By Jeff Adams, December 30, 2014
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The Actuarial Standards Board (“ASB”) made changes to ASOP 6, which is the Actuarial Standard of Practice (“ASOP”) related to Measuring Retiree Group Benefit Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions. One of these changes is the requirement that Per Capita Benefit Costs must be age-graded if the benefits program is fully community rated. The narrative that follows explains why this change is in error and must be repealed before it goes into effect.
ASOP 6 defines the principles to be used in the valuation of employer liabilities and costs of retiree benefits that are guaranteed to current or future retirees. One retiree benefit discussed in this ASOP is health care. Generally, costs and liabilities for postretirement health care benefits are valued using a seriatim method which uses an estimated Per Capita Benefit Cost as the annual estimated cost for the base year and trend assumptions for use in trending these base year costs into subsequent years. Since, on average, health care costs increase as an individual ages, health Per Capita Benefit Costs are generally age-graded. The actuary uses premium rates or incurred claims estimates to develop a table that has average annual claim costs for each year of attained age, beginning with the earliest year of possible retirement and ending at some point where the assumption can be made that the last entry can be used for the defined age (say 90) and all succeeding ages (91 and older retirees).
One current exception to the use of age-grading is when the benefit plan through which the retiree health benefits are purchased is fully community-rated. A plan that is fully community rated has rates that vary based only on benefit and family tier (single, family, etc.). This implies that the premium would be the same if a group had two enrollees aged 64 or if it had enrollees aged 22. The fact that the rates are community-rated means that the rates for any group are based on all groups in the pool and not on the experience of that single group. Under this type of rating arrangement, a group would pay the same rate regardless of the ages of its retirees that it places in the community-rated pool. Using this logic, the community rates are currently used as the Per Capita Benefit Costs since this represents the total cost to the group regardless of the experience and the ages of its retirees.
The ASB has changed its requirement in the case of a fully community-rated group. It does not dispute the logic of the previous paragraph. Still, it does say that a group may change benefit plans to a lower-cost experience-rated plan in the future. That necessitates using age-graded costs in the current valuation even though there may be no intent on the part of the group to change plans in the near future.
Reasons That New Methodology is Not Appropriate
There are multiple problems with requiring fully community-rated health benefit plans to be valued using age-graded Per Capita Benefit Costs:
The ASB should repeal the portion of the ASOP 6 changes that require age-grading for fully community-rated groups. Failure to do this will result in overstated, erroneous liabilities and substantial confusion and anger in the marketplace. It is understandable that the Actuarial Standards Board is trying to prevent huge losses due to switches from community-rated to experience-rated coverage, but a more appropriate and less disruptive method of accomplishing this is to require a person with fiscal responsibility of the employer-group to sign off that they understand that a switch from community-rated to experience-rated may result in a substantial increase in postretirement liability.