Proposed Revision of ASOP No. 32 – Social Insurance (October 2018)

Social Insurance

Proposed Revision of Actuarial Standard of Practice No. 32

TRANSMITTAL MEMORANDUM

October 2018

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Social Insurance Programs

FROM: Actuarial Standards Board (ASB)

SUBJ: Proposed Revision of Actuarial Standard of Practice (ASOP) No. 32

This document contains an exposure draft of a proposed revision of ASOP No. 32, Social Insurance. Please review this exposure draft and give the ASB the benefit of your comments and suggestions. Each written comment letter or email received by the comment deadline will receive appropriate consideration by the drafting committee and the ASB.

The ASB accepts comments by either electronic or conventional mail. The preferred form is e-mail, as it eases the task of grouping comments by section. However, please feel free to use either form. If you wish to use e-mail, please send a message to comments@actuary.org. You may include your comments either in the body of the message or as an attachment prepared in any commonly used word processing format. Please do not embed your comments in the exposure draft and do not password protect any attachments. If the attachment is in the form of a PDF, please do not “copy protect” the PDF. Include the phrase “ASB COMMENTS” in the subject line of your message. Please note: Any message not containing this exact phrase in the subject line will be deleted by our system’s spam filter. Also, please indicate in the body of the e-mail if your comments are being submitted on your own behalf or on behalf of a company or organization.

If you wish to use conventional mail, please send comments to the following address:

ASOP No. 32 Revision
Actuarial Standards Board
1850 M Street, NW, Suite 300
Washington, DC 20036

The ASB posts all signed comments received to its website to encourage transparency and dialogue. Comments received after the deadline may not be considered. Anonymous comments will not be considered by the ASB nor posted to the website. Comments will be posted in the order that they are received. All posted comments will be available to the general public on the ASB website. The ASB disclaims any responsibility for the content of the comments, which are solely the responsibility of those who submit them.

Deadline for receipt of responses in the ASB office: February 1, 2019

History of the Standard

ASOP No. 32 was originally adopted in January 1998 and updated only for deviation language effective May 1, 2011. In 2016, the ASB reviewed ASOP No. 32, and appointed a task force to further review and produce an exposure draft of a revised standard.

The reasons for the review included the following:

1. some government programs covered by the standard, and some not covered by the standard, had evolved significantly since 1998;

2. standards in related practice areas had evolved significantly since 1998; and

3. the financial status of social insurance programs had become the subject of intense public scrutiny.

The task force members include actuaries practicing in each of the listed programs covered by the standard, actuaries with experience in related areas, and a non-actuary with expertise in the field of social insurance.

Notable Changes from the Existing ASOP

Changes made to the exposure draft include the following:

1. made several changes related to the scope of covered programs (see additional discussion in the appendix) including the following:

a. created a defined term for Social Insurance Program (used interchangeably with Program) to refer to the programs covered by the standard.

b. deleted state-sponsored unemployment insurance programs from the list of covered programs. No new programs were added to the list of covered programs;

c. added a listing of programs that might meet the requirements of section 1.2 items a. through g. but which are not covered by the standard. The appendix includes reasons for why these programs are not covered;

d. replaced language in section 1.2 to more clearly specify that the guidance applies to actuarial services performed when the principal for the actuary is a government agency with responsibility for the valuation of a Social Insurance Program; and

e. added language in section 1.2 to more clearly include actuaries performing the following roles in the scope of the standard: auditor, reviewer, a member of an actuarial advisory committee, or a member of a technical panel.

2. deleted the defined terms, “actuarial assumption,” “actuarial report,” “required actuarial document,” “scenario and statement of actuarial opinion,” and added a definition for “sustainability” to section 2;

3. added a new section 3.1 on clarifying the assignment;

4. addressed the situation where there has been a consistent pattern of legislated changes in section 3.2;

5. replaced the concept of best judgment assumptions with the concept of reasonableness in section 3.4;

6. added a new section 3.4.4 for newly established or substantially changed Social Insurance Programs;

7. substantially changed section 3.8 on valuation period;

8. added a new section 3.9 on assessment of sustainability;

9. added a new section 3.10 on individual level examples;

10. added a new section 3.11, which provides guidance on documentation requirements; and

11. substantially changed the disclosure requirements in section 4.

Request for Comments

The ASB appreciates comments and suggestions on all areas of this proposed standard. Rationale for any suggested changes would be helpful. In addition, the ASB would like to draw the reader’s attention to the following questions:

1. The task force was asked to consider whether Medicaid should be covered by the standard. After completing the process outlined in the appendix, the task force concluded that Medicaid should not be covered by the standard. Do you agree or disagree with this decision?

2. The task force deleted state-sponsored unemployment insurance programs from the list of Social Insurance Programs covered by the standard. Do you agree or disagree with this decision?

3. Do you agree with the scope of the standard? More specifically,

a. Do you agree with the provisions in section 1.2 regarding the characteristics of a Social Insurance Program?

b. Do you agree with the lists of programs included and not included in the scope as provided in section 1.2 and discussed further in the appendix?

c. Do you agree with the list of programs that do not meet the proposed definition of a Social Insurance Program (as listed in the appendix)?

The ASB voted in October 2018 to approve this exposure draft.

ASOP No. 32 Task Force
Janet M. Barr, Chairperson
Suzanne M. Codespote	Jeffrey P. Petertil
Karen P. Glenn	Neela K. Ranade
Stephen C. Goss	F. Kevin Russell

Warren R. Luckner	Jeffery M. Rykhus
Clare M. McFarland	John A. Wandishin
Alicia H. Munnell	Joan M. Weiss

Actuarial Standards Board
Beth E. Fitzgerald, Chairperson
Christopher S. Carlson	Darrell D. Knapp
Maryellen J. Coggins	Cande J. Olsen
Robert M. Damler	Kathleen A. Riley
Mita D. Drazilov	Barbara L. Snyder

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.

SOCIAL INSURANCE

STANDARD OF PRACTICE

 

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

1.1 Purpose

This actuarial standard of practice (ASOP) provides guidance to actuaries when performing actuarial services for or on behalf of Social Insurance Programs.

1.2 Scope

This standard applies to actuaries when performing actuarial services when the actuary’s principal is a government agency with responsibility for the valuation of a Social Insurance Program. The standard also applies to actuaries with oversight responsibility for the actuarial services for Social Insurance Programs when serving as an auditor, reviewer, a member of an actuarial advisory committee, or a member of a technical panel. Such actuaries should follow the guidance to the extent practicable.

This standard also applies to actuaries issuing an actuarial opinion related to a Social Insurance Program required by law or regulation and embedded in another document.

For purposes of this standard, a Social Insurance Program is a program with all of the following characteristics:

a. key features, including benefits and financing method, are prescribed by statute or regulation;

b. financing is, in whole or in part, by contributions (for example, taxes or premiums) from or on behalf of participants, which in some programs are supplemented by government income from other sources. Explicit accountability of benefit payments and income is usually provided in the form of a trust fund;

c. participation is universally (or almost universally) compulsory for a defined population, or the contribution is set at such a subsidized level that the vast majority of the population eligible to participate, does participate;

d. eligible individuals are not required to demonstrate financial need to participate. However, certain program features could vary with individual circumstances. For example, a dependency status may need to be established, benefit reductions may apply to those who continue to work while receiving a benefit, or premium increases may apply to those who exceed an income threshold;

e. benefits for any individual are not usually directly related to contributions made by or with respect to that individual;

f. the program is administered or at least supervised by the government; and

g. the program is not established by the government solely for its present or former employees.

For Social Insurance Programs that provide protection directly to the population, “participant” or “individual” refers to a person. For Social Insurance Programs that provide protection through a guaranty or insurance-type arrangement, “participant” or “individual” may also refer to a plan or other entity.

Programs that meet the characteristics described in items a. through g. above and to which this standard applies include the following:

• the Federal Old-Age and Survivors Insurance (OASI) program and the Federal Disability Insurance (DI) program, together known as the Social Security program;
• the Hospital Insurance (HI) and the Supplementary Medical Insurance (SMI) programs, together known as the Medicare program;
• Pension Benefit Guaranty Corporation (PBGC) programs; and
• the Railroad Retirement account program.

Programs that might meet the characteristics described in items a. through g. above, but to which this standard does not apply, include the following:

• the Affordable Care Act or other similar government-sponsored risk adjustment programs;
• workers’ compensation programs;
• programs that primarily provide property/casualty insurance;
• the Railroad Unemployment and Sickness Insurance account programs;
• state-mandated disability income programs; and
• state-sponsored unemployment insurance programs.

This standard does not apply to actuaries performing actuarial services on behalf of private organizations that contract with the Medicare Advantage or Medicare Prescription Drug Programs.

This standard does not apply to actuaries performing actuarial services for programs such as Medicaid, the Children’s Health Insurance Program, and the Supplemental Security Income Program that do not meet the characteristics described in items a. through g. above.

If the actuary deviates 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 for guidance on disclosing such deviation.

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.

1.4 Effective Date

This standard will be effective for any actuarial services performed on or after six months following adoption by the Actuarial Standards Board.

Section 2. Definitions

The terms below are defined for use in this actuarial standard of practice.

2.1 Actuarial Status

A measure of the relative value of Program income and Program assets to Program costs over a specified period of time.

2.2 Financial Adequacy

A condition in which Program costs are projected not to exceed the sum of Program income and Program assets over a specified period of time.

2.3 Long-Range Period

A period long enough to discern the general pattern and level of future costs. For some Programs this means a period long enough to cover the future lifetime of essentially all Program participants as of the valuation date.

2.4 Program

A term used interchangeably with Social Insurance Program.

2.5 Program Assets

The investments held by the trust fund and any cash balance available to meet Program costs.

2.6 Program Cost

The Program’s expenditures for benefits (sometimes referred to as “claim costs”) and administrative or general expenses. The amount required to attain and maintain a target trust fund level may also be included in Program cost.

2.7 Program Income

The Program’s earmarked tax income, investment income, premiums, general fund revenue, and any other receipts and income.

2.8 Short-Range Period

A period long enough to encompass a complete economic cycle or planning cycle, whichever is appropriate.

2.9 Social Insurance Program

A program for which this standard applies as described in section 1.2; used interchangeably with Program.

2.10 Sustainability

The capacity of a Social Insurance Program to continuously support the benefits provided by laws applicable to the Program, when considering the applicable financing mechanism and the potential future demographic and economic environment in which it will operate.

2.11 Trust Fund

An account to which income is credited and from which expenditures for benefits and often administrative or general expenses are deducted for a specified Program.

Section 3. Analysis of Issues and Recommended Practices

3.1 Clarify the Assignment

When taking on an assignment, the actuary should work with the principal to specify in writing the following:

a. the role of the actuary and the purpose of the assignment;

b. significant financing, accounting, or investment policies applicable to the assignment;

c. significant transition issues; and

d. objectives related to a specific funding target, the security of benefits, a principle of equity among generations, or a pattern of contribution rates.

3.2 Coverage and Program Features

The actuary should take into account relevant Program features, some of which may be unique to the Social Insurance Program or require special treatment as they relate to social insurance risks. In particular, the actuary should consider the ongoing nature of the Program, based on current legislation and regulations. If legislation has consistently been enacted to address a particular issue affecting a Social Insurance Program, the actuary may assume that this pattern of legislated changes will continue in the future when determining the actuarial status of the Program. If it is reasonable to assume that certain Program features are not viable over time, the actuary may develop alternative scenarios.

3.3 Financing of the Program

The actuary should take into account the Program’s current or proposed financing, including sources of income and the applicable financing mechanism, in developing the assumptions and methods. The primary mechanisms are as follows:

a. Statutory—The Program income and the Program costs are specified by law for all future years and are changed only through legislative action;

b. Administrative—The Program income or the Program costs may be changed periodically through administrative action;

c. Automatic—The Program income is adjusted annually as specified by law to maintain financial adequacy; and

d. General Fund Revenues—When applicable under statute, the excess of Program cost over other dedicated funding sources, such as beneficiary premiums, is provided for by transfers from the general fund revenues.

3.4 Assumptions

The actuary should use assumptions that are reasonable, both individually and in combination, and take into account anticipated future events affecting the related Social Insurance Program. The actuary should consider the actual past experience of the Social Insurance Program and take into account relevant factors that may create material differences in future experience. In selecting actuarial assumptions, the actuary should be guided, to the extent appropriate, by ASOP No. 6, Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions, 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.

In performing actuarial calculations regarding the Program cost or Program income of Social Insurance Programs, including the impact of proposed changes, the actuary should take into account the factors described below.

3.4.1 Demographic Assumptions

Demographic assumptions relate to the projections of the numbers and characteristics of individuals who are covered or potentially covered by the Program, contribute to the Program, or receive benefits from the Program. The actuary should take into account the rates of entry into and withdrawal from the covered population and the beneficiary population, evaluating whether assumed future rates are reasonable. When the numbers of covered individuals and beneficiaries are projected using current participant data only, the actuary should consider using data from the broader population to check for reasonableness.

3.4.2 Economic Assumptions

Economic assumptions relate to the projections of the level of income to the Program and the level of benefit payments by the Program. When the difference between two or more economic rates has a greater impact on actuarial status than the level of such rates, the actuary should take into account the relationship among the rates. The actuary should use assumptions that are reasonable and consistent, as discussed in ASOP No. 27.

3.4.3 Other Factors

In choosing assumptions, the actuary should consider experience related to the actual operation of the Program, including the following:

a. the rates of actual retirement, which may differ from the rates of receipt of the retirement benefit;

b. the effects of behavioral changes induced by the availability and level of benefits;

c. excess cost growth factors for health care;

d. the administrative or general expenses for Programs where Program income finances the Program’s administration; and

e. bankruptcy rates of employers for certain Programs, including the relationship of such rates to the general economy and the correlation of such rates with assumptions for asset returns and discount rates.

3.4.4 Newly Established or Substantially Changed Social Insurance Programs

Credible experience data might not exist for a newly established Program or a substantially changed Social Insurance Program. To establish actuarial assumptions in such cases, the actuary may:

a. investigate the risk characteristics of the potential covered population through surveys or other inquiries until credible data are available; or

b. consider relevant external experience, such as the experience of other Social Insurance Programs (including the Program being replaced, if any) or the experience of similar programs in other countries; or

c. use reasonable proxies or default values.

If fully credible experience does not exist to develop assumptions, the actuary should disclose that the analysis has been based on insufficient experience or data not specific to the Social Insurance Program under consideration. The actuary should consider recommending that the analysis be performed again when actual information becomes available.

3.5. Valuation Period

The actuary should select a valuation period appropriate to the purpose of the assignment. The actuary should consider, for most Programs, both short-range and long-range periods.

When selecting the length of a valuation period, the actuary should consider the time horizon and economic environment in which the Social Insurance Program operates. For some Programs, the nature of the risk insured by the Program and significant changes in the participant base insured by the Program make long-range projections unreliable or inappropriate. In such instances, the actuary should consider using only a short-range period.

Valuation Periods that extend into the infinite horizon have so much uncertainty associated with them that they have limited usefulness. The actuary should follow the disclosure requirements in sections 4.1(e) if required to perform an infinite horizon analysis.

3.6 Actuarial Projections

The actuary should produce year-by-year projections of Program operations, highlighting when there is risk of the Program being unable to pay benefits when due at any time during the valuation period. In doing so, the actuary should take into account the following:

3.6.1 Actuarial Method

The actuary should select an actuarial method for computing and summarizing estimates of Program cost and Program income consistent with the financing mechanism. If alternative financing mechanisms are valued, the actuary should select actuarial methods that are flexible enough to permit these valuations and provide consistent comparison of the alternative financing mechanisms.

The actuary should generally use an open-group method for Programs financed using a pay-as-you-go or partially-funded financing mechanism. An open-group method is one that reflects all participants, including those currently participating and those who are assumed to become participants in each future year of the valuation. The actuary should generally use a closed-group method for Programs financed using a mechanism that is intended to fully fund Program benefits over the current participants’ working years. A closed-group method is one where only current participants as of the valuation date are included.

The actuary should be guided, to the extent appropriate, by ASOP No. 4, if the financing mechanism involves income derived from a defined benefit pension plan.

3.6.2 Inclusion of All Material Financial Operations

The actuary should include all material aspects of expected future Program income and Program costs under current law and regulation (except as noted in section 3.2), within the valuation period.

3.6.3 Summarized Values

Summarized values of the year-by-year estimates may be useful in communicating the actuarial status of the Program. When applicable, the actuary should choose a summarization method that is consistent with the Program’s design and structure and its financing and investment structure. Summarized values in most cases are present values of the year-by-year projections.

3.6.4 Experience Analysis

The actuary should consider conducting an experience analysis, including both a comparison of actual and expected experience for the previous year and a comparison of results between the prior valuation and the current valuation. This analysis could include a reconciliation of the financial impact of changes in actuarial assumptions and methods, changes in legislation or policy, trust fund investment gains or losses, changes due to the passage of time, and other components that contributed to the difference in results from one valuation to the next.

3.7 Sensitivity Testing

The actuary should consider performing an analysis of the sensitivity of Program cost or Program income under reasonable, alternative assumptions that are different from expected experience. In deciding whether to perform sensitivity testing, the actuary should consider the following:

a. the intended use of the actuarial communication;

b. the sensitivity of the Program cost, Program income, or actuarial status to the choice of the assumptions; and

c. whether data used in setting assumptions has limited credibility or applicability.

3.8 Tests of Financial Adequacy

The actuary should consider creating a test for financial adequacy of a Program that assesses whether the Program financing is sufficient. Tests of financial adequacy may be based on criteria such as the following: 1) the estimated year of trust fund reserve depletion, 2) required trust fund levels, 3) positive trust fund levels under pessimistic assumptions, or 4) a low probability of trust fund reserve depletion under a stochastic model.

For testing financial adequacy over a short-range period, the actuary should, in valuing Program assets, include only those assets that are readily available for the immediate payment of benefits.

If a test of financial adequacy is appropriate, the actuary should consider applying such a test to both short-range and long-range periods. For certain Programs, given the nature of the risk insured by the Program and the occurrence or possibility of significant changes over time in the participant base insured by the Program, the actuary should consider testing only for the short-range period.

3.9 Assessment of Sustainability

The actuary should consider performing an assessment of sustainability of a Social Insurance Program. In assessing sustainability, the actuary may use stochastic analysis or may examine patterns of projected relevant measures. Examples of relevant measures include the following:

a. the ratios of Program income or ratios of Program cost for each future year of a long-range period to either a measure of economic output, such as the Gross Domestic Product (GDP) of the United States, or to the revenue base of the Social Insurance Program;

b. the ratio of Program assets at the beginning of a year to the Program cost for that year, for each future year of a long-range period;

c. the ratio of a Program’s general fund revenues to total Federal income taxes, for each future year of a long-range period; and

d. the ratio of an individual beneficiary’s projected out-of-pocket medical expenses for a Program (including premiums and cost-sharing) to the projected income the individual beneficiary may receive from Social Security or any other Social Insurance Program.

The actuary may provide commentary to help the intended user understand the assessment of sustainability.

3.10 Individual-Level Examples

The actuary should consider providing examples that describe the level of benefits or level of guarantee provided to individuals to provide additional context. The actuary may provide a schedule of benefits or guarantees for representative individuals or ratios of benefits or guarantees to salaries or other relevant revenue bases.

3.11 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. 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 or could assume the assignment if necessary. 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, Actuarial Communications, section 3.8, 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

4.1 Actuarial Communications

When issuing actuarial communications subject to this standard, the actuary should refer to ASOP No. 41 and ASOP No. 23, Data Quality. In addition, such actuarial communications should disclose the following, when practical and relevant:

a. clarification of the assignment, as discussed in section 3.1;

b. a description of the Program benefits, the population covered, and disclosure of any assumptions regarding the continuation into the future of a consistent pattern of legislated changes to the Program, as discussed in section 3.2;

c. a description of the current or proposed financing of the Program, as discussed in section 3.3;

d. a detailed description of the assumptions and the basis for their determination, as discussed in section 3.4. The description should include the following, if applicable:

1. any relevant factors or historical experience that led to the choice of assumptions;

2. any assumptions that differ from recent experience because of trends, changes in the environment, or anticipated changes in the Program or its operation; and

3. any assumptions that were set using input or expertise from outside sources, the sources of such information, and the reasons for reliance on them.

e. a description of the valuation period, as discussed in section 3.5. The actuary should also disclose the following, if applicable:

1. the lengths of any selected short-range and long-range periods; and

2. a statement regarding the uncertainty associated with results that are far into the future and any reservations about the length of the valuation period if it is selected by someone other than the actuary.

f. a description of the results of the actuarial projections performed, as discussed in section 3.6, including the following:

1. a statement highlighting whether Program cost is expected to exceed Program income at any time during the valuation period, noting any significant differences between Program income and Program cost toward the end of the valuation period and the expected impact of such differences on the future actuarial status;

2. a description of the actuarial method used, including whether an open-group or closed-group method was used;

3. a description of the summarization method used, if applicable; and

4. the results of any experience analysis performed, if applicable.

g. a description of the results of any sensitivity testing performed as discussed in section 3.7;

h. a description of the results of any financial adequacy testing performed, as discussed in section 3.8, including the criteria used for the financial adequacy testing;

i. a description of the results of any sustainability assessment performed, as discussed in section 3.9, including the criteria used for the sustainability assessment; and

j. if applicable, examples that describe the level of benefits or level of guarantee provided to individuals, as discussed in section 3.10.

4.2 Additional Disclosures

The actuary should also include the following, as applicable, in an actuarial communication:

a. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, or other legally binding authority);

b. the disclosure in ASOP No. 41, section 4.3, 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. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has otherwise deviated materially from the guidance of this standard.

Appendix

Background and Current Practices

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

Background

Definition of Social Insurance Program for Purposes of ASOP No. 32

The task force surveyed educational materials that define social insurance and decided to base the definition of “social insurance” on the work done by the Committee on Social Insurance Terminology of the American Risk and Insurance Association (CSITARIA) in 1965 and 1966, which was referenced in the 2012 7^th edition of Social Insurance and Economic Security by George E. Rejda and the 1985 3^rd edition of Social Insurance by Robert J. Myers. There are a few differences between the CSITARIA definition and the definition in this revised standard:

• The task force added language regarding a trust fund to the item on financing. The CSITARIA definition did not include a trust fund as a defining characteristic of a social insurance program.
• The task force decided to not include a sentence from the CSITARIA definition that states, “There is a definite plan for financing the benefits that is designed to be adequate in terms of long range considerations.” The task force did not find this statement to be true for several Programs covered by the standard, for which tax rates or premiums that are set by statute are not adequate for long-term Program solvency.

To help with understanding the ASOP No. 32 definition of Social Insurance Program, which details the programs that are covered by the standard, the task force established three lists of programs as follows:

• programs covered by the standard;
• programs that otherwise might meet the qualifications to be a Social Insurance Program (in section 1.2 items a. through g.) but are not covered by the standard; and
• programs that do not meet the definition of a Social Insurance Program and are not covered by the standard.

The first two lists of programs were added to the scope section of the standard. The reasons why the programs in the second list are not covered by the standard are stated below. The third list of programs, with information on why they do not meet the definition of a Social Insurance Program, is also below. The task force deemed these items to be informational rather than specific guidance.

The following provides information on the reasons why some programs, which otherwise might meet the definition of a social insurance program, are not covered by the standard:

• The Affordable Care Act government-sponsored risk adjustment programs – Risk adjustment is subject to ASOP No. 45, The Use of Health Status Based Risk Adjustment Methodologies.
• Workers’ compensation programs – These programs are subject to certain ASOPs for property/casualty work. Requirements for workers’ compensation benefits can be satisfied by a variety of insured and self-funded arrangements.
• Railroad Unemployment and Sickness Insurance Account programs – These programs are railroad industry substitutes for state unemployment and workers’ compensation programs and, in part, for Medicare. The funding does not allow for a long-term surplus or deficit to these programs.
• State-mandated disability income programs – Actuaries have not been providing professional services for these programs.
• State-sponsored unemployment insurance programs – Actuaries have not been providing professional services for these programs.

In addition to the programs listed above, actuarial services provided on behalf of private organizations that contract with the Medicare Advantage or Medicare Prescription Drug programs are not covered by this standard.

The following list of publicly financed programs and other government-run insurance programs do not meet the definition of social insurance, and therefore this standard does not apply:

• Medicaid – Eligibility depends on need in the form of low income and/or low assets.
• Children’s Health Insurance Program (CHIP) – Eligibility depends on need in the form of low income.
• Supplemental Security Income (SSI) – Eligibility depends on need in the form of low income and assets.
• Civil Service Retirement System (CSRS) – This program was established solely for government employees who were hired before 1987.
• The Federal Employees Retirement System (FERS) – This program was established solely for government employees who were hired in 1987 and later.
• Federal Employees’ Group Life Insurance (FEGLI) and Service members’ Group Life Insurance (SGLI) – These programs are voluntary and established for government employees.
• Veterans’ benefits – These benefits are established for former employees of the government, are financed entirely from general revenues, and for some benefits require income below a certain threshold.
• Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) – These programs may be property and casualty insurance programs.
• Federal crop insurance – This program is a non-compulsory property and casualty insurance program.
• Federal flood insurance – This program is a non-compulsory property and casualty insurance program.

Consideration of Expansion of Scope

The ASB asked the task force to consider whether the scope of the standard should be expanded to include Medicaid, in particular, but potentially also certain other public assistance programs. The ASB noted that actuarial work is being performed for such programs, and the guidance in this standard might be adapted to cover such work. The task force also considered whether changing the definition of a Social Insurance Program would allow Medicaid to be covered.

A group was convened that included ASB members, task force members, and other actuaries whose work includes Medicaid projects. The group considered the issue of including Medicaid in the standard from various points of view. It explored specific items from ASOP No. 32 to determine whether the guidance in those items should apply to actuaries whose work includes the Medicaid program. The group found that this guidance was not relevant to Medicaid work, mainly because there are no dedicated assets of the Medicaid program and the work that Medicaid actuaries do mainly involves estimating program expenses and liabilities.

The task force also explored whether work done by actuaries on Medicaid projects is covered by other ASOPs, including ASOP No. 5, Incurred Health and Disability Claims. The task force identified one topic, the trending of incurred claim costs to future periods, which may not be adequately covered by current ASOPs. This topic is more general in nature and would not normally be considered for inclusion in an ASOP that applies to social insurance programs.

The task force considered whether the broader policy community (beyond just actuaries) considers Medicaid to be a social insurance program. One task force member, who is a leader in the policy community, believed that Medicaid is often studied with social insurance programs because of its relationship to Medicare and long-term care, not because it is considered a social insurance program. Some task force members, who believed that Medicaid is not a social insurance program and that ASOP No. 32 should not be expanded to include Medicaid, suggested consideration of the development of a more specialized standard of practice for public assistance programs, which might include programs such as Medicaid, the Children’s Health Insurance Program, the Veterans Health Administration, public health insurance exchanges, and SSI.

The task force ultimately reached consensus on proceeding with a first exposure draft without changing the scope materially from the current standard and agreed to solicit and encourage public comments on this issue. The ASB supported this recommendation.

Importance of Projecting the Costs of Social Insurance Programs

The task force discussed the following:

• the current actuarial challenges of Programs covered by the standard;
• stakeholders and users of actuarial services for such Programs;
• Program actuaries’ current use of ASOP No. 32 and other ASOPs to resolve issues; and
• the main metrics currently used for communicating the status of Programs covered by the standard.

Most of the covered Programs are experiencing financial challenges and facing long-term deficits. The task force noted that while the specific metrics on current and projected financial status may vary from Program to Program, the calculation and communication of such metrics is valuable for stakeholders. The task force believes that the current standard has been a useful tool in providing guidance on calculation of metrics and that it is important to update it.

Current Practices

Tests of Financial Adequacy

There are several well-established formal methods cur­rent­ly being used to test the financial adequacy of Social Insurance Programs, as well as measures developed to assess the actuarial status and sustainability of these Programs over different time periods.

The frequency with which Programs assess their financial status varies. Some (OASDI, Medicare, and PBGC, for instance) evaluate their financial position each year, while others, such as the Railroad Retirement Board, may perform a valuation every third year.

The projection period used by the different Programs also varies. While OASDI and Medicare use a projection period of 75 years, PBGC considers a projection period of 10 to 20 years to be appropriate.

The major Social Insurance Programs (OASDI, Medicare HI, and PBGC) project the future year in which that Program’s asset reserves are expected to become depleted under various scenarios.

Various other metrics are also used by the different Programs to measure and communicate the current and projected financial status. For example, OASDI and Medicare HI determine the current and projected trust fund ratios (beginning of year asset reserves divided by costs payable during the year) while PBGC projects the net financial position (assets less liabilities). The Railroad Retirement Board employs a metric called the Accounts Benefit Ratio (assets at the end of a year divided by benefits and expenses during the year).

In cases where a longer-term projection is not reasonable, an assessment of Program operations over the next one to five years is often performed.

Caveats

This standard does not address every circumstance that could arise because of variations in benefits, financing mechanisms, the number of Program participants, investment media and policies, measures of actuarial status, specialized actuarial assumptions relevant to the Program, dramatic changes in the participant base insured by the Program, or other relevant factors.

For Programs such as OASI and DI, benefit amounts and the incidence of claims are reasonably predictable and variances from expected values usually emerge gradually. Under PBGC’s Programs, on the other hand, benefit amounts can vary widely, the incidence of claims can be highly unpredictable, and the experience of a relatively small number of pension plans can dramatically affect future projections. A sustained trend towards a smaller participant base in the PBGC’s pension insurance programs may also affect actuarial results in unanticipated ways.

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