Actuarial Notes

Practices for Preparing Health Contract Reserves

By Health Practice Financial Reporting Committee of the American Academy of Actuaries · American Academy of Actuaries · 2010 · CP321-104-25

Study guide: Exam CP-321

A public policy practice note, dated September 2010, in which the American Academy of Actuaries' Health Practice Financial Reporting Committee describes practices it considers commonly employed by U.S. health actuaries, to assist actuaries who must prepare financial statements by giving examples of common approaches. It is organized as nineteen questions on contract reserves under statutory (SAP) and GAAP accounting, and is not a promulgation of the Actuarial Standards Board or binding on any actuary.

On the syllabus

Introduction

  • The statutory accounting guidance discussed is based on the March 2009 NAIC Accounting Practices and Procedures Manual, in particular SSAP 54 and Appendix A-010, Minimum Reserve Standards for Individual and Group Health Insurance Contracts.
  • GAAP guidance historically resided in FAS 60 and is now found in ASC Topic 944; the note refers to FAS 60 as the source of relevant GAAP guidance throughout.
  • A contract reserve for a policy is defined as the excess of the present value of future policy claims over the present value of future net premiums.

1 What is the purpose of contract reserves?

  • Contract reserves arise when the future pattern of expected claim payments does not match the future pattern of benefit net premiums, and represent the portion of current and past premiums needed to pre-fund future increases in claims.

2 What is the main GAAP and SAP guidance on contract reserves, and how does that guidance differ between the two bases of accounting?

  • FAS 60 requires a provision for adverse deviation in the assumptions used to calculate benefit reserves, and the lock-in principle: the assumptions in place when a contract was first recognized continue to be used unless testing indicates a premium deficiency, when they are unlocked and replaced with current assumptions.
  • SSAP 54 provides guidance on policy reserves for accident and health contracts, which it defines to include both unearned premium reserves and contract reserves.

3 What types of health insurance products typically require contract reserves?

4 How do you determine appropriate SAP or GAAP contract reserve assumptions?

5 What methods are used for contract reserves for SAP versus GAAP?

6 What is the tax deductibility of health contract reserves?

7 When can you unlock GAAP assumptions?

8 How do you unlock GAAP assumptions when you have a premium deficiency?

9 How do you establish contract reserves when there is a changing benefit and/or premium pattern?

10 How do gross premium valuations and contract reserves interact?

11 How is GAAP loss recognition testing different from GAAP DAC recoverability testing?

12 How are GAAP recoverability testing and loss recognition testing performed?

13 How does the SAP gross premium valuation test compare to GAAP loss recognition testing?

14 On a GAAP basis, how do you determine if you have profits followed by losses?

15 If you have profits followed by losses on a GAAP basis, how do you establish a "loss reserve"?

16 How are future premium rate increases for level premium issue age products accounted for in loss recognition testing and asset adequacy testing?

17 How do unamortized deferred acquisition costs (DAC) relate to contract reserves?

18 Are contract reserves held for policies in open claim status?

19 How are waiver-of-premium provisions accounted for in contract reserves?

Sources