison of a particular measure of plan assets to a particular measure of pension obligations.

ASOP 4 | §2.12 | FUNDING VALUATION

A measurement of pension obligations or projection of cash flows performed by the actuary intended to be used by the principal to determine plan contributions or to evaluate the adequacy of specified contribution levels to support benefit provisions.

ASOP 4 | §2.13 | GAIN AND LOSS ANALYSIS

An analysis of the effect on the plan’s funded status between two measurement dates resulting from the difference between expected experience based upon a set of assumptions and actual experience.

ASOP 4 | §2.14 | IMMEDIATE GAIN ACTUARIAL COST METHOD

An actuarial cost method under which actuarial gains and losses are included as part of the unfunded actuarial accrued liability of the pension plan, rather than as part of the normal cost of the plan.

ASOP 4 | §2.15 | MARKET-CONSISTENT PRESENT VALUE

An actuarial present value that is estimated to be consistent with the price at which benefits that are expected to be paid in the future would trade in an open market between a knowledgeable seller and a knowledgeable buyer. The existence of a deep and liquid market for pension cash flows or for entire pension plans is not a prerequisite for this present value measurement.

ASOP 4 | §2.16 | MEASUREMENT DATE

The date as of which the values of the pension obligations and, if applicable, assets are determined.

ASOP 4 | §2.17 | NORMAL COST

The portion of the actuarial present value of projected benefits (and expenses, if applicable) that is allocated to a period, typically twelve months, under the actuarial cost method. Under certain actuarial cost methods, the normal cost is dependent upon the actuarial value of assets.

ASOP 4 | §2.18 | OUTPUT SMOOTHING METHOD

A method to reduce volatility of the results of a contribution allocation procedure. The output smoothing method may be a component of the contribution allocation procedure or may be applied to the results of a contribution allocation procedure. Output smoothing methods include techniques such as

1) phasing in the impact of assumption changes on contributions,

2) blending a prior valuation with a subsequent valuation to determine contributions, or

3) placing a corridor around changes in the dollar amount, contribution rate, or percentage change in contributions from year to year.

An output smoothing method may involve a combination of techniques. For purposes of this standard, an asset valuation method is not an output smoothing method.

ASOP 4 | §2.19 | PARTICIPANT

An individual who satisfies the requirements for participation in the plan.

ASOP 4 | §2.20 | PERIODIC COST

The amount assigned to a period using a cost allocation procedure for purposes other than funding. This may be a function of pension obligations, normal cost, expenses, or assets. In many situations, periodic cost is determined for accounting purposes.

ASOP 4 | §2.21 | PLAN PROVISIONS

The relevant terms of the plan document and any relevant administrative practices known to the actuary.

ASOP 4 | §2.22 | PRESCRIBED ASSUMPTION OR METHOD SET BY ANOTHER PARTY

A specific assumption or method that is selected by another party, to the extent that law, regulation, or accounting standards gives the other party responsibility for selecting such an assumption or method. For this purpose, an assumption or method set by a governmental entity for a plan that such governmental entity or a political subdivision of that entity directly or indirectly sponsors is deemed to be a prescribed assumption or method set by another party.

ASOP 4 | §2.23 | PRESCRIBED ASSUMPTION OR METHOD SET BY LAW

A specific assumption or method that is mandated or that is selected from a specified range or set of assumptions or methods that is deemed to be acceptable by applicable law (statutes, regulations, or other legally binding authority). For this purpose, an assumption or method set by a governmental entity for a plan that such governmental entity or a political subdivision of that entity directly or indirectly sponsors is not deemed to be a prescribed assumption or method set by law.

ASOP 4 | §2.24 | SPREAD GAIN ACTUARIAL COST METHOD

An actuarial cost method under which actuarial gains and losses are included as part of the current and future normal costs of the plan.

Section 3
Analysis of Issues and Recommended Practices

ASOP 4 | §3.1 | OVERVIEW

Measuring pension obligations and determining periodic costs or actuarially determined contributions are processes in which the actuary may be required to make judgments or recommendations on the choice of assumptions, actuarial cost methods, asset valuation methods, amortization methods, and output smoothing methods.

The actuary may have the responsibility and authority to select some or all assumptions, actuarial cost methods, asset valuation methods, amortization methods, and output smoothing methods. In other circumstances, the actuary may be asked to advise the individuals who have that responsibility and authority. In yet other circumstances, the actuary may perform actuarial calculations using prescribed assumptions or methods set by another party or prescribed assumptions or methods set by law.

ASOP 4 | §3.2 | GENERAL PROCEDURES

When measuring pension obligations, determining periodic costs, or determining actuarially determined contributions, the actuary should perform the following general procedures:

a. identify the purpose of the measurement (section 3.3);

b. identify the measurement date (section 3.4);

c. identify plan provisions applicable to the measurement and any associated valuation issues (section 3.5);

d. gather data necessary for the measurement (section 3.6);

e. obtain from the principal other information necessary for the purpose of the measurement (section 3.7);

f. select assumptions (section 3.8);

g. measure accrued or vested benefits, if applicable (section 3.9);

h. measure market-consistent present values, if applicable (section 3.10);

i. calculate a low-default-risk obligation measure, if applicable (section 3.11);

j. reflect how plan or plan sponsor assets as of the measurement date are reported, if applicable (section 3.12);

k. select an actuarial cost method, if applicable (section 3.13);

l. select an amortization method, if applicable (section 3.14);

m. select an asset valuation method, if applicable (section 3.15);

n. select an output smoothing method, if applicable (section 3.16);

o. select a cost allocation procedure or contribution allocation procedure, if applicable (sections 3.17 and 3.18);

p. assess the implications of the contribution allocation procedure or plan’s funding policy, if applicable (section 3.19);

q. take into account the contribution lag, if applicable (section 3.20);

r. calculate a reasonable actuarially determined contribution, if applicable (section 3.21);

s. perform a gain and loss analysis, if applicable (section 3.22);

t. take into account the sources of significant volatility, if applicable (section 3.23);

u. assess the assumptions and methods not selected by the actuary, if applicable (section 3.24); and

v. consider preparing and retaining documentation (section 3.26).

The actuary should refer to ASOP No. 56, Modeling, for guidance with respect to models when measuring pension obligations, determining periodic costs, or determining actuarially determined contributions.

In addition, the actuary may use approximations and estimates where circumstances warrant (section 3.25).

ASOP 4 | §3.3 | PURPOSE OF THE MEASUREMENT

The actuary should reflect the purpose of the measurement.

Examples of measurement purposes include the following:

a. determining periodic costs or actuarially determined contributions;

b. assessing funded status;

c. pricing benefit provisions;

d. comparing benefit provisions between plans;

e. determining withdrawal liabilities or benefit plan settlements; and

f. measuring pension obligations for plan sponsor mergers and acquisitions.

3.3.1 Projected or Point-in-Time Measurements

The actuary should consider using different assumptions or methods for measurements projected into the future versus point-in-time measurements.

3.3.2 Uncertainty or Risk

The actuary should refer to the guidance on uncertainty and risk in ASOP No. 41 and ASOP No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions.

ASOP 4 | §3.4 | MEASUREMENT DATE CONSIDERATIONS

The actuary should address the following measurement date considerations:

3.4.1 Information as of a Different Date

The actuary may estimate asset and participant information at the measurement date on the basis of information as of a different date. In these circumstances, the actuary should make appropriate adjustments to the data. Alternatively, the actuary may calculate the obligations as of a different date and then adjust the obligations to the measurement date (see section 3.4.3 for additional guidance). In either case, the actuary should determine that any such adjustments are reasonable in the actuary’s professional judgment, given the purpose of the measurement.

3.4.2 Events after the Measurement Date

If the actuary is aware of events that occur subsequent to the measurement date and prior to the date of the actuarial communication, the actuary should reflect those events appropriately for the purpose of the measurement. Unless the purpose of the measurement requires or prohibits the inclusion of such events, the actuary may, but need not, reflect these events in the measurement.

3.4.3 Adjustment of Prior Measurement

The actuary may adjust the results from a prior measurement in lieu of performing a new detailed measurement if, in the actuary’s professional judgment, such an adjustment would produce a reasonable result for the purpose of the new measurement. To determine whether such an adjustment would produce a reasonable result, the actuary should consider reflecting items such as the following, if known to the actuary:

a. changes in the number of participants or the demographic characteristics of that group;

b. length of time since the prior measurement;

c. differences between actual and expected contributions, benefit payments, expenses, and investment performance;

d. changes in economic and demographic expectations; and

e. changes in plan provisions.

When adjusting obligations from a prior measurement date, the actuary should consider using revised assumptions to determine the obligations if appropriate for the purpose of the new measurement.

ASOP 4 | §3.5 | PLAN PROVISIONS

When measuring pension obligations and determining periodic costs or actuarially determined contributions, the actuary should reflect all significant plan provisions known to the actuary, as appropriate for the purpose of the measurement.

However, if in the actuary’s professional judgment, omitting a significant plan provision is appropriate for the purpose of the measurement, the actuary should disclose the omission in accordance with section 4.1(e).

3.5.1 Adopted Changes in Plan Provisions

Unless contrary to applicable law or not appropriate for the purpose of the measurement, the actuary should reflect plan provisions adopted on or before the measurement date for at least the portion of the period during which those provisions are in effect. Unless the purpose of the measurement requires or prohibits that such plan provisions be reflected, the actuary may, but need not, reflect plan provisions adopted after the measurement date.

3.5.2 Proposed Changes in Plan Provisions

The actuary should reflect proposed changes in plan provisions as appropriate for the purpose of the measurement.

3.5.3 Plan Provisions That are Difficult to Measure

Some plan provisions may create pension obligations that are difficult to appropriately measure using traditional valuation procedures. Examples of such plan provisions include the following:

a. gain-sharing provisions that trigger benefit increases when investment returns are favorable but do not trigger benefit decreases when investment returns are unfavorable;

b. floor-offset provisions that provide a minimum defined benefit in the event a participant’s account balance in a separate plan falls below some threshold;

c. benefit provisions that are tied to an external index, but subject to a floor or ceiling, such as certain cost-of-living-adjustment provisions and cashbalance-crediting provisions; and

d. benefit provisions that may be triggered by an event such as a plant shutdown or a change in control of the plan sponsor.

For such plan provisions, the actuary should consider using alternative valuation procedures, such as stochastic modeling, option-pricing techniques, or deterministic procedures in conjunction with assumptions that are adjusted to reflect the impact of variations in experience from year to year. When selecting alternative valuation procedures for such plan provisions, the actuary should use professional judgment based on the purpose of the measurement and other relevant factors.

The actuary should disclose the valuation procedures used to value any significant plan provisions of the type described in this section 3.5.3, in accordance with section 4.1(f).

ASOP 4 | §3.6 | DATA

With respect to the data used for measurements, including data supplied by others, the actuary should refer to ASOP No. 23, Data Quality, for guidance.

3.6.1 Participants

The actuary should include in the measurement all participants reported to the actuary, except in appropriate circumstances where the actuary may exclude persons such as those below a minimum age or service level. When appropriate, the actuary may include employees who might become participants in the future.

3.6.2 Hypothetical Data

When appropriate, the actuary may prepare measurements based on assumed demographic characteristics of current or future plan participants.

ASOP 4 | §3.7 | OTHER INFORMATION FROM THE PRINCIPAL

The actuary should obtain from the principal other information, such as accounting policies or funding elections, necessary for the purpose of the measurement.

ASOP 4 | §3.8 | ASSUMPTIONS

The actuary should refer to ASOP Nos. 27 and 35 for guidance on the selection and assessment of assumptions.

In addition, the actuary should assess whether the combined effect of assumptions is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic) except when provisions for adverse deviation are included or when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. 51. For this purpose, the actuary should assess assumptions other than

1) prescribed assumptions or methods set by law and

2) assumptions that the actuary has not selected and is unable to assess for reasonableness for the purpose of the measurement.

ASOP 4 | §3.9 | MEASURING THE VALUE OF ACCRUED OR VESTED BENEFITS

Depending on the scope of the assignment, the actuary may measure the value of any accrued or vested benefits as of a measurement date. The actuary should take into account the following when making such measurements:

a. relevant plan provisions and applicable law;

b. the status of the plan (for example, whether the plan is assumed to continue to exist or be terminated);

c. the contingencies upon which benefits become payable, which may differ for ongoing-basis and termination-basis measurements;

d. the extent to which participants have satisfied relevant eligibility requirements for accrued or vested benefits and the extent to which future service or advancement in age may satisfy those requirements;

e. whether or the extent to which death, disability, or other ancillary benefits are accrued or vested;

f. whether the plan provisions regarding benefits earned provide an appropriate attribution pattern for the purpose of the measurement (for example, if the plan’s benefit accruals are significantly back-loaded, it may be appropriate to value accrued benefits with a less back-loaded attribution pattern); and

g. the impact of a special event (such as a plant shutdown or plan termination), when applicable. Examples of factors that may impact the measurement include the following:

1. the effect of the special event on continued employment;

2. the impact of the special event on participant behavior due to factors such as subsidized payment options;

3. expenses associated with a potential plan termination, including transaction costs to liquidate plan assets; and

4. changes in investment policy.

ASOP 4 | §3.10 | MARKET-CONSISTENT PRESENT VALUES

When calculating a market-consistent present value, the actuary should do the following:

a. select assumptions based on the actuary’s observation of the estimates inherent in market data in accordance with the guidance in ASOP Nos. 27 and 35, depending on the purpose of the measurement; and

b. reflect benefits earned as of the measurement date.

In addition, the actuary may reflect benefit payment default risk or the financial health of the plan sponsor in the calculation.

ASOP 4 | §3.11 | LOW-DEFAULT-RISK OBLIGATION MEASURE

When performing a funding valuation, the actuary should calculate and disclose a low-default-risk obligation measure of the benefits earned (or costs accrued if appropriate under the actuarial cost method used for this purpose) as of the measurement date. The actuary need not calculate and disclose this obligation measure more than once per year.

When calculating this measure, the actuary should use an immediate gain actuarial cost method.

When calculating this measure, the actuary should select a discount rate or discount rates derived from low-default-risk fixed income securities whose cash flows are reasonably consistent with the pattern of benefits expected to be paid in the future. Examples of discount rates that may meet these requirements include, but are not limited to, the following:

a. US Treasury yields;

b. rates implicit in settlement of pension obligations including payment of lump sums and purchases of annuities from insurance companies;

c. yields on corporate or tax-exempt general obligation municipal bonds that receive one of the two highest ratings given by a recognized ratings agency;

d. non-stabilized ERISA funding rates for single employer plans; and

e. multiemployer current liability rates.

When plan provisions create pension obligations that are difficult to appropriately measure using traditional valuation procedures, such as benefits affected by actual investment returns, movements in a market index, or other similar factors, the actuary should consider using alternative valuation procedures such as those described under section 3.5.3 to calculate the low-default-risk obligation measure of those benefits earned or costs accrued as of the measurement date.

For purposes of this obligation measure, the actuary should consider reflecting the impact, if any, of investing plan assets in low-default-risk fixed income securities on the pattern of benefits expected to be paid in the future, such as in a variable annuity plan.

When calculating this measure, the actuary should not reflect benefit payment default risk or the financial health of the plan sponsor.

Other than the discount rate or discount rates, the actuary may use the same assumptions used in the funding valuation for this measure. Alternatively, the actuary may select other assumptions that are consistent with the discount rate or discount rates and reasonable for the purpose of the measurement, in accordance with ASOP Nos. 27 and 35.

The actuary should provide commentary to help the intended user understand the significance of the low-default-risk obligation measure with respect to the funded status of the plan, plan contributions, and the security of participant benefits. The actuary should use professional judgment to determine the appropriate commentary for the intended user.

ASOP 4 | §3.12 | RELATIONSHIP BETWEEN ASSET AND OBLIGATION MEASUREMENT

The actuary should reflect how plan or plan sponsor assets as of the measurement date are reported. For example, if the plan or plan sponsor assets have been reduced to reflect a lump sum paid, the lump sum or the related annuity value should also be excluded from the obligation.

ASOP 4 | §3.13 | ACTUARIAL COST METHOD

When selecting an actuarial cost method to assign periodic costs or actuarially determined contributions to time periods in advance of the time benefit payments are due, the actuary should select an actuarial cost method that meets the following criteria:

a. the period over which normal costs are allocated for a participant begins no earlier than the date of employment and does not extend beyond the last assumed retirement age. The period may be applied to each individual participant or to groups of participants on an aggregate basis;

When a plan has no active participants and no participants are accruing benefits, a reasonable actuarial cost method will not produce a normal cost for benefits. For purposes of this standard, an employee does not cease to be an active participant merely because he or she is no longer accruing benefits under the plan;

b. the attribution of normal costs bears a reasonable relationship to some element of the plan’s benefit formula or the participant’s compensation or service. The attribution basis may be applied on an individual or group basis. For example, the actuarial present value of projected benefits for each participant may be allocated by that participant’s own compensation or may be allocated by the aggregated compensation for a group of participants;

c. expenses are considered when assigning periodic costs or actuarially determined contributions to time periods. For example, the expenses for a period may be added to the normal cost for benefits, or expenses may be reflected as an adjustment to the investment return assumption or the discount rate. As another example, expenses may be reflected as a percentage of pension obligation or normal cost; and

d. the sum of the actuarial accrued liability and the actuarial present value of future normal costs equals the actuarial present value of projected benefits and expenses, to the extent expenses are included in the actuarial accrued liability and normal cost. For purposes of this criterion, under a spread gain actuarial cost method, the sum of the actuarial value of assets and the unfunded actuarial accrued liability, if any, shall be considered to be the actuarial accrued liability.

When disclosing a funded status measurement using a spread gain actuarial cost method, the actuary should also calculate and disclose a funded status measurement using an immediate gain actuarial cost method.

ASOP 4 | §3.14 | AMORTIZATION METHOD

When selecting an amortization method, the actuary should select an amortization method for each amortization base that is expected to produce amortization payments that fully amortize the amortization base within a reasonable time period or reduce the outstanding balance by a reasonable amount each year.

For purposes of determining a reasonable time period or a reasonable amount, the actuary should take into account factors including, but not limited to, the following, if applicable:

a. whether the amortization method is open or closed;

b. the source of the amortization base;

c. the anticipated pattern of the amortization payments, including the length of time until amortization payments exceed nominal interest on the outstanding balance;

d. whether the amortization base is positive or negative;

e. the duration of the actuarial accrued liability;

f. the average remaining service lifetime of active plan participants; and

g. the funded status of the plan or period to plan insolvency.

When selecting an amortization method, the actuary should select an amortization method that is expected to produce total amortization payments that are expected to fully amortize the unfunded actuarial accrued liability within a reasonable time period or reduce the unfunded actuarial accrued liability by a reasonable amount within a sufficiently short period.

The actuary should assess whether the unfunded actuarial accrued liability is expected to be fully amortized.

For purposes of this section, the actuary should assume that all assumptions will be realized and actuarially determined contributions will be made when due.

ASOP 4 | §3.15 | ASSET VALUATION METHOD

The actuary should refer to ASOP No. 44 for guidance on the selection and use of an asset valuation method.

ASOP 4 | §3.16 | OUTPUT SMOOTHING METHOD

When selecting an output smoothing method, the actuary should select an output smoothing method that results in a reasonable relationship between the smoothed contribution and the corresponding actuarially determined contribution without output smoothing. A reasonable relationship includes the following:

a. the output smoothing method produces a value that does not fall below a reasonable range around the corresponding actuarially determined contribution without output smoothing; and

b. any shortfalls of the smoothed contribution to the corresponding actuarially determined contribution without output smoothing are recognized within a reasonable period of time.

ASOP 4 | §3.17 | ALLOCATION PROCEDURE

When selecting a cost allocation procedure or contribution allocation procedure, the actuary should take into account the following:

a. the balance among benefit security, intergenerational equity, and stability or predictability of periodic costs or actuarially determined contributions;

b. the timing and duration of expected benefit payments;

c. the nature and frequency of plan amendments; and

d. relevant input from the principal, for example, a desire to achieve a target funding level within a specified time frame.

ASOP 4 | §3.18 | CONSISTENCY BETWEEN CONTRIBUTION ALLOCATION PROCEDURE AND THE PAYMENT OF BENEFITS

When selecting a contribution allocation procedure, the actuary should select a contribution allocation procedure that, in the actuary’s professional judgment, is consistent with the plan accumulating adequate assets to make benefit payments when due, assuming that all assumptions will be realized and that the plan sponsor or other contributing entity will make actuarially determined contributions when due. In some circumstances, a contribution allocation procedure may not be expected to produce adequate assets to make benefit payments when they are due even if the actuary uses a combination of assumptions selected in accordance with ASOP Nos. 27 and 35, an actuarial cost method selected in accordance with section 3.13 of this standard, and an asset valuation method selected in accordance with ASOP No. 44.

Examples of such circumstances include the following:

a. a plan covering a sole proprietor with funding that continues past an expected retirement date with payment due in a lump sum;

b. using the aggregate actuarial cost method for a plan covering three employees, in which the principal is near retirement and the other employees are relatively young; and

c. a plan amendment with an amortization period so long that overall plan actuarially determined contributions would be scheduled to occur too late to make plan benefit payments when due.

ASOP 4 | §3.19 | IMPLICATIONS OF CONTRIBUTION ALLOCATION PROCEDURE OR FUNDING POLICY

When performing a funding valuation, the actuary should do the following:

a. qualitatively assess the implications of the contribution allocation procedure or the plan’s funding policy on the plan’s expected future contributions and funded status;

b. estimate how long before any contribution as determined by the contribution allocation procedure or the plan’s funding policy is expected to exceed the normal cost, plus interest on the unfunded actuarial accrued liability, if applicable;

c. estimate the period over which the unfunded actuarial accrued liability, if any, is expected to be fully amortized; and

d. assess whether the contribution allocation procedure or funding policy is significantly inconsistent with the plan accumulating assets adequate to make benefit payments when due, and estimate the approximate time until assets are depleted.

For purposes of this section, contributions set by law or by a contract, such as a collective bargaining agreement, constitute a funding policy.

For purposes of this section, the actuary may presume that all assumptions will be realized and the plan sponsor (or other contributing entity) will make contributions anticipated by the contribution allocation procedure or funding policy.

ASOP 4 | §3.20 | CONTRIBUTION LAG

When calculating an actuarially determined contribution, the actuary should consider reflecting the passage of time between the measurement date and the expected timing of actual contributions.

ASOP 4 | §3.21 | REASONABLE ACTUARIALLY DETERMINED CONTRIBUTION

When performing a funding valuation, except where the actuarially determined contribution is based on a prescribed assumption or method set by law, the actuary should also calculate and disclose a reasonable actuarially determined contribution. For this purpose, an actuarially determined contribution is reasonable if it uses a contribution allocation procedure that satisfies the following conditions:

a. all significant assumptions selected by the actuary are reasonable, all significant prescribed assumptions or methods set by another party do not significantly conflict with what in the actuary’s professional judgment is reasonable in accordance with ASOP Nos. 27 and 35, and the combined effect of these assumptions is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic) except when provisions for adverse deviation are included;

b. the actuarial cost method used should be consistent with section 3.13. If an actuarial cost method with individual attribution is used, each participant’s normal cost should be based on the plan provisions applicable to that participant;

c. if an amortization method is used, it should be consistent with section 3.14;

d. if an asset valuation method is used, it should be consistent with section 3.15;

e. if an output smoothing method is used, it should be consistent with section 3.16; and

f. the contribution allocation procedure should, in the actuary’s professional judgment, be consistent with the plan accumulating assets adequate to make benefit payments when due, assuming that all assumptions will be realized and that the plan sponsor or other contributing entity will make actuarially determined contributions when due.

ASOP 4 | §3.22 | GAIN AND LOSS ANALYSIS

When performing a funding valuation, the actuary should perform a gain and loss analysis for the period between the prior measurement date and the current measurement date, unless in the actuary’s professional judgment, successive gain and loss analyses would not be appropriate for assessing the reasonableness of the assumptions. For example, successive gain and loss analyses may not provide useful information about the reasonableness of the assumptions for a small plan in which a single individual accounts for most of the actuarial accrued liability. If a gain and loss analysis is performed, the actuary should at least separate the total gain or loss into investment gain or loss and other gain or loss.

ASOP 4 | §3.23 | VOLATILITY

If the scope of the actuary’s assignment includes an analysis of the potential range of future pension obligations, periodic costs, actuarially determined contributions, or funded status, the actuary should take into account sources of volatility that, in the actuary’s professional judgment, are significant. Examples of potential sources of volatility include the following:

a. plan experience differing from that anticipated by the economic or demographic assumptions, as well as the effect of new entrants;

b. changes in economic or demographic assumptions;

c. the effect of discontinuities in applicable law or accounting standards, such as full funding limitations, the end of amortization periods, or liability recognition triggers;

d. the delayed effect of smoothing techniques, such as the pending recognition of prior experience losses; and

e. patterns of rising or falling periodic cost expected when using a particular actuarial cost method for the plan population.

When analyzing potential variations in economic and demographic experience or assumptions, the actuary should refer to ASOP No. 51 for additional guidance, where applicable.

ASOP 4 | §3.24 | ASSESSMENT OF ASSUMPTIONS AND METHODS NOT SELECTED BY THE ACTUARY

For each measurement date, the actuary should assess whether an assumption or method not selected by the actuary is reasonable for the purpose of the measurement, other than

1) prescribed assumptions or methods set by law and

2) assumptions or methods that the actuary has not selected and is unable to assess for reasonableness for the purpose of the measurement.

For purposes of this assessment, reasonable assumptions or methods are not necessarily limited to those the actuary would have selected for the measurement. In this assessment, the actuary should determine whether the assumption or method significantly conflicts with what, in the actuary’s professional judgment, would be reasonable for the purpose of the measurement. If, in the actuary’s professional judgment, there is a significant conflict, the actuary should disclose this conflict in accordance with section 4.2(a).

ASOP 4 | §3.25 | APPROXIMATIONS AND ESTIMATES

Where circumstances warrant, the actuary may use approximations or estimates in performing the actuarial services. The following are some examples of such circumstances:

a. situations in which the actuary reasonably expects the results to be substantially the same as the results of detailed calculations;

b. situations in which the actuary’s assignment requires informal or rough estimates; and

c. situations in which the actuary reasonably expects the amounts being approximated or estimated to represent only a minor part of the overall pension obligation, periodic cost, or actuarially determined contribution.

When using approximations or estimates, the actuary should use professional judgment to establish a balance between the degree of refinement of methodology and whether the impact on the results is material.

ASOP 4 | §3.26 | DOCUMENTATION

The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. If preparing documentation, the actuary should consider preparing such documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work. The degree of such documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4.

Section 4
Communications and Disclosures

ASOP 4 | §4.1 | REQUIRED DISCLOSURES IN AN ACTUARIAL REPORT

When issuing an actuarial report to which this standard applies, the actuary should refer to ASOP Nos. 23, 27, 35, 41, 44, 51, and 56. In addition, such communication should contain the following disclosures when relevant and material. An actuarial communication can comply with some, or all, of the specific requirements of this section by making reference to information contained in other actuarial communications available to the intended users (as defined in ASOP No. 41), such as an annual actuarial valuation report.

a. a statement of the purpose of the measurement and a statement to the effect that the measurement may not be applicable for other purposes (see section 3.3);

b. the measurement date (see section 3.4);

c. a description of adjustments made for events after the measurement date (see section 3.4.2);

d. a description of adjustments of prior measurements (see section 3.4.3);

e. an outline or summary of the plan provisions reflected in the actuarial valuation, a description of known changes in significant plan provisions reflected in the actuarial valuation from those used in the immediately preceding measurement prepared for a similar purpose, and a description of any significant plan provisions not reflected in the actuarial valuation, along with the rationale for not reflecting such significant plan provisions (see section 3.5);

f. a description of the valuation procedures used to value any significant plan provisions of the type described in section 3.5.3, such that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary’s work as presented in the actuarial report (see section 3.5.3);

g. the date(s) as of which the participant and financial information were compiled;

h. a summary of the participant information (see section 3.6.1);

i. if hypothetical data are used, a description of the data (see section 3.6.2);

j. a description of any accounting policies or funding elections made by the principal that are pertinent to the measurement (see section 3.7);

k. a description of known changes in significant assumptions and methods from those used in the immediately preceding measurement prepared for a similar purpose. For assumption and method changes that are not the result of a prescribed assumption or method set by another party or a prescribed assumption or method set by law, the actuary should include an explanation of the information and analysis that led to those changes. The explanation may be brief but should be pertinent to the plan’s circumstances (see section 3.8);

l. a statement indicating whether, in the actuary’s professional judgment, the combined effect of the assumptions other than

1) prescribed assumptions or methods set by law and

2) assumptions that the actuary has not selected and is unable to assess for reasonableness for the purpose of the measurement is expected to have no significant bias (i.e., it is not significantly optimistic or pessimistic), except when provisions for adverse deviation are included or when alternative assumptions are used for the assessment of risk, in accordance with ASOP No. 51 (see section 3.8);

m. a description of the types of benefits regarded as accrued or vested if the actuary measured the value of accrued or vested benefits, and, to the extent the attribution pattern of accrued benefits differs from or is not described by the plan provisions, a description of the attribution pattern (see section 3.9);

n. a description of whether and how benefit payment default risk or the financial health of the plan sponsor was included, if a market-consistent present value measurement was performed (see section 3.10);

o. if applicable, a low-default-risk obligation measure (see section 3.11). In addition to the measure, the actuary should disclose the following:

1. the discount rate or discount rates used and rationale for selection;

2. a description of other significant assumptions, if any, that differ from those used in the funding valuation and rationale for their selection;

3. the immediate gain actuarial cost method used;

4. a description of the valuation procedures that differ from those used in the funding valuation to value any significant plan provisions of the type described in section 3.5.3 such that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary’s work; and

5. commentary to help the intended user understand the significance of the low-default-risk obligation measure with respect to the funded status of the plan, plan contributions, and the security of participant benefits;

p. a description of the actuarial cost method and the manner in which normal costs are allocated, in sufficient detail such that another actuary qualified in the same practice area would be able to understand the significant characteristics of the method (for example, how the actuarial cost method is applied to multiple benefit formulas, compound benefit formulas, or benefit formula changes, where such plan provisions are significant) (see section 3.13);

q. if applicable, a description of the particular measures of plan assets and obligations that are included in the actuary’s disclosure of the plan’s funded status. For funded status measurements that are not prescribed by federal law or regulation, the actuary should accompany this description with each of the following additional disclosures:

1. whether the funded status measure is appropriate for assessing the sufficiency of plan assets to cover the estimated cost of settling the plan’s benefit obligations;

2. whether the funded status measure is appropriate for assessing the need for or the amount of future contributions; and

3. if applicable, a statement that the funded status measure would be different if the measure reflected the market value of assets rather than the actuarial value of assets;

r. funded status based on an immediate gain actuarial cost method if the actuary discloses a funded status based on a spread gain actuarial cost method (see section 3.13). A description of the immediate gain actuarial cost method used for this purpose should be disclosed;

s. the remaining balance to be amortized, the remaining amortization period, and the amortization payment included in the periodic cost or actuarially determined contribution for each amortization base along with a disclosure if the unfunded actuarial accrued liability is not expected to be fully amortized (see section 3.14);

t. a description of any output smoothing method used. If an output smoothing method is used, the actuary should also disclose the corresponding actuarially determined contribution without output smoothing (see section 3.16);

u. a description of the cost allocation procedure or contribution allocation procedure including a description of the amortization method and any pay-asyou-go funding (i.e., the intended payment by the plan sponsor of some or all benefits when due) (see section 3.17);

v. a description of all changes in cost allocation procedures or contribution allocation procedures that are not a result of a prescribed assumption or method set by law, including the resetting of an actuarial asset value. The actuary should disclose the reason for the change and the general effects of the change on relevant periodic cost, actuarially determined contribution, funded status, or other measures by words or numerical data, as appropriate. The disclosure of the reason for the change and the general effects of the change may be brief but should be pertinent to the plan’s circumstances (see section 3.17);

w. a qualitative description of the implications of the contribution allocation procedure or plan’s funding policy on future expected plan contributions and funded status (see section 3.19[a]), if applicable. The actuary should disclose the significant characteristics of the contribution allocation procedure or plan’s funding policy, and the significant assumptions used in the assessment;

x. if applicable, an estimate of how long before any contribution as determined by the contribution allocation procedure or the plan’s funding policy is expected to exceed the normal cost, plus interest on the unfunded actuarial accrued liability (see section 3.19[b]);

y. an estimate of the period over which the unfunded actuarial accrued liability, if any, is expected to be fully amortized (see section 3.19[c]);

z. if applicable, a statement indicating that the contribution allocation procedure or funding policy is significantly inconsistent with the plan accumulating adequate assets to make benefit payments when due, as well as an estimate of the approximate time until assets are depleted (see section 3.19[d]);

aa. if applicable, a reasonable actuarially determined contribution, the corresponding funded status, and any material assumptions or methods that were used in the calculation that are not otherwise disclosed. The actuary should include a description of how pertinent conditions discussed in section 3.17 have been taken into account in determining the reasonable actuarially determined contribution (see section 3.21). The disclosure may be brief but should be relevant to the plan’s circumstances;

bb. if applicable, the results of the gain and loss analysis separating the total gain or loss into investment gain or loss and other gain or loss. The actuary may meet the disclosure requirements of this section by providing more detailed results of the gain and loss analysis performed (see section 3.22). For example, the actuary could separate the non-investment gain or loss into demographic and economic gains or losses, or could identify gains or losses caused by individual decrements (for example, withdrawal, retirement, mortality) and other economic factors (for example, salary growth, inflation);

cc. if, in the actuary’s professional judgment, the actuary’s use of approximations and estimates could produce results that differ materially from results based on a detailed calculation, a statement to this effect (see section 3.25); and

dd. a statement, appropriate for the intended users, indicating that future measurements (for example, of pension obligations, periodic costs, actuarially determined contributions, or funded status, as applicable) may differ significantly from the current measurement. For example, a statement such as the following could be applicable: “Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following:

plan experience differing from that anticipated by the economic or demographic assumptions;

changes in economic or demographic assumptions;

increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plan’s funded status); and

changes in plan provisions or applicable law.” (See section 3.23)

In addition, the actuarial communication should include one of the following:

1. if the scope of the actuary’s assignment included an analysis of the range of such future measurements, disclosure of the results of such analysis together with a description of the factors considered in determining such range; or

2. a statement indicating that, due to the limited scope of the actuary’s assignment, the actuary did not perform an analysis of the potential range of such future measurements.

ASOP 4 | §4.2 | DISCLOSURES IN AN ACTUARIAL REPORT ABOUT ASSUMPTIONS OR METHODS NOT SELECTED BY THE ACTUARY

The actuary should include disclosures in an actuarial report stating the source of any material assumptions or methods that the actuary has not selected.

With respect to any assumption or method that the actuary has not selected, other than prescribed assumptions or methods set by law, the actuary’s report should identify the following, if applicable:

a. any assumption or method that the actuary has not selected that, individually or in combination with other assumptions or methods, significantly conflicts with what, in the actuary’s professional judgment, is reasonable for the purpose of the measurement (see section 3.24); or

b. any assumption or method that the actuary has not selected and is unable to assess for reasonableness for the purpose of the measurement.

ASOP 4 | §4.3 | ADDITIONAL DISCLOSURES IN AN ACTUARIAL REPORT

The actuary also should include disclosures in an actuarial report in accordance with ASOP No. 41 for the following circumstances:

a. if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and

b. if in the actuary’s professional judgment, the actuary has deviated materially from the guidance of this ASOP.

ASOP 4 | §4.4 | CONFIDENTIAL INFORMATION

Nothing in this ASOP is intended to require the actuary to disclose confidential information.