Commentary

New Computational Protocol

Topic l - In The Early Years

In the early years of actuarially-certified health plan claim reserves, the actuary was stressed with numerous conflicting interests which had to be accommodated. For example: (a) the mutual insurer required policyholder equity so the reserves had to meet this demand, (b) the publicly-held insurer expected the actuary to certify reserves which would respond to market forces, (c) the closely-held insurer might seek the financial haven of having assets protected from prying eyes or intruding arms, (d) reserves set in anticipation of a merger or acquisition was often seen and (e) the next NAIC triennial examination was an ever-present consideration.

Critical to these early practices is the fact that all of the above-cited conflicting issues were accommodated without the need for the basic computational protocol having to be modified.

Topic 2 - Present Practices

At the present, the actuary continues to be stressed except that the conflicting interests have dramatically increased in size and scope. For example: (a) the issue of (i) IRS-involvement with tax issues and (ii) the plan sponsor fiduciary issues introduced by ERISA, (b) the use of claim reserves for non-financial reasons (experience-monitoring, e.g.), (c) the pervasive culture of enterprise risk management, (d) the multiplicity of funding methods (trusts, MEWAs, VEBAs, HMOs, e.g.), (e) new state and/or federal legislation (f) new professional guidelines set by the actuaries and accountants and (g) multiplicity of health plan governmental regulators with their wide and disparate agenda.

The result of these new sights and sounds is this: (b) the old protocol where one computational methodology would accommodate the few conflicting interests must be replaced with (b) a new protocol which is capable of so accommodating many conflicting interests.

Topic 3 - New Protocol Described

The old protocol involved a single work-product: e.g., a certification done in the traditional manner which provided a reserve of, say $1,000. The new protocol adds an additional work-product: e.g., an amendment by which the actuary certifies to an additional reserve of, say, $X. The additional $X responds to the need for the reserve to be increased (cited above) which may not be conveniently met in by the traditional computational methodology. To enhance the explanation, an example is attached.