Actuarial Standards of Practice

Introduction to the
Actuarial Standards of Practice
Developed by the
Actuarial Standards Board
Approved by the
October 2008
(Doc. No. 113)

Introduction to the Actuarial Standards of Practice — October 2008
TABLE OF CONTENTS
Transmittal Memorandum iii
Section 1. Overview...................................................................................................................1
Section 2. The Actuarial Standards Board ..................................................................................1
Section 3. Actuarial Standards of Practice ..................................................................................1
Section 4. Compliance with ASOPs ...........................................................................................5
APPENDIX
Appendix: Comments on the Exposure Draft and Responses.......................................................8
ii
October 2008
TO: Members of Actuarial Organizations Governed by the Standards of Practice of the

Actuarial Standards Board and Other Interested Persons
FROM: Actuarial Standards Board (ASB)
SUBJ: Introduction to the Actuarial Standards of Practice (ASOPs)
This document contains the October 2008 revision to the Introduction to the Actuarial Standards
of Practice (“Introduction”).
Background
In 1989, the ASB published a Preface to its standards that provided insight into the nature of
professions and the role that professionalism standards and disciplinary procedures play, with
specific reference to those of the actuarial profession.
Since that time, there have been significant developments in the structure of the professionalism
standards and disciplinary procedures of the actuarial profession. The ASB determined that it
would be beneficial to adopt an introduction to the standards 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. For these reasons, the
ASB withdrew the Preface and prepared the Introduction to the Actuarial Standards of Practice
in 2004.
Recently, the ASB concluded that a limited review of the Introduction was appropriate in order
to clarify and update certain language.
Exposure Draft
The exposure draft of this revision was issued in July 2008 with a comment deadline of August
22, 2008. The ASB reviewed the 14 comment letters received and made changes to the draft as
appropriate.
This revision clarifies the language in sections 3.1.2 and 3.1.3 (now 3.1.3 and 3.1.4) regarding
the process that the ASB follows when developing ASOPs. Apparently, some actuaries have
interpreted the prior language to indicate that the Board merely codifies (or catalogs) current
practices when developing an ASOP. The actual process in developing ASOPs goes well beyond
a simple codification of practices. Therefore, the language was clarified to articulate more clearly
the process the Board has been following to develop ASOPs.
Second, language in section 3.2.3 that related to prescribed statements of actuarial opinion was
deleted in light of the new revisions (effective January 1, 2008) to the Qualification Standards
iii
for Actuaries Issuing Statements of Actuarial Opinion in the United States (Including Continuing
Education Requirements).
Third, due to the current ASB project to standardize the “deviation” provisions in all ASOPs and
move to the substantial guidance to ASOP No. 41, Actuarial Communications, the language in
section 4.6 was substantially altered to conform to the new deviation procedures.
The transmittal memorandum accompanying the exposure draft indicated that the proposal had a
limited purpose—to clarify language in four specified sections. The proposal was not intended to
be reflective of any changes in the way standards are set. At the same time, the ASB recognizes
that there may be larger issues with the Introduction than those that are being addressed by these
revisions. Accordingly, the ASB, in a separate document, is inviting members of the profession
or other interested parties who have suggestions on how to improve the standard setting process
to share their ideas with the ASB.
Although the Board did not request comments on other areas of the Introduction, it did review
and react to comments suggesting clarifications on sections outside the original mandate of the
Exposure Draft, making changes where appropriate. See the Appendix for a detailed discussion
of the comments received and the Board’s responses.
The Board thanks everyone who took the time to comment on the exposure draft.
The ASB voted in October 2008 to adopt this Introduction.
Stephen G. Kellison, Chairperson

Albert J. Beer Robert G. Meilander
Alan D. Ford James J. Murphy
Patrick J. Grannan Godfrey Perrott
David R. Kass Lawrence J. Sher
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.
iv
INTRODUCTION TO THE ACTUARIAL STANDARDS OF PRACTICE
Section 1. Overview
The Actuarial Standards Board (ASB) promulgates actuarial standards of practice (ASOPs) for
use by actuaries when providing professional services in the United States. For purposes of this
Introduction, Financial Reporting Recommendations and Actuarial Compliance Guidelines
promulgated or republished by the ASB that have not been superseded are also ASOPs. This
Introduction sets forth principles that have been broadly applicable to the work of the ASB since
its inception. This Introduction is part of the standards and carries the same weight and authority
as the ASOPs themselves.
Section 2. The Actuarial Standards Board
2.1 The ASB is vested by the U.S.-based actuarial organizations1 with the responsibility for
promulgating ASOPs for actuaries providing professional services in the United States.
Each of these organizations requires its members, through its Code of Professional
Conduct2, to observe the ASOPs of the ASB when practicing in the United States.
Actuaries who are required by their non-U.S. actuarial organizations to observe
applicable standards of practice when providing professional services should also look to
these ASOPs when practicing in the United States.
2.2 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 practice area, to promulgate
ASOPs, and to amend or withdraw ASOPs when, in the ASB’s judgment, such
amendment or withdrawal is appropriate. The ASB is the final authority for determining
the content of its ASOPs.
Section 3. Actuarial Standards of Practice
3.1 The Purpose of ASOPs
3.1.1 The ASOPs are not narrowly prescriptive and neither dictate a single approach
nor mandate a particular outcome. ASOPs are intended to provide actuaries with a
framework for performing professional assignments and to offer guidance on
relevant issues, recommended practices, documentation, and disclosure. Each
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 identical Codes of Professional Conduct effective January 1, 2001.
1
ASOP articulates a process of analysis, documentation, and disclosure that, in the

ASB’s judgment, constitutes appropriate practice within the scope and purpose of
the ASOP.
3.1.2 Proposals for developing new ASOPs and revising existing ones come from a
variety of sources, including individual actuaries, actuarial firms, professional
committees (e.g., American Academy of Actuaries practice councils), the
Actuarial Board for Counseling and Discipline, and the ASB (and its committees)
itself. If it accepts the proposal, the ASB assigns it to the appropriate committee
or task force to begin the project.
3.1.3 The process of developing a new ASOP or revising an existing ASOP generally
begins with the identification of practices that the ASB believes are broadly
accepted by qualified actuaries as appropriate to the proper performance of a
particular type of professional assignment or aspect of professional practice. After
reviewing the current range of practices, the ASB determines whether it is
appropriate under the circumstances to restrict or elevate practice to serve the
public interest, to reflect recent advancements in actuarial science, or for other
reasons. Additionally, the ASB may provide supporting context to delineate how
the appropriate level of practice may be achieved in specific situations.
3.1.4 The ASB seeks to define an appropriate level of practice, recognizing that the
adoption of an ASOP and its subsequent use by practitioners and enforcement by
the U.S.-based actuarial organizations will have the effect of rendering practices
described in the ASOP as “generally accepted.” Similarly, the ASB sometimes
promulgates an ASOP in a new area of practice. Again, the ASB seeks to define
an appropriate level of practice for actuaries working in the new area, often by
looking at current practice in other areas. The process of exposure to the
profession and other interested parties is intended to confirm the general range of
practice and to seek input on the impact that the proposed ASOP would have on
the level of practice.
3.1.5 ASOPs are intended for use by actuaries who, by virtue of having the necessary
education and experience to understand and apply them, are qualified to make use
of them. Other individuals should consider obtaining the advice of a qualified
actuary before making use of or otherwise relying upon these ASOPs. 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.
3.1.6 The ASB recognizes that actuarial practice involves the identification,
measurement, and management of contingent future events in environments that
rarely, if ever, emerge exactly as projected. Moreover, the ASOPs are intended to
provide guidance for dealing with commonly encountered situations. ASOPs take
into account relevant issues arising from the scope of the assignment, limited
information, time constraints, and other practical difficulties such as conflicts with
regulatory or other restrictions. Actuaries in professional practice may also have
2
to handle new or nonroutine situations not anticipated by the ASOPs. In those

situations, the actuary should exercise professional judgment in applying the
ASOPs.
3.1.7 The ASOPs are principles-based and do not attempt to dictate every step and
decision in an actuarial assignment. Rather, the ASOPs provide the actuary with
an analytical framework for exercising professional judgment, identifying factors
that the actuary typically should consider when faced with a particular type or
aspect of professional service. The ASOPs generally leave room for the actuary to
use professional judgment when selecting methods and assumptions, conducting
an analysis, and reaching a conclusion. Emphasizing process over outcome, the
ASOPs recognize that actuaries can and do reasonably differ in their preferred
methodologies and choices of assumptions and can reasonably reach differing
opinions, even when faced with the same facts. Two actuaries could follow a
particular ASOP, both using reasonable methods and assumptions, and reach
appropriate results that could be substantially different.
3.1.8 There are situations where legislative or regulatory bodies or other professional
organizations have established rules or requirements that are not in accordance
with generally accepted actuarial principles and practice or where an actuary is
prevented from applying professional judgment. To deal with these situations, the
ASB provides guidance on compliance in such environments. ASOPs that focus
on compliance issues typically contain the word “compliance” in their titles.
3.1.9 Unlike the ASOPs, which actuaries are required to observe, the actuarial literature
provides information that an actuary might choose, but is not required, to consider
when providing professional services. Practice notes published by the Academy,
for example, describe various methods actuaries use to satisfy an ASOP or to
comply with a legal or regulatory requirement, but do not purport to codify
generally accepted practice and are not binding upon actuaries. Similarly, 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. Practice also evolves as actuarial research and
literature document new methods and improved techniques, and generally
accepted practice frequently comes into use through the profession’s collective
adoption of techniques described in the actuarial literature. However, unlike the
ASOPs, such literature is not binding upon the actuary, and the actuary can
legitimately exercise professional judgment in deciding whether and how to make
use of such materials.
3.2 The Format of ASOPs—Each ASOP document contains (1) a transmittal memorandum,
(2) the ASOP itself, and (3) one or more supporting appendices.3
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 sections 3.2.1–3.2.3 of this Introduction.
3
3.2.1 The transmittal memorandum and the appendices are not part of the ASOP and
are nonbinding. The transmittal memorandum provides background information
and a description of the key issues related to the development of the ASOP. The
appendices (1) provide the background and historical issues involved and describe
current or alternative practices and (2) 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.
3.2.2 Each ASOP begins with two sections that (1) summarize briefly the purpose,
scope, cross references, and effective date of the ASOP, and (2) define the special
terms used within the ASOP.
a. The purpose and scope identify 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.
b. 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, i.e., actuaries are not required to ensure that
professional services performed by them or under their direction satisfy
the ASOP, until the effective date of the ASOP, because in adopting the
ASOP the ASB may have defined a new practice or elevated practice, as
described in section 3.1.3 above. In the case of a revision to an existing
ASOP, the existing ASOP is binding until the effective date of the revised
ASOP.
c. Each ASOP contains a list of definitions of terms used within it. 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.
3.2.3 The other two sections of the ASOP (1) provide an analysis of issues and
recommended practices and (2) address communications and disclosures.
a. The Analysis of Issues and Recommended Practices section is organized

by major topics or issues, or by major tasks involved in completing
assignments within the ASOP’s scope. Emphasis is placed on providing
4
the actuary with an appropriate analytical framework for completing the

assignment that is within the scope of the ASOP.
b. The Communications and Disclosures section contains a clause that

describes what an actuary should do when, in the actuary’s professional
judgment, a deviation from one or more provisions of the ASOP is
deemed to be appropriate. Special communications or disclosures
pertinent to the subject of the ASOP and applicable limitations are
identified in this section. Where appropriate, reference may be made to
applicable provisions of the Code of Professional Conduct.
Section 4. Compliance with ASOPs
4.1 Actuaries are required by Precept 3 of the Code of Professional Conduct to ensure that
work performed by them or under their direction satisfies applicable ASOPs. ASOPs are,
therefore, binding upon actuaries because failure to follow an applicable ASOP can
breach the Code of Professional Conduct, rendering the actuary subject to the
profession’s counseling and discipline processes.
4.2 Actuaries are expected to take a good faith approach in applying ASOPs, exercising good
judgment and common sense; it would be inappropriate for any user of an ASOP to make
a strained interpretation of the provisions of the ASOP.
4.3 Actuaries should observe those ASOPs that are relevant to the task at hand; not all
ASOPs will apply. An ASOP should not be interpreted as having applicability beyond its
stated scope and purpose. Most, but not all, of the ASOPs are task-specific, dealing with
particular kinds of professional services performed by actuaries. A few ASOPs, however,
deal more broadly with particular aspects of many types of actuarial assignments (for
example, ASOP No. 23, Data Quality). Actuaries are responsible for identifying the
ASOPs that apply to the task at hand. The Academy’s Council on Professionalism
publishes advisory Applicability Guidelines to assist actuaries in identifying the ASOPs
that may be relevant.
4.4 The ASB seeks to avoid creating conflicts between the ASOPs. When an actuary believes
that two ASOPs have conflicting requirements when applied to a specific situation and
neither ASOP provides explicit guidance concerning which of the two takes precedence,
the actuary is encouraged to contact the Actuarial Board for Counseling and Discipline
(ABCD) for confidential guidance on appropriate practice. Where two ASOPs have
differing but not conflicting requirements, the ASB anticipates that the actuary will apply
professional judgment to harmonize the two ASOPs in a reasonable fashion. The actuary
may choose to seek confidential guidance from the ABCD to support the actuary’s
judgment.
4.5 ASOPs frequently use a few terms that, while not defined within them, are integral to an
informed reading of the ASOPs. For example:
5
4.5.1 KnownASOPs frequently refer to circumstances, factors, practices of the

principal, or other information or items that are known. The ASB recognizes that,
in many cases, the actuary relies upon the principal and others acting on the
principal’s behalf for information and cannot reasonably be expected to act based
on information that was not provided to the actuary. Consequently, unless an
ASOP clearly indicates otherwise, “known” means that the actuary had actual
knowledge of the item in question at the time the actuary performed professional
services under the ASOP.
4.5.2 Practical/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. Neither of these terms is intended to suggest that all
possible steps should always be taken to complete an assignment. To the contrary,
the constraints of a professional relationship or assignment and the specifics of a
given environment frequently require the actuary to choose 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 legitimate 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 practical or practicable to undertake a particular task. The actuary might
choose to disregard items that, in the actuary’s professional judgment, are not
material to the purpose and nature of the assignment.
4.5.3 Professional judgment—Actuaries bring to their assignments not only highly

specialized training, but also the broader knowledge and understanding that come
from experience. The ASOPs frequently call upon actuaries to thoughtfully apply
both training and experience to their professional assignments, recognizing that
reasonable differences of opinion are appropriate, if not inevitable, when
professionals undertake to project the effect of contingent future events. The ASB
anticipates that the actuary’s use of professional judgment will be presented in
such a way that another qualified actuary would recognize when and where
judgment has been applied, even if the other qualified actuary might disagree with
the resulting conclusions.
4.5.4 Reasonable—In many instances, the ASOPs call for the actuary to take reasonable
steps, make reasonable inquiries, or otherwise exercise reason when performing a
professional service. The intent is not to require the actuary to go beyond what the
actuary deems to be appropriate under the circumstances, given the nature of the
assignment and the professional relationship and relevant business considerations.
Rather, the intent is to call upon the actuary to exercise the level of care and
diligence that, in the actuary’s professional judgment, is consistent with generally
accepted actuarial practice and necessary to complete the assignment in an
appropriate manner.
6
4.5.5 Reliance—The ASOPs recognize that actuaries are frequently required to rely
upon non-actuaries such as other professionals, management, and trustees for
information and professional opinions that are pertinent to an assignment.
Similarly, actuaries often rely upon their actuarial colleagues to perform some
component of a larger actuarial analysis in circumstances where it would be
inappropriate or impractical for the actuary to redo the colleagues’ work or where
the actuary would not be qualified to do so. Accordingly, the ASOPs usually
permit the actuary to rely in good faith upon such individuals, subject to
appropriate disclosure of such reliance.
4.6 The ASOPs make specific provision for those situations where the actuary 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 required
in such ASOP and in ASOP No. 41.
4.6.1 It may be appropriate for the actuary to deviate from one or more provisions of an
ASOP, such as in situations that differ from those contemplated when the ASOP
was adopted or where, in the professional judgment of the actuary, the application
of new practice based on recent advances in actuarial science would be more
appropriate.
4.6.2 It is appropriate for the actuary to deviate from one or more provisions of an
ASOP to the extent that a law, regulation, or other binding authority requires such
deviation.
7
APPENDIX
Comments on the Exposure Draft and Responses
The exposure draft of revisions to the Introduction to the Actuarial Standards of Practice was
issued in July 2008 with a comment deadline of August 22, 2008. Fourteen 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 ASB carefully considered all comments
received, and reviewed (and modified, where appropriate) the proposed changes. Summarized
below are the significant issues and questions contained in the comment letters and the responses
to each. Unless otherwise noted, the section numbers and titles used below refer to those in the
exposure draft.
GENERAL COMMENTS
Comment One comment sent on behalf of 29 actuaries noted that the proposed changes are
relatively minor but requested that the comment deadline be extended by 120 days in
order to give members of the profession more time to address how standards are set.
Response The transmittal memorandum accompanying the exposure draft indicated that the
proposal had a limited purpose -- to clarify language in four specified sections. The
proposal was not intended to be reflective of any changes in the way standards are set.
The reviewers believed there was sufficient time to review and comment on the
limited changes. The ASB invites members of the profession or other interested
parties who have suggestions on how to improve the standard setting process to share
their specific ideas with the ASB.
C OMMENTS ON REQUESTED SECTIONS FOR REVIEW
Section 3.1.2 (Now 3.1.3)
Comment One commentator suggested that the last sentence in 3.1.2 (now 3.1.3) be changed to
the following: “Additionally, the ASB may provide supporting context to delineate how
the level of practice may appropriately be achieved in specific situations. Such contextual
language is recognized as being potential (sic) time sensitive. The actuary should not
blindly follow such contextual language when it is no longer appropriate.”
Response The reviewers agree that the addition of “may” in the first sentence is appropriate and
made the change. They did not feel that the additional language was needed and made
no additional change.
8
Comment Two commentators suggested changing the wording in the first sentence of 3.1.2 (now
3.1.3) to expand the scope not only to developing a new ASOP but also to include
revisions of ASOPs.
Response The reviewers agree and made the change.
Comment One commentator suggested adding “pertinent to the ASOP at hand” to the end of the
second sentence of 3.1.2 (now 3.1.3).
Response The reviewers did not feel that this addition was needed and made no change.
Comment One commentator suggested adding a modifier to make clear what level of practice is
expected in the last sentence of the section.
Response The reviewers agreed that the addition of the modifier would be beneficial to clarify
intent, and inserted the word “appropriate.”
Comment One commentator suggested adding wording to address the criteria that determine when
ASOPs are updated.
Response The reviewers agree and have added a new subsection, 3.1.2, to address this (and
renumbered the subsequent subsections accordingly).
Comment One commentator suggested adding a sentence following the third sentence of the
existing 3.1.3 (now 3.1.4) that states the following: “Again, the ASB seeks to define an
appropriate level of practice for actuaries working in the new area, often by looking at
current practice in other areas and deciding on the appropriateness of current practices.”
Response The reviewers do not believe that this addition is needed and made no change.
Section 3.2.3
Comment One commentator suggested that “Code” be changed to “Code of Professional

Conduct” in all instances for clarity.
Section 4.6
Comment Several commentators expressed concern that the current section 4.6, as exposed, did
not adequately convey the purpose for deviation language and the process, including
disclosure, for a deviation. One of these commentators indicated that the proposed
section 4.6 language would be adequate assuming the amendments to ASOP 41 which
include standardized deviation language were adopted no later than the amendments to
the Introduction.
Response The reviewers agree and have expanded and clarified this section.
9
COMMENTS ON OTHER SECTIONS OF THE ASOP
Overvi ew
Comment One commentator suggested making the last line of the overview more direct by
changing it to the following: “This introductory material is part of the standards and
carries the same weight and authority as the ASOPs themselves.”
Comment One commentator questioned the usage of “litigation” and “malpractice,” and
suggested that since “malpractice” can be charged in a legal context or other context,
perhaps it should be in a standalone statement.
Response The reviewers disagree, and made no change.
Comment One commentator suggested that the last sentence in the section should be modified to
excise the phrase “must be able to.”
Response The reviewers agree and reworded the sentence for clarity.
Comment One commentator took issue with the following sentence: “The ASOPs intentionally
leave significant room for the actuary to use professional judgment when selecting
methods and assumptions.” He believes this is not universally true, and that the draft
should reflect that.
Response The reviewers agree and revised the sentence to clarify its meaning.
Comment One commentator suggested that the phrase “generally accepted practice” be changed
to “a particular ASOP.”
Comment One commentator noted the language "two actuaries advising a principal could provide
appropriate yet substantially different results to that principal” and questioned whether the
actuary would be obliged to advise the principal of this possibility. The commentator
suggested that if this is the case, then the text in 3.1.6 should be modified to reflect this.
Response The reviewers decided that any change of this nature is outside of the scope of this update
to the Introduction.
10
Comment One commentator suggested that the Introduction is not clear on the applicability of
ASOPs when they are inconsistent with law or regulation, and suggested that this be
addressed in section 3.1.7.
Response The reviewers note that the newly added section 4.6.2 addresses this point.
Comment One commentator suggested that the Introduction should remind actuaries working for
legislative or regulatory bodies that they are subject to the ASOPs, or, if that is not the
case, it should expressly exempt them from following ASOPs when they make
recommendations on law or regulations.
Response The reviews agree that all U.S. actuaries, including those who work for legislative or
regulatory bodies are subject to the ASOPs to the extent that their advice involves the
performance of actuarial services. The reviewers do not see a need to remind one
subset of the actuarial profession that they are subject to ASOPs.
Comment One commentator pointed out that the Introduction has no discussion on the
procedures the ASB uses when reviewing and revising ASOPs.
Response The reviewers agree that this needs to be addressed and added section 3.1.2 to address
the issue.
Comment One commentator suggested that it might be appropriate for section 3.1.8 to include a
statement that the ASB does not approve nor disapprove of materials other than
ASOPs used by the actuary in providing professional services.
Response The reviewers do not feel such a statement is needed.
Section 3.2.2.b
Comment One commentator suggested adding a comma for clarity in the following sentence: “An
ASOP is not binding, i.e., actuaries are not required to ensure that professional services
performed by them or under their direction satisfy the ASOP, until the effective date of the
ASOP, because in adopting the ASOP the ASB may have defined a new practice or
elevated practice, as described in section 3.1.3 above.”
11
Actuarial Standard
of Practice
No. 1
Nonguaranteed Charges or Benefits

for Life Insurance Policies and Annuity Contracts
Revised Edition
Developed by the
Task Force to Revise ASOP No. 1 of the
Life Committee of the
Adopted by the
March 2004
(Doc. No. 092)

ASOP No. 1March 2004
T A B L E OF C O N T E N T S
Section 1. Purpose, Scope, Cross References, and Effective Date 1

1.1 Purpose 1
1.2 Scope 1
1.3 Cross References 1
1.4 Effective Date 2
Section 2. Definitions 2
2.1 Anticipated Experience Factor 2
2.2 Applicable Law 2
2.3 Determination Policy 2
2.4 Nonguaranteed Charge or Benefit 2
2.5 Policy 2
2.6 Policy Class 2
2.7 Policy Factor 2
Section 3. Analysis of Issues and Recommended Practices 3

3.1 Advice on Determination Policy 3
3.2 Determination of Nonguaranteed Charges or Benefits 3
3.3 Determination Process 3
3.4 Policy Classes 3
3.5 Nonguaranteed Charges or Benefits Used in Illustrations 4
3.6 Documentation 4
Section 4. Communications and Disclosures 4

4.1 Actuarial Communication 4
4.2 Disclosure 4
4.3 Reliance on Data Supplied by Others 5
4.4 Prescribed Statement of Actuarial Opinion 5
4.5 Deviation from Standard 5
APPENDIXES
Appendix 1—Background and Current Practices 6

Background 6
Current Practices 7
Appendix 2—Comments on the Exposure Draft and Task Force Responses 9
ii
March 2004

Actuarial Standards Board and Other Persons Interested in Nonguaranteed
Charges or Benefits for Life Insurance Policies and Annuity Contracts
SUBJ: Actuarial Standard of Practice (ASOP) No. 1
This booklet contains the final version of ASOP No. 1, Nonguaranteed Charges or Benefits for
Life Insurance Policies and Annuity Contracts.
Background
In 1986, the Interim Actuarial Standards Board adopted the original version of ASOP No. 1,
which was titled The Redetermination (or Initial Determination) of Non-Guaranteed Charges
and/or Benefits for Life Insurance and Annuity Contracts. In 1990, the Actuarial Standards
Board adopted a reformatted version of ASOP No. 1.
As originally written, ASOP No. 1 was primarily concerned with the determination of
nonguaranteed charges or benefits in individual life insurance policies and annuity contracts. In
light of evolving practice, the ASB believed it was appropriate to revise ASOP No. 1. This
revision of ASOP No. 1 adds additional guidance on the determination of nonguaranteed charges
or benefits.
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 (hereafter the Model).
The Model itself was drafted to accomplish specific regulatory objectives. ASOP No. 24
concerns itself with guidelines for compliance with the Model. With respect to illustrated
nonguaranteed charges or benefits for life insurance policies and annuity contracts that are not
subject to or represented as being in accordance with the Model, this revision of ASOP No. 1
imposes new obligations on the actuary that reflect generally accepted actuarial practice.
Exposure Draft
The exposure draft of this ASOP was issued in March 2003, with a comment deadline of
August 15, 2003. Fifteen comment letters were received. The task force carefully considered all
comments received and made clarifying changes to the language in some sections. For a
summary of the substantive issues contained in the exposure draft comment letters and the task
force’s responses, please see appendix 2.
iii
The most significant changes from the exposure draft are as follows:
1. The task force revised the standard to utilize the term “determination” in place of
“redetermination.”
2. The task force modified section 3.1 to clarify that the actuary should consider relevant
policy provisions and applicable law.
3. The task force clarified section 3.5, which addresses the actuary’s responsibilities with
respect to illustrations not subject to ASOP No. 24.
4. Section 3.6, Documentation, was added to conform with other recently adopted ASOPs.
In addition, the task force changed the heading of section 4.2 to Disclosure and changed
the requirements to provide more flexibility.
5. The task force changed the term “company” to “insurer” throughout the ASOP to
recognize that an insurer is not necessarily a company.
The ASB voted in March 2004 to adopt this standard.
Task Force to Revise ASOP No. 1
Thomas A. Phillips, Chairperson

Thomas A. Campbell Nik Godon
Michael A. Cioffi Kenton L. Scheiwe
Life Committee of the ASB
Robert G. Meilander, Chairperson

Charles Carroll Thomas A. Phillips
Michael A. Cioffi Allan W. Ryan
Stephen N. Patzman Barry L. Shemin
Michael A. LaMonica, Chairperson

Cecil D. Bykerk William A. Reimert
Ken W. Hartwell Lawrence J. Sher
Lew H. Nathan Karen F. Terry
Godfrey Perrott William C. Weller
iv
ACTUARIAL STANDARD OF PRACTICE NO. 1
NONGUARANTEED CHARGES OR BENEFITS

FOR LIFE INSURANCE POLICIES AND ANNUITY CONTRACTS
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 with
respect to the determination of, or the development of determination policy on,
nonguaranteed charges or benefits for life insurance policies and annuity contracts.
Throughout this standard, the term determination includes both initial determination and
subsequent redeterminations, where appropriate.
1.2 Scope—This standard applies to actuaries when performing professional services in

connection with the determination and illustration of nonguaranteed charges or benefits
(except as provided below) for life insurance policies and annuity contracts where
nonguaranteed charges or benefits may vary at the discretion of the insurer. Examples of
such policies include fixed and variable universal life policies, indeterminate premium
policies, deferred annuity contracts, and equity-indexed policies.
This standard does not apply to actuaries when performing professional services with
respect to illustrations of nonguaranteed charges or benefits subject to ASOP No. 24,
Compliance with the NAIC Life Insurance Illustrations Model Regulation.
respect to policyholder dividends, which are covered by ASOP No. 15, Dividend
Determination for Participating Individual Life Insurance Policies and Annuity
Contracts. To the extent that a policy involves both nonguaranteed charges or benefits
and policyholder dividends, this standard applies with respect to nonguaranteed charges
or benefits, and ASOP No. 15 applies with respect to policyholder dividends.
When applicable law conflicts with this standard, compliance with such applicable law
shall not be deemed a deviation from this standard, provided the actuary discloses that the
professional services were performed in accordance with the requirements of such
applicable law.
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
1.4 Effective Date—This standard is effective for all actuarial work performed within the
scope of this standard on or after September 30, 2004.
Section 2. Definitions
The terms below are defined for use in this actuarial standard of practice.
2.1 Anticipated Experience Factor—An assumption that reflects anticipated experience and
may be used to determine nonguaranteed charges or benefits. A particular anticipated
experience factor reflects future experience of a specific type. Examples of experience
factors include investment income, mortality, policy termination, and expense rates.
2.2 Applicable Law—Federal, state, and local statutes, regulations, case law, and other legal
binding authority that may govern the actuarial work being performed.
2.3 Determination PolicyThe insurer’s criteria or objectives for determining nonguaranteed

charges or benefits for a particular policy class.
2.4 Nonguaranteed Charge or Benefit—Any element within a policy (as defined in

section 2.5), other than policy dividends, which affects policyholder costs or value, and
which may be changed at the discretion of the insurer after issue. Examples of
nonguaranteed charges or benefits include excess interest, mortality charges or expense
charges lower than those guaranteed in the policy, indeterminate premiums, and
participation rates for equity-indexed products.
2.5 PolicyExcept when used in the term determination policy, policy refers to individual
life insurance policies and annuity contracts and group life insurance and annuity
certificates with nonguaranteed charges or benefits that operate in substantially the same
manner as individual life insurance policies and individual annuity contracts with respect
to nonguaranteed charges or benefits.
2.6 Policy Class—A group of policies considered together for purposes of determining a
nonguaranteed charge or benefit.
2.7 Policy Factor—A premium, value, charge, or benefit that limits a nonguaranteed charge
or benefit. Policy factors are based on the guarantees defined in the policy. Examples of
policy factors include minimum cash values, minimum interest rates, maximum mortality
charges, maximum gross premiums, and maximum policy loan interest rates.
2
Section 3. Analysis of Issues and Recommended Practices
3.1 Advice on Determination Policy—When advising the insurer on the actuarial aspects of a
determination policy, the actuary’s advice should be consistent with the insurer’s stated
marketing, financial, and other objectives. The actuary should consider relevant policy
provisions and applicable law.
3.2 Determination of Nonguaranteed Charges or Benefits—The actuary should recommend

nonguaranteed charges or benefits that are consistent with the insurer’s determination
policy. When the determination policy is not provided to the actuary, the actuary should
inquire about the insurer’s intentions for the determination of nonguaranteed charges or
benefits and have the insurer confirm those intentions as the determination policy.
3.3 Determination Process—The actuary may use modeling, averaging, grouping of policy
classes, or other methods, as the actuary deems appropriate, to calculate the specific
nonguaranteed charges or benefits.
Determination is a process subject to practical constraints. The actuary should consider

relevant conditions and circumstances such as the size of a particular group of policies,
and the costs, practical difficulties, and effects of making changes to the nonguaranteed
charges or benefits.
The actuary should consider conducting sensitivity tests of the impact of likely deviations
from the anticipated experience on which the actuary’s advice is based, if the actuary
expects such deviations to have a material effect.
3.4 Policy Classes—Policies will usually be grouped into classes for purposes of determining
nonguaranteed charges or benefits. The determination policy may include a definition of
the policy classes to be used. If the policy classes have not been defined in the
determination policy, the actuary should establish policy classes considering criteria such
as the following:
a. the similarity of the policy types;
b. the structure of policy factors and nonguaranteed charges or benefits;
c. the similarity of anticipated experience factors;
d. the time period over which the policies were issued; and
e. the underwriting and marketing characteristics of the policies.
In addition, the actuary may consider combining policy classes that are reasonably
consistent based on the above criteria if, in the actuary’s professional judgment, such
combinations would be appropriate.
3
3.5 Nonguaranteed Charges or Benefits Used in IllustrationsThe actuary should determine

nonguaranteed charges or benefits to be used in illustrations not subject to ASOP No. 24
consistently with how the actuary determines nonguaranteed charges or benefits for the
policies involved. The actuary should consider conducting tests of illustrated
nonguaranteed charges or benefits to ascertain whether those could be supported by
reasonably anticipated experience.
3.6 DocumentationThe actuary should prepare and retain adequate documentation in

compliance with the requirements of ASOP No. 41, Actuarial Communications. The
actuary should prepare sufficient documentation to comply with the disclosure
requirements of section 4.2.
Section 4. Communications and Disclosures
4.1 Actuarial Communication—The actuary should issue an actuarial communication in

accordance with ASOP No. 41 to the insurer stating the actuary’s recommendations for
the nonguaranteed charges or benefits and the bases therefor, unless another actuary
advising the same insurer is issuing such an actuarial communication that incorporates
such work.
4.2 DisclosureThe actuary should disclose the following items when appropriate and
available:
a. a description of the insurer’s determination policy for the policies and policy
classes involved. The actuary should describe any additional material assumptions
with respect to the determination policy that were made to complete the analysis;
b. any known areas in which the recommended nonguaranteed charges or benefits

do not follow the insurer’s determination policy;
c. any material change in the determination policy or in the assumptions the actuary
has made about the determination policy since the previous determination;
d. the policy classes involved and any material changes in the assignment of policies
to policy classes;
e. a description of the processes and methods used in the determination of

nonguaranteed charges or benefits, including any significant modeling, averaging,
or other approximation methods;
f. the nonguaranteed charges or benefits recommended for the forthcoming period;
g. the significant policy factors used in the determination of nonguaranteed charges

and benefits;
4
h. the anticipated experience factors used in the determination of nonguaranteed

charges and benefits and any material changes in such factors from the last
determination;
i. any conclusions or recommendations related to sensitivity testing; and
j. applicable law recognized in formulating the actuary’s recommendations.
4.3 Reliance on Data Supplied by Others—The actuary may rely on data supplied by another.
In doing so, the actuary should disclose both the fact and the extent of such reliance. The
accuracy and comprehensiveness of data supplied by others are the responsibility of those
who supply the data. For further guidance, the actuary is directed to ASOP No. 23, Data
Quality.
4.4 Prescribed Statement of Actuarial Opinion—This ASOP does not require a prescribed
statement of actuarial opinion as described in the Qualification Standards for Prescribed
Statements of Actuarial Opinion promulgated by the American Academy of Actuaries.
However, law, regulation, or accounting requirements may also apply to an actuarial
communication prepared under this standard, and as a result, such actuarial
communication may be a prescribed statement of actuarial opinion.
4.5 Deviation from Standard—An actuary should be prepared to justify the use of any
procedures that depart materially from those set forth in this standard and must include,
in any actuarial communication disclosing the result of the procedures, an appropriate
statement with respect to the nature, rationale, and effect of such departures. Compliance
with applicable law that conflicts with this standard shall not be deemed a deviation from
this standard, provided the actuary discloses that the professional services were
performed in accordance with the requirements of such applicable law.
5
Appendix 1
Background and Current Practices
Note: This appendix is provided for informational purposes, but is not part of the standard of
practice.
Background
In the mid-1970s, there began to be increased activity with respect to products with
nonguaranteed charges or benefits as opposed to dividends under traditional participating
policies. Reasons for this included items such as the increased volatility in the North American
economy, increased competition within the insurance industry, and the advent of universal life
whose unbundled form required nonguaranteed charges or benefits.
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
ASOP No. 1 in October 1986. 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 such
areas as benefit design, pricing structure, marketing practices, and investment philosophies. It
was, therefore, impossible for the standard to offer guidance on issues for which there was no
generally accepted actuarial practice, such as for the applicability of the contribution principle,
which had been accepted and in effect for many years for traditional participating life policies.
Rather, the standard reflected that the actuary’s essential obligations were (1) to assure the com-
pletion of all of the activities required to advise the client professionally; and (2) to prepare an
actuarial communication for the client presenting this advice.
Since the promulgation of the original standard in 1986, the volume of these products sold has
continued to grow and considerable product innovation has taken place. As a result, there is now
a clearer understanding of what represents generally accepted actuarial practice with respect to
these products, and ASOP No. 1 has been revised to reflect these practices.
Furthermore, ASOP No. 15, Dividend Determination for Participating Individual Life Insurance
Policies and Annuity Contracts, has been revised and ASOP No. 24, Compliance with the NAIC
Life Insurance Illustration Model Regulation, has been promulgated. ASOP No. 1 has also been
revised to be consistent, where appropriate, with these newer standards.
6
Current Practices
The actuary may provide professional services in two principal areas with respect to non-
guaranteed charges or benefits. The actuary is normally involved in the determination of
nonguaranteed charges or benefits in accordance with insurer determination policy. The actuary
may also be involved in advising the insurer in setting the determination policy.
It is common in current practice to base advice on the determination of nonguaranteed charges or

benefits of policies, including the relationship between nonguaranteed charges and benefits and
the anticipated experience factors, on insurer determination policy. Insurer determination policy
may be documented in sufficient detail (for example, in a previous actuarial communication) for
the actuary to appropriately determine the nonguaranteed elements in question. If not, the actuary
will generally gather sufficient information from the insurer to provide the actuarial services.
The recovery of past losses or the distribution of past gains may be an aspect of the deter-
mination policy. In addressing this issue, the actuary will typically look to policy provisions,
insurer determination policy, and applicable law.
It is also common in practice for the actuary to adjust nonguaranteed charges or benefits for
items not directly related to the actual nonguaranteed charge or benefit, such as the following:
a. to reflect anticipated gains or losses on supplementary benefit riders;
b. to reflect anticipated gains or losses arising from the usage of settlement option
guarantees;
c. to reflect other anticipated gains or losses arising from policy factors, such as
nonforfeiture interest rates that are low or high relative to projected investment income
rates;
d. to smooth the transition from one set of nonguaranteed charges or benefits to another;
e. to smooth the incidence of nonguaranteed charges or benefits between policy durations;

and
f. to be consistent with nonguaranteed charges or benefits of other similar products.
The actuary may also advise the insurer on the formulation of insurer determination policy.
When advising on determination policy, the actuary commonly reviews the determination policy
of similar polices with respect to the policy classes and nonguaranteed charges or benefits.
Insurer determination policy with respect to nonguaranteed charges or benefits is not necessarily
fixed. The insurer may appropriately adjust determination policy among groups of policies or
may revise a determination policy for a given product in order to meet changing financial,
marketing, and other goals.
7
The actuary may have responsibilities in addition to the requirements of this ASOP. For
example, the Exhibit 5 Interrogatories of the National Association of Insurance Commissioners’
current annual statement address additional issues with respect to the determination of non-
guaranteed charges or benefits (see section 3.5 of this standard).
8
Appendix 2
Comments on the Exposure Draft and Task Force Responses
The exposure draft of this revised actuarial standard of practice (ASOP), titled The
Determination of Nonguaranteed Charges or Benefits for Life Insurance Policies and Annuity
Contracts, was issued in March 2003, with a comment deadline of August 15, 2003. Fifteen
comment letters were received. The ASOP No. 1 Task Force carefully considered all comments
received. Summarized below are the significant issues and questions contained in the comment
letters and the task force’s responses. Unless otherwise noted, the section numbers and titles used
below refer to those in the exposure draft. Where the task force changed a term between the
exposure draft and the final standard (for example, replacing company with insurer), the
comment reflects the original term used by the commentator, whereas the response uses the term
as it appears in the final standard.
GENERAL COMMENTS
Comment A few commentators stated that the use of the terminology “redetermination (or initial determination)”
in the title and the reliance on the term “redetermination” in the standard was unnecessarily obtuse.
Response The task force agreed and revised the standard to utilize the term “determination.”
SECTION 1. PURPOSE, SCOPE, CROSS-REFERENCES, AND EFFECTIVE DATE
Section 1.2, Scope
Comment One commentator observed that this standard is limited in scope by two other standards, 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 commentator also suggested that the scope be expanded to allow for future standards
that may take precedence over the current standard.
Response The task force agreed that future standards might take precedence over current ones, but believed that
it was beyond the scope of the standard to provide for possible future standards.
Comment The task force solicited comments on whether the scope should provide guidance in other areas such
as health or credit insurance policies with nonguaranteed elements. The general consensus of the
commentators was that the scope was appropriately determined.
Response The task force agreed with the general consensus and made no change in scope.
Comment One commentator suggested that variable products be included in the examples of policies with
nonguaranteed elements.
Response The task force agreed and added variable products.

SECTION 2. DEFINITIONS
Section 2.2, Applicable Law
Comment One commentator suggested that sections 2.2 and 4.2(j) may place an excessively burdensome
requirement on the actuary to recognize and document all applicable law in the determination of
nonguaranteed charges or benefits.
Response The task force believed that applicable law should be considered and added language to section 3.1 to
make this clear. Section 4.2 was modified to reflect appropriate documentation of the applicable law.
9
New section 2.3, Determination Policy and section 2.4, Policy (now section 2.5)
Comment One commentator questioned the dual usage of the word “policy.” The standard utilizes the term to
refer to life insurance policies (contracts) and to refer to the determination policy of the company. The
commentator suggested that the dual usage might be confusing.
Response The task force made clarifying changes to the standard to distinguish between the terms “policy” and
“determination policy.” The term “policy” is used exclusively to refer to contracts of insurance while
the term “determination policy” is used exclusively to refer to the determination policy of the insurer.
Section 2.3, Nonguaranteed Charge or Benefit (now section 2.4)
Comment One commentator suggested that the examples of nonguaranteed charges or benefits be expanded to
include the “mortality and expense risk charge” commonly found in variable life products.
Response The task force expanded the list to include expense charges.
Section 2.4, Policy (now section 2.5)
Comment Several commentators suggested changes to this definition to improve the description of “group life
insurance and annuity certificates with nonguaranteed charges or benefits that operate in substantially
the same manner as individual life policies and individual annuity contracts with respect to
nonguaranteed charges or benefits.”
Response There was clear support in the comments for including group life insurance and annuity certificates in
the definition of policy. However, there was no clear consensus on significant improvements to the
definition. After review, the task force concluded the original definition was most appropriate.
SECTION 3. ANALYSIS OF ISSUES AND RECOMMENDED PRACTICES
Section 3.1, Advice on Redetermination Policy (now titled Advice on Determination Policy)
Comment A few commentators stated that there was insufficient guidance in this section as to what the actuary
should consider in advising the company on determination policy. Comments included various
suggestions for items to be added to the list of company objectives.
Response The task force considered changes but determined that “stated marketing, financial, and other
objectives” was sufficiently broad and flexible for guidance. The task force, however, added an
additional sentence to provide for consideration of legal and regulatory requirements.
Section 3.2, Redetermination of Nonguaranteed Charges or Benefits (now titled Determination of
Nonguaranteed Charges or Benefits)
Comment One commentator suggested that the standard should provide guidance on the impacts of capital gains
and losses on nonguaranteed charges or benefits.
Response The task force believed that section 3.3 gives the actuary appropriate flexibility to address capital
gains and losses.
Section 3.5, Illustrations Not Subject to ASOP No. 24 (now titled Nonguaranteed Charges or Benefits Used in
Illustrations)
Comment Several commentators questioned the clarity and objective of treating the determination of illustrated
nonguaranteed elements the same as the determination of nonguaranteed elements.
Response The task force clarified the section.

Comment One commentator recommended that a statement be added that anticipated experience should not
reflect any assumed improvement beyond the current date.
Response This ASOP applies only to illustrations that are not subject to ASOP No. 24. The task force was not
aware of any requirement such as that proposed by the commentator with respect to such illustrations.
Comment One commentator suggested the standard should provide guidance regarding the timing of conducting
tests of illustrated nonguaranteed charges or benefits.
Response The task force discussed timing, but decided the actuary should have flexibility in this matter.
10
Comment One commentator noted that section 3.5 used the phrase “currently anticipated experience” while
other parts of the standard used “anticipated experience.”
Response The task force replaced the word “currently” with “reasonably.”
SECTION 4. COMMUNICATIONS AND DISCLOSURES
Section 4.2, Documentation (now section 4.2, Disclosure)
Comment Several commentators made general comments that the documentation section seemed overly
burdensome.
Response The task force added the phrase “when appropriate and available” to provide more flexibility in
disclosure.
Comment Regarding section 4.2(c), a few commentators remarked that the documentation of the impact of
changes in determination policy may be beyond the scope of the actuary’s responsibilities, as the
company establishes determination policy.
Response The task force agreed and deleted the phrase.

Comment Regarding section 4.2(f), a few commentators stated that the documentation of all specific
nonguaranteed charges or benefits might be overly burdensome.
Response The task force believes that the standard of practice, when taken in conjunction with ASOP No. 41,
Actuarial Communications, gives the actuary sufficient flexibility to determine the method, means,
and amount of disclosure necessary to describe specific nonguaranteed charges or benefits.
Comment Regarding section 4.2(i), one commentator suggested that documentation of all sensitivity tests
performed and the results of all sensitivity tests might be overly burdensome.
Response The task force agreed and changed the wording of section 4.2(i).
11
Actuarial Standard
of Practice
No. 2
Recommendations for Actuarial Communications Related to

Statements of Financial Accounting Standards Nos. 87 and 88
Developed by the
Pension Committee of the
Interim Actuarial Standards Board
Adopted by the
April 1987
(Doc. No. 004)

TABLE OF CONTENTS
RECOMMENDATIONS
1. Background 1
2. Scope 1
3. Existing Standards 1
4. Disclosure 1
5. Disclosure of Exceptions 1
6. Sample Disclosure 2
ii
June 1987
TO: Members of the American Academy of Actuaries and Other Persons with an
Interest in Actuarial Calculations with Respect to Statements of Financial
Accounting Standards Nos. 87 and 88
FROM: Pension Committee of the Interim Actuarial Standards Board (IASB)
Enclosed is an IASB Actuarial Standard of Practice, Recommendations for Actuarial

Communications Related to Statements of Financial Accounting Standards Nos. 87 and 88. It
reflects the review by the IASB and its Pension Committee of comments received in response to
an exposure draft issued in January 1987.
In reply to the exposure draft, there were twenty-one responses. In addition to responses from
actuaries, responses were received from a large multinational corporation, the Financial
Executives Institute, and the Financial Accounting Standards Board. The opinions expressed
ranged from suggesting that existing standards sufficed and that the actuary’s role is solely to
technically calculate the numbers, to suggestions for significantly expanded disclosure. The
responses were well thought out, and of help to the IASB.
By far the greatest number of comments were related to the sample disclosure, and to
enumeration there of various items for which SFAS No. 87 results could be inappropriate. The
IASB determined that the language should be made less negative in tone, and has made changes
to reflect that. However, the IASB does not believe that this facet of the disclosure should be
completely deleted, as some suggested. The IASB feels strongly that there is a great risk that
incorrect judgments of benefit security and funding will be made from the SFAS No. 87
numbers, given their ready availability.
For example, plan participants might judge themselves to be adequately protected in the event of
plan termination when this would not be true. Indeed, SFAS No. 87, ¶ 18 says, “The
accumulated benefit obligation and vested benefit obligation provide information about the
obligation the employer would have if the plan were discontinued.” In fact, the IASB can
envision many common circumstances where these items would be very bad indicators of the
asset sufficiency in the event of plan termination, primarily because the calculations are on an
“ongoing plan” basis, and because of the way in which the discount rate is selected. The IASB
strongly believes that the profession’s traditional role of protecting participants would be
compromised if specific references to the inappropriateness of SFAS No. 87 numbers for this
purpose were omitted. However, the other items listed were, in the IASB’s opinion, more related
to good consulting than to professional standards, so those were deleted.
Finally, the IASB incorporated SFAS No. 88 more directly into the proposed standard than it did
in the exposure draft.
iii
Pension Committee of the IASB
Thomas D. Levy, Chairperson

Robert W. Haver Carol W. Proffer
Peter L. Hutchings Harry S. Purnell
Judith E. Latta Richard G. Roeder
Joseph P. Macaulay William C. Spencer
Michael J. Mahoney John A. Steinbrunner
Kenneth W. Porter Howard Young
Ronald L. Bornhuetter, Chairperson

E. Paul Barnhart Walter N. Miller
Edwin F. Boynton Thomas E. Murrin
James C. Hickman George B. Swick
Barbara J. Lautzenheiser Jack M. Turnquist
iv
RECOMMENDATIONS FOR
ACTUARIAL COMMUNICATIONS RELATED TO
STATEMENTS OF FINANCIAL
ACCOUNTING STANDARDS NOS. 87 AND 88
1. Background—The Financial Accounting Standards Board (FASB) adopted Statement of

Financial Accounting Standards (SFAS) No. 87, Employers’ Accounting for Pensions,
and SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, in December 1985. They made
major changes in the way pension information is determined and presented in employers’
financial statements. Although much of the information required will have to be fur-
nished by actuaries, the basis for those calculations is prescribed by the FASB.
2. Scope—Pronouncements of the FASB set forth required practices with respect to

calculations for SFAS No. 87 and SFAS No. 88. The recommendations in this actuarial
standard establish disclosure standards for actuarial communications with respect to
SFAS No. 87 and SFAS No. 88.
3. Existing Standards—Interpretative Opinion 3 of the Guides and Interpretative Opinions

as to Professional Conduct of the American Academy of Actuaries, and Pension Plan
Recommendation C, “Pension Actuarial Communications,” apply fully with respect to
SFAS No. 87 and SFAS No. 88 calculations. (Pension Plan Recommendation C was
superseded in 1988 by section 13, Pension Actuarial Communications, of Actuarial
Standard of Practice No. 4, Recommendations for Measuring Pension Obligations.) In
view of the number of potential indirect users of such calculations and the likelihood of
significant variations from generally accepted actuarial principles and practices, the
actuary should carefully evaluate what disclosure is appropriate for communications
related to SFAS No. 87 and SFAS No. 88.
4. Disclosure—An actuarial communication for purposes of SFAS No. 87 and SFAS No. 88
must be identified as such. The results of calculations prepared for other purposes (e.g.,
funding, plan reporting, government requirements, plan terminations, etc.) are likely to be
significantly different; the actuary should disclose this fact.
5. Disclosure of Exceptions—If the calculations conflict significantly with the actuary’s

understanding of SFAS No. 87 and SFAS No. 88, including conflict with respect to the
assumptions utilized, that fact should be disclosed as part of the actuarial communication.
1
6. Sample Disclosure—In the absence of exceptions, application of SFAS No. 88, or other
special circumstances, the following sample disclosure is suggested:
Actuarial computations under Statement of Financial Accounting Standards

(SFAS) No. 87 are for purposes of fulfilling employer accounting requirements.
The calculations reported herein have been made on a basis consistent with our
understanding of SFAS No. 87. Determinations for purposes other than meeting
employer financial accounting requirements may be significantly different from
the results reported herein. Accordingly, additional determinations are needed for
other purposes, such as judging benefit security at termination or adequacy of
funding for an ongoing plan.
2
Actuarial Standard
of Practice
No. 3
Continuing Care Retirement Communities
Revised Edition
Developed by the
Health Committee of the
Adopted by the
September 2007
(Doc. No. 111)

ASOP No. 3⎯September 2007
TABLE OF CONTENTS
Transmittal Memorandum iv

1.1 Purpose 1
1.2 Scope 1
2.1 Additional Fee 2
2.2 Actuarial Balance Sheet 2
2.3 Advance Fee 2
2.4 Cash and Investment Balance 2
2.5 Cohort of New Residents 2
2.6 Continuing Care Retirement Community (CCRC) 2
2.7 Fee Structure 3
2.8 Health Care Guarantee 3
2.9 Health Center 3
2.10 Independent Living Unit 3
2.11 Levels of Care 3
2.12 Living Unit 3
2.13 Morbidity Rate 3
2.14 Non-Resident 3
2.15 Periodic Fee 3
2.16 Permanent Transfer 3
2.17 Physical Property 3
2.18 Population Projection 4
2.19 Residency Agreement 4
2.20 Resident 4
2.21 Temporary Transfer 4
2.22 Trend 4
2.23 Withdrawal Rate 4
2.24 Valuation Date 4

3.1 Introduction 4
3.2 Determination of Satisfactory Actuarial Balance 4
3.2.1 Condition 1: Adequate Resources for Current Residents 4
3.2.2 Condition 2: Adequate Fee Structure for a Cohort of New Residents 5
3.2.3 Condition 3: Positive Projected Cash and Investment Balances 5
3.3 Projected Population Movements 5
3.3.1 Closed-Group Projection of Current Residents 6
3.3.2 Closed-Group Projection of a Cohort of New Residents 6
3.3.3 Open-Group Projection 6
ii
3.4 Actuarial Balance Sheet 6

3.4.1 Assets 6
3.4.2 Liabilities 6
3.5 Cohort Pricing Analysis 7
3.6 Actuarial Asset and Liability Values 7
3.6.1 Future Periodic Fees 7
3.6.2 Future Additional Fees and Third Party Payments 7
3.6.3 Physical Property for Assets Currently in Service 7
3.6.4 Future Use of Physical Property 8
3.6.5 Future Operating Expenses 8
3.6.6 Future Refunds 8
3.6.7 Value of Long-Term Debt 8
3.7 Cash Flow Projections 8
3.8 Selection of Actuarial Assumptions 9
3.8.1 Mortality, Morbidity, and Withdrawal Assumptions 9
3.8.2 Trend Assumptions for Fees and Expenses 10
3.8.3 Investment Rate and Discount Rate Assumptions 10
3.8.4 Revenue and Expense Allocation Assumptions 10
3.8.5 Going-Concern Assumption 10
3.8.6 Reasonableness of Assumptions 11
3.9 Benevolence Funds and Financial Assistance Subsidies 11
3.10 For-Profit CCRCs 11
3.11 Equity or Cooperative CCRCs 12
3.12 Additional Considerations Affecting a CCRC’s Finances 12
3.13 External Restrictions 12
3.14 Reliance on Data or Other Information Supplied by Others 12
3.15 Documentation 13

4.1 Communications and Disclosures 13
4.1.1 Actuarial Data, Assumptions, and Methods 13
4.1.2 Assignments Involving an Opinion on Satisfactory Actuarial Balance 14
4.1.3 Specific Disclosures 15
4.2 Deviation 15
4.2.1 Material Deviations to Comply with Applicable Law 15
4.2.2 Other Material Deviations 15
APPENDIXES

Background 17
Current Practices 17
Illustrative Capital Expense Charge Development and Physical Property Valucation 17
Illustrative Formulas for Expensing and Valuing Physical Property 20
Appendix 2—Comments on the Exposure Draft and Responses 22
iii
September 2007

Actuarial Standards Board and Other Persons Interested in Continuing Care
Retirement Communities
This document contains the final version of the revision of ASOP No. 3, now titled Continuing
Care Retirement Communities.
Background
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 light of the
evolution in practice since then, as well as the adoption of a new format for standards, the ASB
believed it was appropriate to revise this standard in order to reflect current, generally accepted
actuarial practice.
Although parts of the existing ASOP that were considered educational in nature were moved to
the appendix, some educational material was retained in the body of the proposed revision to
reflect the paucity of literature concerning actuarial practice regarding CCRCs.
This revision includes some prescriptive disclosure requirements that the task force believes are
appropriate and are intended to enhance the quality of actuarial communications regarding
CCRCs.
Exposure Draft
The exposure draft of this revision was issued in December 2006 with a comment deadline of
April 30, 2007. The Task Force to Revise ASOP No. 3 carefully considered the eight comment
letters received and made changes to the language in several sections in response. For a summary
of the substantive issues contained in the exposure draft comment letters and the responses,
please see appendix 2.
There were no significant changes from the exposure draft although several clarifications were
made.
The ASB voted in September 2007 to adopt this standard.
iv
Molly J. Shaw, Chairperson

Dave Bond Darryl G. Wagner
Gary L. Brace Gregory T. Zebolsky
Gary Teitel
Health Committee of the ASB
Paul R. Fleischacker, Chairperson

Michael S. Abroe James M. Gutterman
Gary L. Brace John C. Lloyd
Robert G. Cosway John W.C. Stark
Cecil D. Bykerk, Chairperson

William C. Cutlip Godfrey Perrott
Alan D. Ford Lawrence J. Sher
David R. Kass Karen F. Terry
v
CONTINUING CARE RETIREMENT COMMUNITIES
1.1 Purpose—This actuarial standard of practice (ASOP) provides guidance to the actuary
when performing professional services related to a continuing care retirement community
(CCRC).
1.2 Scope—This standard applies to actuaries when performing professional services,

including giving advice, in connection with CCRCs (including nonprofit and for-profit
entities). These professional services may be performed for owners, operators, financing
entities, current residents, or prospective residents of a CCRC, as well as for other
professionals or regulatory bodies.
Examples of the services covered by this ASOP include, but are not limited to, the
following:
a. testing the financial condition of the CCRC for satisfactory actuarial balance;
b. estimating actuarial values of assets and liabilities;
c. evaluating the fee structure for existing residents or a cohort of new residents;
d. developing population projections, including resident 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;
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 for the

CCRC’s use.
1
The actuary should comply with this standard except to the extent it may conflict with
applicable law (statutes, regulations, and other legally binding authority). If compliance
with applicable law requires the actuary to depart from the guidance set forth in this
standard, the actuary should refer to section 4 regarding deviation.
1.3 Cross References—When this standard refers to the provisions of other documents, the
1.4 Effective Date—This standard is effective for professional services performed in

connection with a CCRC on or after March 1, 2008.
2.1 Additional Fee—An amount that may be payable by a resident, in accordance with a
residency agreement, for services made available but not covered by the advance fee and
the periodic fees (such as guest meals, additional meals, barber/beauty shop, use of a
carport, and non-covered health care services).
2.2 Actuarial Balance Sheet—A measure of the assets and liabilities, as of the valuation date,
associated with current residents.
2.3 Advance Fee—An amount payable by a resident at the inception of a residency

agreement. The advance fee is usually specified in the residency agreement and is usually
payable prior to the resident assuming occupancy of a living unit (sometimes referred to
as an entrance fee, endowment fee, entry fee, or founder’s fee).
2.4 Cash and Investment Balance—The value of cash, cash equivalents, and marketable
securities of a CCRC (historically referred to as cash balance by CCRC practitioners).
This excludes the value of the physical property assets of the CCRC.
2.5 Cohort of New Residents—A hypothetical group of new residents assumed to enter the
CCRC over a specified period of time and assumed to have certain demographic
characteristics.
2.6 Continuing Care Retirement Community (CCRC)—A residential facility that provides
stated housekeeping, social, and health care services in return for some combination of an
advance fee, periodic fees, and additional fees.
2
2.7 Fee Structure—A combination of fees that generally includes advance fees, periodic fees,
and additional fees.
2.8 Health Care Guarantee—A clause in a residency agreement guaranteeing access to health
care and defining the type of health care services to be provided to the resident. These
health care services may be offered with or without additional charges to the periodic
fees.
2.9 Health Center—A facility associated with a CCRC where health care is provided to
residents in accordance with the residency agreement. The health center typically
includes some combination of assisted living, special care, and nursing care units. Non-
residents may also live in the health center.
2.10 Independent Living Unit—Living quarters designed for residents capable of living
independently. A resident could receive home health care in the independent living unit,
but a resident who needs full-time health care on either a temporary or permanent basis is
normally transferred to the health center.
2.11 Levels of Care—Varying degrees of care, which are based on a resident’s health status.
Typical levels of care include independent living units, assisted living units, nursing care
units, and special care units. The levels of care may be dictated by state licensure. A
transfer to a different level of care need not involve a transfer to a different type of living
unit.
2.12 Living Unit—The various living quarters of a CCRC, including independent living units
and health center units.
2.13 Morbidity Rate—The probability of incurring 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 morbidity rates.
2.14 Non-Resident—A person living in the CCRC who has signed an agreement without a
health care guarantee and without a refund guarantee. Non-residents normally pay for all
health care services received on a fee for service basis.
2.15 Periodic Fee—Amounts payable by a resident periodically (usually monthly) during the
existence of a residency agreement. The periodic fees are typically adjusted from time to
time to reflect changes in operating costs.
2.16 Permanent Transfer—A move from one level of care to another level of care without
expectation of returning to the former level of care.
2.17 Physical Property—Physical assets, such as land, building, furniture, fixtures, or

equipment, which belong to the CCRC. These assets, excluding land, are assumed to
depreciate over their respective lifetimes. These assets are also referred to as the fixed
assets of the CCRC.
3
2.18 Population Projection—An estimate of the number of residents expected to live in the
CCRC at various future times.
2.19 Residency Agreement—The contract between one or more individuals and the CCRC
that describes the services to be provided and the obligations of the parties. The contracts
are usually of long duration and may be for the life of the individual or the life of the
survivor of two or more individuals. The residency agreement describes the health care
guarantee, if any, and any portion of the advance fee that would be refundable upon
termination of the residency agreement.
2.20 Resident—A person living in the CCRC who has signed a residency agreement with a
health care guarantee or a refund guarantee.
2.21 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.
2.22 Trend—Measure of rates of change, over time, that affects revenues, costs, or actuarial
assumptions.
2.23 Withdrawal Rate—The probability that a residency agreement will be terminated by the
resident’s leaving the CCRC for reasons other than death.
2.24 Valuation Date—The date as of which the values of the assets and liabilities of the CCRC
are determined.
3.1 Introduction—When providing professional services related to a CCRC, the actuary

should consider the relevant financial items associated with the CCRC, current residents,
new residents, and levels of care provided, as well as relevant residency agreement
provisions and applicable law. The actuary should use methods and assumptions that are,
in the actuary’s professional judgment, appropriate in light of the scope and purpose of
the assignment.
3.2 Determination of Satisfactory Actuarial Balance—In determining whether the CCRC is

in satisfactory actuarial balance as of the valuation date, the actuary should evaluate
whether the CCRC meets all of the following three conditions:
3.2.1 Condition 1: Adequate Resources for Current Residents—The resources

available to the CCRC related to current residents include any existing resources
for the current residents plus the actuarial present value of future resources, such
as periodic fees expected to be paid in the future by such residents.
4
The actuary may consider these resources adequate if they are greater than or
equal to any existing liabilities for the current residents plus the actuarial present
value of the expected costs associated with the obligations to such residents under
their contracts. The actuary should determine if this condition is satisfied through
the use of the actuarial balance sheet (see section 3.4).
A proposed CCRC is not required to meet this condition to be in satisfactory

actuarial balance. The actuary should start evaluating this condition for a new
CCRC when the block of current residents is of sufficient size to make this
determination. For example, the actuary may evaluate this condition at the earlier
of three years after opening or when the CCRC reaches its targeted occupancy.
3.2.2 Condition 2: Adequate Fee Structure for a Cohort of New Residents—For a

cohort of new residents, the expected fees are the sum of the advance fee paid at
or before occupancy plus the actuarial present value at occupancy of the new
residents’ expected future periodic fees. Expected fees may include any future
additional fees and third party payments attributable to the new residents.
The actuary may consider the fee structure adequate if the expected fees are
greater than or equal to the actuarial present value at occupancy of the costs
associated with the obligations assumed by the CCRC for that cohort. The actuary
should determine if this condition is satisfied through the use of the cohort pricing
analysis (see section 3.5).
3.2.3 Condition 3: Positive Projected Cash and Investment Balances—The actuary

should project cash and investment balances over the projection period. This
projection should include revenue and expenses from all known sources,
including current and new residents and non-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.
The actuary may consider the cash and investment balances adequate if these
balances are positive in each projection year. The actuary should determine if this
condition is satisfied through the use of the cash flow projection (see section 3.7).
3.3 Projected Population Movements—The actuary should base the development of the
actuarial balance sheet (see section 3.4), the cohort pricing analysis (see section 3.5), and
the cash flow projection (see section 3.7) respectively on the three types of population
projections described below, using appropriate assumptions for mortality, morbidity, and
withdrawal. The actuary should project the residents’ movements through various levels
of care, the number of surviving residents by level of care status, and the projected
number of independent living units occupied.
5
3.3.1 Closed-Group Projection of Current Residents—When testing for condition 1 (see

sections 3.2.1 and 3.4), the actuary should use a population projection that is
performed solely with respect to current residents on the valuation date. The
actuary should project the surviving residents’ movements through various levels
of care until contract termination by death or withdrawal. This projection excludes
new residents and non-residents.
3.3.2 Closed-Group Projection of a Cohort of New Residents—When testing for

condition 2 (see sections 3.2.2 and 3.5), the actuary should use a population
projection that is performed solely with respect to a cohort of new residents. The
actuary should project the surviving residents’ movements through various levels
of care until contract termination by death or withdrawal. This projection excludes
non-residents.
3.3.3 Open-Group Projection—When testing for condition 3 (see sections 3.2.3 and
3.7), the actuary should use a population projection that tracks residents in the
CCRC on the valuation date together with expected new residents consistent with
assumed occupancy levels. The actuary should reflect non-residents in this
population projection if they will fill unoccupied units or beds in various levels of
care consistent with assumed occupancy levels.
3.4 Actuarial Balance Sheet—The actuary should consider the guidance below when
developing the actuarial balance sheet.
3.4.1 Assets—The actuary should estimate the following: the actuarial present value of
future periodic fees (described in section 3.6.1), the actuarial present value of
future additional fees and third party payments (described in section 3.6.2), and
the actuarial value of 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.
3.4.2 Liabilities—The actuary should estimate the following: the actuarial present value
of the future use of physical property (described in section 3.6.4), the actuarial
present value of future operating expenses (described in section 3.6.5), the
actuarial present value of future refunds (described in section 3.6.6), and the
actuarial present value of 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, resident
6
deposits, fees paid in advance, short-term debt obligations, and other items not
specifically reflected in the above guidance.
3.5 Cohort Pricing Analysis—The actuary should develop the cohort pricing analysis based
on the present value of revenues and expenses associated with a cohort of new 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 the future use of physical property
(described in section 3.6.4), the actuarial present value of future operating expenses
(described in section 3.6.5), and the actuarial present value of future refunds (described in
section 3.6.6).
The actuary may consider, subject to disclosure, the use of expense levels consistent with
the targeted number of residents when there is expected to be a material change in the
population, such as growth resulting from new construction.
3.6 Actuarial Asset and Liability Values—When developing the actuarial balance sheet or
the cohort pricing analysis, the actuary should develop the following 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 residents of
the appropriate closed-group population in each level of care in each future year,
and discounting the result back to the valuation date. The estimate of future fees
will usually 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 payments to the CCRC from third party payers (such as
Medicare, Medicaid, and other insurance), if applicable, by projecting the
additional revenue payable by, or on behalf of, the surviving residents of the
appropriate closed-group population in each level of care in each future year and
discounting the result back to the valuation date. The estimate of these future
revenues should usually reflect current experience adjusted for projected future
increases to such revenues.
3.6.3 Physical Property for Assets Currently in Service—The actuary should estimate
the actuarial value of physical property for assets currently in service as the
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
7
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 residents of the appropriate closed-group population in
each future year and discounting the result back to the valuation date. The actuary
should use a methodology to estimate the annual capital expense charges that is
consistent with the methodology used in 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 surviving residents 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—The actuary should estimate the actuarial present value of future
refunds by estimating the amount of refund due each terminating resident of the
appropriate closed-group population in each future year and discounting the
amounts back to the valuation date. The actuary should base the estimate of the
refund due each terminating resident each future year on the terms of the
residency agreement assumed to be applicable to that resident and the CCRC’s
actual practice, if any, with regard to payment of refunds.
3.6.7 Value of Long-Term Debt—The actuary should estimate the actuarial 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.
3.7 Cash Flow Projections—The actuary should perform cash flow projections over the
projection period using open-group methods and should reflect the projected financial
effects of existing residents, new residents replacing existing residents, and non-residents
to the extent living unit capacity allows. The actuary should select assumptions in the
8
cash flow projections that are consistent with those used in the development of the
actuarial balance sheet and cohort pricing analysis (see sections 3.4 and 3.5).
The actuary should reflect revenues from all known sources (such as advance fees,
periodic fees, additional fees, payments from non-residents, reimbursements from
Medicare or other third party payer, 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 of
advance fees).
The cash flow projection should show the cash and investment balances at the beginning
and end of each projection year.
The actuary should consider the guidance in ASOP No. 7, Analysis of Life, Health, or
Property/Casualty Insurer Cash Flows, when choosing assumptions for cash flow
projections.
3.8 Selection of Actuarial Assumptions—The actuary should consider the guidance below
when selecting assumptions for performing actuarial analyses covered by this ASOP.
3.8.1 Mortality, Morbidity, and Withdrawal Assumptions—In selecting assumptions for

rates of mortality, morbidity and withdrawal, the actuary should consider which
of the following, in the actuary’s professional judgment, are appropriate to reflect
in each of these assumptions:
a. age and gender;
b. health characteristics;
c. permanent and temporary transfer patterns;
d. level of care status and expected differences in experience between residents

in different levels of care;
e. time elapsed since the last change in the level of care;
f. single or multiple occupancy;
g. profile of new residents who are expected to enter the CCRC when
vacancies occur;
h. time elapsed since the resident entered the CCRC;
i. actual experience of the CCRC and the credibility of the experience;
9
j. contractual guarantees, such as health care guarantees and advance fee

refunds; and
k. operational policies and practices of the CCRC, such as transfer policies.
The actuary should consider trend assumptions for rates of mortality, morbidity,
and withdrawal that are reasonable, in the actuary’s professional judgment. In
selecting trend assumptions, the actuary should consider and review appropriate
data. These data may include past trend experience studies, past projections of
trends or appropriate industry studies.
3.8.2 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 as to 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 in an appropriate actuarial
communication.
3.8.3 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 contracts.
a. Investment Rate⎯The actuary should consider the past investment

performance, short- and long-term market expectations, and the future
investment strategy of the CCRC to estimate investment income for the
cash flow projection.
b. Discount Rate⎯The actuary should use 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.
3.8.4 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 residents. The actuary should consider whether the sum of all
allocated expenses reconciles to the total projected expenses of the CCRC.
3.8.5 Going-Concern Assumption—The actuarial balance sheet, the cohort pricing

analysis, and the cash flow projection rely on assumptions predicated on the
10
ongoing financial viability and continuation of the CCRC. This implies that the
CCRC will be able to maintain appropriate occupancy levels by attracting new
residents to replace existing residents as the latter vacate units. The actuary should
consider the ability of the CCRC to attract new residents or any other known,
significant circumstances that, in the actuary’s professional judgment, may affect
the CCRC’s ability to remain a going concern.
3.8.6 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,
using relevant information available to the actuary.
In reviewing the assumptions for reasonableness, the actuary may consider such
factors as the following:
a. the 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. the size of the CCRC’s resident population;
g. the ability to increase fees or decrease expenses in future periods;
h. the level of surplus available to provide for adverse fluctuation; and
i. any significant margins for uncertainty which have been included in the
actuarial assumptions.
3.9 Benevolence Funds and Financial Assistance Subsidies—The actuary should consider
both the funds available and the potential future liabilities for residents who do not pay
the full scheduled fees. For example, some CCRCs may set aside assets or funds from
charitable contributions to assist residents who cannot afford the full scheduled fees, the
periodic fee increases, or advance fees. Other CCRCs may include the costs of any
assistance in the basic fee structure.
3.10 For-Profit CCRCs—When performing professional services with respect to for-profit

CCRCs, the actuary should consider the nature and financial implications of the
ownership arrangement, including owner’s equity, past and possible future equity
11
distributions, potential income tax liability, and historical and future capital expenditures
funded by the owner.
3.11 Equity or Cooperative CCRCs—The actuary should consider the nature and financial
implications of any ownership arrangement, including advance fee payments and refunds,
and the value of assets invested in the physical property and the replacement costs of
these fixed assets. For example, in some CCRCs, residents may either own a particular
unit or a membership in the CCRC.
3.12 Additional Considerations Affecting a CCRC’s Finances—The actuary should consider

the scope of the CCRC’s commitments to current and prospective residents and the
nature of its fee structure. The actuary may obtain this knowledge from the applicable
residency agreements and any other reasonable source of information about the CCRC.
When interpreting these documents, the actuary should consider the following:
a. the admission criteria and how they are applied;
b. the terms of the residency agreement and any limitations on the period for which
commitments are made;
c. any known, significant limitations on the CCRC’s ability to change future

periodic fees;
d. any provision for refunding the advance fee;
e. any limitation on the services provided and any requirement of additional charges
for services;
f. any contract provisions for prepaid health care or for additional charges if a
resident receives health care;
g. any affiliation with another entity and the extent to which any such entity would
assume responsibility for the CCRC’s obligations; and
h. any other matter that, in the actuary’s professional judgment, is expected to have a
material effect on the CCRC’s current or future financial statements.
3.13 External Restrictions—The actuary should consider restrictions on the CCRC 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-residents, and any relevant lender-imposed restrictions.
3.14 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, for guidance.
12
3.15 Documentation⎯The actuary should prepare and retain appropriate documentation

regarding the methods, assumptions, procedures, and the sources of the data used. The
documentation should be in a form such that another actuary qualified in the same
practice area could assess the reasonableness of the actuary’s work, and should be
sufficient to comply with the disclosure requirements in section 4.
4.1 Communications and Disclosures⎯When issuing actuarial communications under this

standard, the actuary should refer to ASOP No. 23 and ASOP No. 41, Actuarial
Communications. In addition, the actuary should disclose the following items in an
actuarial communication:
4.1.1 Actuarial Data, Assumptions, and Methods—The actuarial communication should

describe, as applicable, the actuarial data, assumptions and methods used in
performing the actuarial analysis, including the following:
a. summary of historical resident data and population statistics for residents

as of the valuation date;
b. historical and current financial data used to produce the actuarial balance
sheet, cohort pricing analysis, and cash flow projections;
c. assumed rates of mortality, morbidity, withdrawal, and occupancy;
d. assumptions and methodology used in performing the population

projections;
e. investment and discount rates;
f. trend rates for revenues and expenses, and the relationship between the
two;
g. assumptions and methodology used to value and depreciate the physical

property;
h. assumptions and methodology used to estimate each actuarial present

value;
i. 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;
13
j. assumptions and methodology used to allocate general revenue and

expenses; and
k. any material changes in assumptions or methods from the most recent

prior analysis.
4.1.2 Assignments Involving an Opinion on Satisfactory Actuarial Balance—The

actuarial communication 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 section
3.2, and state whether or not each condition is met.
If one or more of the three conditions is not met, the actuary should make
disclosures according to the following:
a. Condition 1: Actuarial Balance Sheet Deficit—If the actuarial balance

sheet shows a deficit (regardless of the results of conditions 2 and 3), the
actuary should state the implications of the deficit. The actuarial
communication should describe management’s plans for handling the
deficit, if known, and the actuary’s comments thereon, if any;
b. Condition 2: Cohort Pricing Analysis Deficit or Inadequacy—If the

cohort pricing analysis indicates a deficit or inadequacy, the actuary
should state the implications of the pricing inadequacy, including the
projected impact on the actuarial balance sheet in the future. The actuarial
communication should describe management’s plans for handling the
pricing inadequacy, if known, and the actuary’s comments thereon, if any;
c. Condition 3: Negative Cash and Investment Balances on the Cash Flow

Projection—If the cash flow projection indicates negative or declining
cash and investment balances over the projection period, the actuary
should state the implications of the projected negative or declining cash
and investment balances. If the cash flow projection indicates negative
cash and investment balances, the actuarial communication should
describe management’s plans for handling the negative cash and
investment balances, including the estimated time before positive cash and
investment balances are achieved, if known, and the actuary’s comments
thereon, if any; and
d. Qualification of Opinion—If the actuary is unable to form the needed

opinion regarding whether the CCRC is in satisfactory actuarial balance,
or if the opinion is adverse (due to failing one or more of the above
conditions), or otherwise qualified, then the statement of actuarial opinion
and the actuarial communication should explain why the actuary is unable
to form an unqualified favorable opinion.
14
4.1.3 Specific Disclosures—The actuary should specifically disclose the following in

an actuarial communication:
a. any significant issues regarding the going-concern assumption;
b. any assistance assumed to be derived from dedicated benevolence funds;
c. any significant issues related to for-profit CCRCs;
d. any significant issues regarding equity and cooperative CCRCs;
e. any significant issues regarding proposed CCRCs;
f. any significant issues regarding the reasonableness of the actuarial

assumptions;
g. that actual experience may significantly differ from projected experience;
h. that measurements made at a future date may differ significantly from the
current measurement due to potential volatility in an actuarial assumption
(for example, present value calculations, periodic fee analyses or
population projections);
i. the results of any sensitivity tests performed; and
j. any additional issues not addressed elsewhere in section 4 that, in the

actuary’s professional judgment, are expected to have a material impact on
the actuarial analyses.
4.2 Deviation—If, in the actuary’s professional judgment, the actuary has deviated materially
from the guidance set forth elsewhere in this standard, the actuary can still comply with
this standard by applying the following sections as appropriate:
4.2.1 Material Deviations to Comply with Applicable Law—If compliance with

applicable law requires the actuary to deviate materially from the guidance set
forth in this standard, the actuary should disclose that the assignment was
prepared in compliance with applicable law, and the actuary should disclose the
specific purpose of the assignment and indicate that the work product may not be
appropriate for other purposes. The actuary should use professional judgment to
determine whether additional disclosure would be appropriate in light of the
purpose of the assignment and the intended users of the actuarial communication.
4.2.2 Other Material Deviations—The actuary’s communication should disclose any

other material deviation from the guidance set forth in this standard. The actuary
should consider whether, in the actuary’s professional judgment, it would be
appropriate and practical to provide the reasons for, or to quantify the expected
15
impact of, such deviation. The actuary should be prepared to explain the deviation
to a principal, another actuary, or other intended users of the actuary’s
communication. The actuary should also be prepared to justify the deviation to the
actuarial profession’s disciplinary bodies.
16
Appendix 1
practice.
Background
Certain contractual obligations of a CCRC are contingent upon the occurrence, timing, and
duration of certain future events. The resident 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 CCRC’s liabilities
for the provision of future promised services.
High occupancy, sound pricing, and effective financial management are keys to the successful
operation of a CCRC. The ability of a CCRC to attract new residents to fill vacancies will
depend on keeping the CCRC competitive as to its physical property, its fee schedule, and the
general attractiveness of its whole environment.
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 resident projections, projected refunds, 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 residents of the CCRC. In order to provide for equity among generations of
residents, it is necessary to allocate an appropriate part of the cost of the use of physical property
to current residents as of the valuation date, and to the cohort of new 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
residents. (Illustrative formulas for expensing and valuing physical property are presented at the
end of this appendix.)
17
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

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 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
18
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 Residents—The actuarial present value of
the future use of physical property for existing residents is the discounted value (with
survivorship) of the annual capital expense charges for the physical property, and its
replacements, allocated to existing residents as of the valuation date.
a. The part of each future year’s capital expense charge that relates to the existing
residents as of the valuation date is determined by estimating the ratio of the
existing resident survivorship group use to total CCRC use. The ratio may be in
proportion to population, to number of CCRC occupied beds or units, to square
footage, or to 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 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.
19
Illustrative Formulas for Expensing and Valuing Physical Property
Note: These formulas illustrate allocations on a per-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
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.
j = 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.
Ao = v * E1 + v2 * E2 + ..... + ve * Ee.
From this we obtain
Ao * (i – j)
E1 = , provided i ≠ j
1 – [v * (1 + j)]e
Vn = Value of the current asset at duration n, where n < e.

Vn = v * En+1 + v2 * En+2 + ..... + ve-n * Ee.
From this we obtain
En+1 = i * Vn + (Vn – Vn+1).
20
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 foregone,
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 residents, or the closed group for a
cohort of new 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.
Cn + Cn+1
Rn+1 = , representing the ratio of the projected closed group population to the
Pn + Pn+1 projected total population.
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.
21
Appendix 2
The exposure draft of this revision to ASOP No. 3, Continuing Care Retirement Communities,
was issued in December 2006 with a comment deadline of April 30, 2007. Eight comment letters
were received, some of which may have been 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 Task Force to
Revise ASOP No. 3 carefully considered all comments received, and the Health Committee and
the ASB reviewed (and modified, where appropriate) the proposed changes to the ASOP.
Summarized below are the significant issues and questions contained in the comment letters and
the responses to each. The term “reviewers” includes the task force, the Health Committee, and
the ASB. Unless otherwise noted, the section numbers and titles used below refer to those in the
final revised ASOP.
GENERAL COMMENTS
Comment One commentator questioned the appropriateness of having a small group develop an ASOP with the
risk that an ASOP can be shaped to benefit special interests without regard to the larger public good, and
that all interests impacted by the results of actuarial practice in the area (such as the residents of a
CCRC) be represented in the formulation of those standards.
Response The purpose of the ASOP is to provide guidance to actuaries practicing in the CCRC environment and
the reviewers believe that the exposure process provides ample opportunity for peer review of the
standards being proposed. Anyone, including all members of the public, is permitted to comment on any
standard. All comments received by the comment deadline are posted online and available for anyone to
review until the ASOP is finalized.
Comment One commentator suggested putting more emphasis on principles and less on prescription and adding
phrasing to the ASOP sufficient to allow actuaries to respond to situations they may confront which call
for actuarial judgment beyond what is indicated in the ASOP.
Response The reviewers believe that the ASOP provides adequate flexibility for actuarial judgment and made no
change.
Comment One commentator suggested there be a discussion of equity among residents and a discussion on the
extent to which CCRC pricing should reflect actuarial principles on a resident-by-resident basis.
Response The reviewers believe the wording should not be prescriptive, and equity and pricing decisions vary
from community to community, and made no change.
Comment The transmittal memorandum of the exposure draft asked if the proposed standard codifies appropriate
actuarial practice, and if not, how should it be changed. One commentator expressed disappointment in
the content because it focused more on reformatting than attempts to codify actuarial practice evolution
since 1994. Another commentator indicated the proposed standard does codify appropriate actuarial
practice.
Response The reviewers believe that the ASOP describes appropriate actuarial practice.
22
SECTION 1. PURPOSE, SCOPE, CROSS REFERENCES, AND EFFECTIVE DATE

Section 1.1, Purpose
Comment One commentator suggested there be a statement about the rationale for applying actuarial techniques
that includes more than just prepayment of health care. The reason should state that it is due to the
existence of advance fees which represent a prepayment of some costs be they health care or shelter, and
funding of this prepayment using advance fees depends on estimates of the resident’s longevity which is
the purpose of actuarial projections.
Response The reviewers believe that such a comment belongs in the background section of appendix 1, and that
the background section is sufficiently general to cover the reasons included in the comment.
Section 1.2, Scope
Comment One commentator suggested that the business context for this ASOP be indicated as well as who requires
the actuarial services and why.
Response The reviewers believe that the current wording adequately indicates who potential users are and the
various uses of the actuarial analysis, and made no change.
Comment One commentator suggested adding “financing entities” to the list of entities using the results of an
actuarial communication prepared according to this ASOP.
Response The reviewers agree and added “financing entities” to the list of potential users of an actuarial
communication.
Comment One commentator suggested there be definitions for the various types of actuarial studies.
Response The reviewers note that the examples cited in section 1.2, Scope, are adequately described and did not
believe that formal definitions were needed. The reviewers added estimating the future services
obligation under GAAP to the examples of services provided in section 1.2.
Comment One commentator asked if mortality rate needed to be defined.
Response The reviewers believe that mortality rate was a term that was well understood in the actuarial community
and that a definition was therefore not needed.
Section 2.2, Actuarial Balance Sheet
Comment One commentator suggested there needs to be a clear distinction between an actuarial balance sheet and
an accounting balance sheet.
Response The reviewers believe that the development of the actuarial balance sheet as described in section 3.4,
Actuarial Balance Sheet, is sufficiently clear in that the actuarial balance sheet is not the same as the
accounting balance sheet.
Section 2.5, Cohort of New Residents
Comment Several commentators suggested revised wording in order to clarify this definition. One commentator
asked if the cohort was real or hypothetical. Another commentator suggested that the definition be
refined to specify the time period over which the cohort of new residents would be expected to occur.
Response The reviewers agree that the definition needed to be clarified, and the definition was revised to indicate
this was a hypothetical distribution over a specified period of time relating to assumed future residents.
Section 2.6, Continuing Care Retirement Community (CCRC)
Comment One commentator asked if some kind of guarantee wasn’t an essential part of the definition of a CCRC.
Response The reviewers note that a CCRC may or may not include a guarantee and made no change.
Section 2.9, Health Center
Comment One commentator suggested that the definition include reference to dementia care.
Response The reviewers consider that the reference to special care is broad enough to include dementia care and
made no change.
23
Section 2.13, Morbidity Rate

Comment One commentator suggested that the definition be expanded to note that a transfer to a different level of
care may not require a transfer to a different living unit.
Response The reviewers agree that this is an important clarification, but felt it was better placed in the definition
for Levels of Care and modified section 2.11 accordingly.
Section 2.14, Non-Resident
Comment One commentator questioned how a person living in a CCRC could be “non-resident” and suggested that
this term be changed.
Response The reviewers believe the definition is clear and the distinction between resident and non-resident is an
important concept in CCRC analyses, and made no change.
Section 2.17, Physical Property
Comment One commentator criticized this definition as going too far in restricting the meaning of words of
common understanding.
Response The reviewers consider the definition to be appropriate and made no change.
Section 2.18, Population Projection
Comment One commentator suggested changing the definition to add number, age and status. One commentator
asked if the definition should specify the number of residents by care level expected to live.
Response The reviewers consider the definition to be appropriate and made no change. Section 3.3, Projected
Population Movements, implies that population projections are done in sufficient detail as needed by the
intended use of the population projection.
Section 2.20, Resident
Comment One commentator questioned whether a contractholder should be considered a resident if there is no
health guarantee but there is a substantial refund guarantee.
Response The reviewers agree and revised section 2.14, Non-Resident, and section 2.20, Resident, to incorporate
either a health care guarantee or a refund guarantee.
Section 2.23, Withdrawal Rate
Comment One commentator questioned the need for this definition.
Response The reviewers believe that the definition is needed.

Section 2.24, Valuation Date
Comment One commentator suggested that “at” be changed to “as of.”
Response The reviewers agree and made the change, and a similar change was made to the first sentence of section
3.2, Determination of Satisfactory Actuarial Balance.
Section 3.1, Introduction
Comment Two commentators suggested that “policy provisions” was not appropriate when dealing with CCRCs.
One commentator suggested using “contract provisions” instead, while the other commentator suggested
using “residency contract provisions” or “residency agreement provisions.”
Response The reviewers agree that “policy” was not appropriate and changed the reference to “residency
agreement provisions,” which is consistent with terminology used in section 2, Definitions.
24
Section 3.2, Determination of Satisfactory Actuarial Balance

Comment The transmittal memorandum of the exposure draft asked if requiring a CCRC to meet all three
conditions for determining satisfactory actuarial balance was appropriate.
One commentator supported this section as written.
One commentator believes meeting all three conditions is appropriate for satisfactory actuarial balance
but noted that it is not clear that the ASOP requires all three conditions be met for the CCRC to be in
satisfactory actuarial balance and made a suggestion to revise the language.
One commentator indicated that the concept of satisfactory actuarial balance does need to include all
three criteria, but guidance should be given to provide flexibility for the actuary to provide a favorable
opinion if only two of the three criteria are initially met using baseline assumptions. This has real world
implications in states where regulations mandate this opinion to avoid fee adjustments to residents that
are not desired or marketable.
One commentator indicated that the requirement to meet all three conditions for satisfactory actuarial
balance was more a matter of actuarial judgment in light of the use which the actuary anticipates will be
made of his/her work than a question appropriate for legislating within the context of an ASOP. The
standard should be that the actuary consider all three elements and justify in writing the basis for
structuring the analysis, including actuarial balance, in the way the actuary has chosen.
One commentator indicated that in the situation where a community is slightly less than 100% funded on
valuation, but shows good surplus in pricing and positive cash flows, this community is not in
satisfactory actuarial balance but may not be considered “impaired.”
Response The reviewers believe that the test for satisfactory actuarial balance includes meeting all three conditions
and made no change. As indicated in section 4.1.2, Assignments Involving an Opinion on Satisfactory
Actuarial Balance, the actuarial communication would discuss the implications of not meeting any of the
three conditions, and the actuary can discuss the projected time frame for meeting all of the conditions
using the baseline assumptions.
Section 3.2.1, Condition 1: Adequate Resources for Current Residents
Comment One commentator indicated that beginning to evaluate this condition after the community has been in
operation three years is arbitrary, and targeted occupancy is not defined. The commentator suggested
that an evaluation be made immediately after the close of the first fiscal year when residents have moved
in, and preferably it could be based on a hypothetical census at projected full occupancy as opposed to
the current census in order to minimize the impact of overhead allocation to a smaller census during fill-
up.
One commentator stated that in terms of time frame, it may be appropriate to provide the actuary with a
defined term for describing the financial state of the facility prior to testing for satisfactory actuarial
balance such as “pre-actuarial balance determination.”
Response The reviewers believe that a first evaluation of this condition is most useful after the community has
achieved a stable occupancy level and once mature annual operating expenses can be determined, which
typically would be after the fill-up period has been completed. The reviewers note that section 3.2.1
gives an example as to when this might occur.
25
Section 3.2.2, Condition 2: Adequate Fee Structure for a Cohort of New Residents
Comment One commentator indicated that as written the analysis does not allow for outside subsidization of the
fee structure, for example, sources such as charitable donations, endowments or from other financial
programs such as LTC insurance or Medicare/Medicaid. Instead, it is limited to amounts paid by the
resident. These third party payments are addressed in section 3.6.2, Future Additional Fees and Third
Party Payments. It also doesn’t allow for consideration of additional fees.
Response The reviewers agree with the suggestion and clarified the wording to include future additional fees and
third party payments attributable to the new residents.
Section 3.2.3, Condition 3: Positive Projected Cash and Investment Balances
Comment The transmittal memorandum of the exposure draft asked if the proposed wording for the time period to
be covered by the cash flow projection was appropriate.
One commentator suggested that the minimum number of years should approximate the average
remaining life expectancy of the current CCRC cohort.
Another commentator suggested 10 years of stabilized operations should be reflected in the cash flow
projection. So for a new community, the projection would reflect the remainder of the fill-up period plus
10 years.
Another commentator indicated that it was unclear as to the value of the second sentence in the middle
paragraph. In the first sentence, it states the actuary should choose a projection period based on his/her
judgment. Adding a sentence to say the actuary “may” consider a minimum period is ineffective. The
commentator recommended that the sentence either read as “should consider” or be eliminated.
Another commentator indicated that the choice of a projection period can be a material aspect of an
actuary’s work. The period should be sufficient to be informative for the users of the actuary’s work,
especially in affecting decisions that may be made in reliance on that work, and projection periods
should never be chosen to conceal deferred elements beyond the chosen period that might be material if
the projection were continued further. Hence, the choice of a particular projection period is a matter of
actuarial judgment, the basis for which the actuary should document in his/her actuarial communication.
For instance, for the purpose of examining a CCRC, it might be decided to use the probable maximum
lifespan of the youngest residents as an appropriate future projection horizon, or the actuary might deem
it desirable to have a projection that spans two or three managerial generations since a change in
leadership might be viewed as a material event. A specific period, whether it is 10 or 20 years, should be
omitted from the ASOP in favor of a more principled approach to this question.
Response The reviewers believe that the first sentence of the second paragraph is the key criteria and expanded
that sentence to indicate that use of a longer time period should not materially affect the results and
conclusions. The second sentence of the second paragraph was deleted.
Section 3.3, Projected Population Movements
Comment One commentator indicated that the notion of “levels of care” implies differences in care that can vary
widely from one community to the next. Some communities are very effective at increasing services as
needed to enable residents to stay in their independent living units. Other communities may have unfilled
beds in a higher area of the community and so may move residents to a higher level before care at that
level is absolutely needed. Consequently, it is important that the experience of the particular CCRC
community which the actuary is concerned be a driver in any calculations. Managerial and medical
decisions relating to care levels may vary widely from community to community, or even from time to
time within a community. Still, the ASOP is silent on this material aspect of actuarial practice relating to
CCRCs.
Response The reviewers believe that the wording here and in section 3.8, Selection of Actuarial Assumptions,
accommodates the potential variation between communities noted above, and made no change.
26
Section 3.6.1, Future Periodic Fees

Comment One commentator indicated that it may be appropriate to reference consideration of ability of the
resident to pay future periodic fees and any appropriate allowance for bad debt or consideration of
facility practices in the event a resident is unable to pay.
Response The reviewers believe that the wording in section 3.9, Benevolence Funds and Financial Assistance
Subsidies, which discusses the need to consider the impact of residents who do not pay the full
scheduled fees, adequately addresses the issue raised and made no change.
Section 3.6.3, Physical Property for Assets Currently in Service
Comment One commentator asked if the cost of capital is defined.
Response The reviewers note that the cost of capital is described in section 3.6.3 and made no change.
Comment One commentator indicated that the use of cost of capital at the time the asset was originally put into
service is not appropriate in current state of practice since the intent of imputing interest is to provide a
mathematical estimate of earnings on these fixed assets. The commentator doesn’t see using prior year’s
cost of capital as any better than current year’s cost of capital. The commentator suggests that the
assumption made for this value should be that the actuary may use a value consistent with the time the
asset was placed in service or one based on the current economic environment.
Response The reviewers agree with this comment and made the appropriate change.
Comment One commentator indicated that practicing actuaries use one of two methods for defining the level of
depreciation expenses for fixed assets and their corresponding current actuarial value. One method
assumes level dollar depreciation expenses and the other assumes increasing dollar depreciation
expenses. The two methods generate different results. In some cases, the actuarial opinion would be
different depending on the depreciation method used. This can be problematic to regulators as well as to
client CCRCs who switch between actuaries. It is suggested the ASOP should state which method is
preferable after careful consideration of all factors.
Response The reviewers believe this is a matter of actuarial judgment and made no change.
Section 3.6.6, Future Refunds
Comment One commentator questioned the actuarial treatment of refund provisions that are identical but where
payment timing may vary due to legal terminology of the residency agreement such as:
(a) unconditionally refundable and typically paid immediately or within 120 days after contract
termination, (b) refundable contingent upon reoccupancy and the proceeds from the next resident’s
advance fee, or (c) refundable upon resale of resident’s unit as in a cooperative contract. The issue is
whether actuarially the refund liabilities should be the same for all three contract options if the intent and
practice of management in regard to payment of refunds is the same for all provisions, i.e., all are paid
shortly after contract termination regardless of whether the reoccupancy or resale has occurred. In other
words, if three communities offered refunds based on one of the above three provisions, but make
payments in the same manner, the resulting actuarial liabilities should not be different.
Response The reviewers agree with the comment and revised the guidance to also include consideration of the
CCRC’s actual payment procedure for refunds.
Section 3.6.7, Value of Long-Term Debt
Comment One commentator suggested changing the last sentence to the following in order to provide for variable
debt: “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 of
the debt.”
Response The reviewers agree and changed the sentence as suggested.
27
Section 3.7, Cash Flow Projections

Comment One commentator questioned including the revenue from non-residents living at the health center. The
influx of residents to the health center means eviction of non-residents and the loss of revenue needs to
be considered. If hospice services will be offered on premises it will call for cost and anticipated revenue
assumptions, and if not, the loss of revenue needs to be considered.
Response The reviewers believe that it is appropriate to include the revenue from non-residents in the health center
since operating expenses include the expense of beds occupied by non-residents. The projected cash
flows follow the projected population movements, so as residents displace non-residents in the health
center, the revenue projections automatically reflect this change.
Comment One commentator disagreed with the inclusion of the last paragraph in this section referring to ASOP
No. 7, Analysis of Life, Health, or Property/Casualty Insurer Cash Flows. The commentator stated that
CCRC practice is so far removed from that of insurance companies that this requirement is unnecessary
and bordering on irrelevant. The commentator states that there are too many differences to recommend
this to actuaries practicing in the CCRC area.
Response While the reviewers agree with the commentator about the limited applicability of ASOP No. 7 to
CCRCs, the reference is appropriate because an actuary would only apply the guidance that is
applicable.
Section 3.8, Selection of Actuarial Assumptions
Comment One commentator indicated that the description of assumptions in section 3.8 appears to focus on static
assumptions and asks if the ASOP should allow for dynamic assumptions and analysis.
Response The reviewers believe the current wording is flexible enough to allow dynamic assumptions if the
actuary chooses to use them and made no change.
Comment One commentator noted that the anticipation of withdrawal trend assumptions should be carefully
thought out as such a notion is contrary to a going concern model.
Response The reviewers agree that the withdrawal assumption, as with any assumption, should be carefully
considered, but believe that a withdrawal trend is not contrary to the going concern model.
Section 3.8.2, Trend Assumptions for Fees and Expenses
Comment One commentator indicated that the last sentence of the second paragraph seems redundant. The
commentator indicates that the first sentence of the second paragraph defines the standard, and if the
actuary does not follow any standard they need to disclose and justify.
Response The reviewers consider using a different trend assumption for the periodic fees versus the operating
expenses as a significant issue and wanted there to be no ambiguity about the need to disclose such a
difference, and made no change.
Comment One commentator disagreed with the use of “trend assumptions” when referencing inflation and fee
increase assumptions in this section. The commentator states that the use of the word “trend” in this
context is confusing. Actuaries must make assumptions regarding future “increases” in monthly and
advance fees. Such increases will be the result of decisions made by management at the CCRC and this
isn’t thought of as a “trend.” Actuaries must also make assumptions regarding expense inflation. The
term “inflation” is much more widely understood than “trend” in the context of future expense increases.
Response The reviewers note that section 2.22, Trend, defines trend as applying to revenues, costs or actuarial
assumptions. Therefore, the reviewers believe the current wording is appropriate and made no change.
Section 3.8.3, Investment and Discount Rate Assumptions (now Investment Rate and Discount Rate
Assumptions)
Comment One commentator suggested that the investment rate assumptions should state that investment
performance includes both earnings as well as appreciation in investment values.
Response The reviewers consider the wording sufficiently flexible to accommodate the actuary’s judgment in
developing an appropriate investment rate and made no change.
28
Section 3.8.5, Going-Concern Assumption

Comment One commentator indicated that it is presumed that the prevailing assumption should be the “going
concern” model, yet the security of residents’ interests in these lifetime contracts is clearly the
paramount public interest issue. Residents are induced to pay large proportions of their retirement assets
in expectation that they will receive lifetime care in accordance with the terms of their contracts. The
“going concern” standard does not seem adequate to protect the vulnerability of residents from the
specter of the financial failure of the CCRC on which they are dependent, so to the extent that those
dependencies are inherent in the CCRC, an assurance of solvency on a “liquidation” basis should be
interwoven with “going concern” analysis to maximize the probability that the enterprise will endure to
be able to fulfill the contractual expectations of the residents for the full duration of their lives.
Response The reviewers believe the three conditions discussed in section 3.2, Determination of Satisfactory
Actuarial Balance, are the appropriate measures to evaluate the financial condition of a CCRC.
Section 3.8.6, Reasonableness of Assumptions
Comment One commentator indicated that the choice of assumptions is critical to the mathematical modeling
which lies at the core of actuarial practice. Consequently, actuaries are expected to be proficient in
showing, good judgment in the choice of assumptions, including adapting assumption sources, for
example, published mortality tables, to the particulars of a specific case. Accordingly, it is desirable that,
as proposed, actuaries be continuously admonished that all assumptions be reasonable under the
circumstances of their use and actuaries should document in their communications the basis for their
judgments that any particular set of assumptions (or any individual assumption within an assumption set)
is the right choice for the particular application.
Response The reviewers agree and consider that the wording in the ASOP supports the above comments.
Comment The transmittal memorandum of the exposure draft asked if the proposed language asking the actuary to
take into consideration the level of surplus and any margins for uncertainty included in the actuarial
assumptions was appropriate.
One commentator indicated that the consideration of the level of surplus and the margins for uncertainty
seem appropriate. This allows the actuary to consider the impact of assumption refinement as compared
to materiality of outcome.
Another commentator indicated that using “margins for uncertainty” is not appropriate for setting
assumptions for CCRC financial and actuarial projections. Population projections, actuarial cash flow
projections, the actuarial balance sheet, and the new entrant (cohort) pricing analysis should be based on
best-estimate assumptions. The commentator asks how the actuary is to determine which direction to
change a particular assumption to add a “margin for uncertainty.” For example, higher mortality will
produce higher refund liabilities but could also produce lower health care liabilities. So, would the
mortality margin be positive or negative? The use of such margins would result in confusion and
problems in interpretation of the results of key actuarial analyses for CCRCs. All CCRC financial
analyses should be based on best estimate assumptions with no margins added or subtracted. The
mechanism for dealing with uncertainty is surplus on the actuarial balance sheet, surplus on the new
entrant (cohort) pricing analysis, and positive cash flows. The existence of such surpluses and positive
cash flows provides the “margins” for uncertainty. Actuaries routinely recommend that CCRCs achieve
certain target levels of such surpluses. Sensitivity testing may also be performed to determine if there is
adequate surplus or cash flows under particular scenarios.
Response The reviewers believe that the current wording is flexible enough to accommodate using assumptions
with or without margins together with the level of surplus available to provide for adverse fluctuations to
demonstrate satisfactory actuarial balance.
29
Section 3.9, Benevolence Funds and Financial Assistance Subsidies

Comment One commentator asked what if a client is not able to provide any data relative to anticipated
benevolence.
Response The reviewers believe that the actuary should use professional judgment to reflect any anticipated
benevolence based on the information that is available and disclose what, if any, level of benevolence
was reflected in the analysis.
Section 3.10, For-Profit CCRCs
Comment The transmittal memorandum of the exposure draft asked if the addition of sections 3.9, 3.10, and 3.11
were appropriate. Two commentators responded that they were appropriate.
One commentator suggested combining sections 3.10 and 3.11, Equity or Cooperative CCRCs, into a
single section entitled “Ownership Considerations.”
Response The reviewers believe it is clearer to retain these two issues as separate sections and made no change.
Comment One commentator suggested that a potential income tax liability be stated and included in the
projections.
Response The reviewers agree with the suggestion and added “potential income tax liability” to the list of issues to
be considered.
Comment One commentator indicated that the comment about capital expenditures funded by the owner is unclear.
The commentator asks if this is suggesting that these shouldn’t be a liability for the actuarial balance
sheet and cohort pricing. If so, then they shouldn’t be counted as an asset either. The commentator asks
if this is suggesting they be treated as a gift.
Response The reviewers note that ownership arrangements vary and the handling of capital expenditures may also
vary. The reviewers do not believe there should be one prescribed way of handling capital expenditures
in For-Profit CCRCs and this determination should be left to the actuary’s professional judgment.
Section 3.11, Equity or Cooperative CCRCs
Comment One commentator questioned the meaning of this section. The issue in regard to a cooperative CCRC is
(1) whether they should be handled as a combination of cooperative and service components in actuarial
analysis or (2) whether an actuary can simply review the service component and ignore the cooperative
element. It is suggested that the ASOP include a more detailed statement on the preference in regard to
how this organization should be modeled in an actuarial study.
Response The reviewers note that arrangements of equity and cooperative CCRCs vary. The reviewers do not
believe there should be one prescribed way of handling these arrangements and this determination
should be left to the actuary’s professional judgment.
Section 3.13, External Restrictions
Comment One commentator suggested that the list of external sources be extended to loan covenants.
Another commentator indicated that the meaning of this section is not clear. If such restrictions generate
results that are not in satisfactory actuarial balance, then the actuary cannot give a positive opinion. In
particular, what is anticipated by lender imposed restrictions since condition 3 only requires that cash
balances be positive, and the commentator points out that lenders are likely to require a high cash
balance.
Response The reviewers believe that relevant lender-imposed restrictions should be considered and modified the
language to clarify this point.
30

Section 4.1.1, Actuarial Data, Assumptions, and Methods
Comment One commentator indicated that since actuaries serve generally as advisors, all communications should
be sufficiently clear and candid so that any person who may rely on the actuary’s work is able to
examine the actuary’s judgments critically to determining if they are appropriate for the intended use.
This requires a high standard of documentation and requires that actuaries be able to explain their
methods, assumptions, judgments and opinions in terms that non-actuaries readily follow and evaluate.
Section 4 as drafted makes clear that actuaries are to document their work with exemplary completeness.
However, the section omits any requirement that the actuary explain the basis for the choice of
assumptions, methodologies, etc. and such explanation should be part of any complete communication.
Response The reviewers believe that such explanation should not be required as a part of this communication and
note that section 3.15, Documentation, requires the appropriate documentation, and made no change.
Comment One commentator indicated that the specific listing of documentation in section 4.1.1 seems redundant
with ASOP No. 41, Actuarial Communications. In addition, many of the items listed in section 4.1.1
may not be applicable depending on the assignment. For example, an assignment involving only a
population projection would not include the items mentioned in section 4.1.1(b), (e), (f), (g), (h), and (j).
Response The reviewers acknowledge there may be some redundancy with ASOP No. 41 but decided that since
CCRC analysis involves issues that may not be familiar to all actuaries it was preferable to list the key
items that should be discussed. Since the items to be included in the actuarial communication depend on
the purpose of the communication, the reviewers changed the first sentence of section 4.1.1 to refer to
applicable items.
Comment One commentator suggested changing item 4.1.1(k) to “any material changes in assumptions or methods
from the most recent prior analysis.”
Response The reviewers agree and changed the sentence as suggested.

Section 4.1.2, Results of Conditions for Satisfactory Actuarial Balance and Qualification of Opinion (now
Assignments Involving an Opinion on Satisfactory Actuarial Balance)
Comment One commentator suggested changing the title of section 4.1.2 to “Assignments Regarding Opinion of
Satisfactory Actuarial Balance” or something similar, in order to clarify that the section is limited in
scope to specific assignments. As worded, the ASOP would require development of the three tests for
any actuarial communication.
Response The reviewers agree and changed the title for section 4.1.2 to “Assignments Involving an Opinion on
Satisfactory Actuarial Balance.”
Comment One commentator questioned the use and implication of “or declining” in paragraph 4.1.2(c). The
commentator asks over what period would the cash balances need to decline (any two consecutive years
or over the total projection period). The commentator indicates that there may be situations where it may
be perfectly appropriate to have slow declining balances or have temporary declines followed by a
plateau.
Response The reviewers agree that in certain circumstances declining cash and investment balances may not pose
any implications, but believe the actuary should comment on the cause of the decline, and made no
change.
Section 4.3, Deviation from Standard (now Deviation)
Comment One commentator indicated that section 4.3.1, Material Deviations to Comply with Applicable Law,
does not address the obligation that we have as professionals to try to ensure that laws with actuarial
implications are properly crafted.
Response While the reviewers agree with the assertion that laws with actuarial implications should be properly
crafted, the reviewers believe that this issue is outside of the scope of the ASOP.
31
Comment One commentator questioned the meaning of principal in the next to last sentence of section 4.3.2, Other
Material Deviations. The commentator asks if this is the principal in the actuary’s own firm.
Response The reviewers refer the commentator to section 2.7, Principal, of ASOP No. 41. Principal refers to the
client or employer of the actuary, and the facts and circumstances of the situation will determine which
is the principal.
Appendix 2 (now Appendix 1)
Comment The transmittal memorandum of the exposure draft asked if the material in appendix 2 was appropriate
for inclusion in this ASOP.
One commentator indicated that including appendix 2 was appropriate.
Another commentator suggested that the material in appendix 2 was more appropriate for publication for
peer review and discussion on a standalone basis. An ASOP—which may be used by a skilled trial
lawyer in a deposition or trial to undermine the valid judgments of a qualified actuary—is not the best
forum for such material.
Response The reviewers note that much of this material was included in previous versions of this ASOP and that
the exposure process provided ample opportunity for peer review of the material in appendix 2.
Comment One commentator suggested revising the first sentence referring to “and also a significant cost to the
residents of the CCRC.” Residents don’t typically have ownership of fixed assets, so, it is a cost of
operating the CCRC.
Response The reviewers consider the current wording appropriate and made no change.
32
Actuarial Standard
of Practice
No. 4
Measuring Pension Obligations and

Determining Pension Plan Costs or Contributions
Revised Edition
Developed by the
Adopted by the
September 2007
(Doc. No. 107)

ASOP No. 4 – September 2007
TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Actuarial Accrued Liability 2
2.2 Actuarial Cost Method 2
2.3 Actuarial Present Value 3
2.4 Actuarial Present Value of Projected Benefits 3
2.5 Actuarial Valuation 3
2.6 Amortization Method 3
2.7 Contribution 3
2.8 Contribution Allocation Procedure 3
2.9 Cost 3
2.10 Cost Allocation Procedure 3
2.11 Expenses 3
2.12 Measurement Date 3
2.13 Normal Cost 3
2.14 Participant 3
2.15 Plan Provisions 3
2.16 Prescribed Assumption or Method 4

3.1 Overview 4
3.2 Prescribed Assumption or Method Selected by the Plan Sponsor 4
3.2.1 Basis for Evaluating Prescribed Assumption or Method 4
3.2.2 Inability to Evaluate Prescribed Assumption or Method 5
3.3 General Procedures 5
3.4 Measurement Date Considerations 5
3.4.1 Information as of a Different Date 5
3.4.2 Events after the Measurement Date 6
3.5 Plan Provisions 6
3.5.1 Adopted Plan Changes 6
3.5.2 Proposed Plan Changes 6
3.6 Data 6
3.6.1 Participants 6
ii
3.6.2 Hypothetical Data 6

3.7 Actuarial Assumptions 7
3.8 Asset Valuation 7
3.9 Interrelationship Among Procedures, Assumptions, and Plan Provisions 7
3.10 Relationship Between Procedures Used for Measuring Assets and Obligations 7
3.12 Cost or Contribution Allocation Procedure 9
3.13 Ability to Pay Benefits When Due 9
3.13.1 Actuary Selects Actuarial Cost Method or Amortization Method 9
3.13.2 Actuary Does Not Select Actuarial Cost Method
or Amortization Method 9
3.14 Measuring the Value of Accrued or Vested Benefits 10
3.15 Volatility 10
3.16 Adjustment of Prior Measurement 11
3.17 Approximations and Estimates 11
3.18 Reliance on Data, Plan Provisions, or Other Information Supplied by Others 12

4.1 Communication Requirements 12
4.2 Disclosure About Prescribed Assumptions or Methods 14
4.3 Deviation 14

Background 15
Appendix 2—Comments on the Third Exposure Draft and Responses 18
iii
September 2007

Actuarial Standards Board and Other Persons Interested in Measuring Pension
Obligations and Determining Pension Plan Costs or Contributions
This document contains the final version of the revision of ASOP No. 4, now titled Measuring
Pension Obligations and Determining Pension Plan Costs or Contributions.
Background
Pension Plan Recommendations A, B, and C were adopted and amended by the American
Academy of Actuaries (Academy) during the period 1976 to 1983. In 1988, Recommendations
for Measuring Pension Obligations was promulgated as an ASOP by the Interim Actuarial
Standards Board and the Board of Directors of the American Academy of Actuaries. In 1990, the
ASB republished that standard as ASOP No. 4, Recommendations for Measuring Pension
Obligations. In October 1993, ASOP No. 4 was reformatted and published in the uniform format
adopted by the ASB, with a title change, Measuring Pension Obligations.
The original ASOP No. 4 contained general recommendations for selecting economic and
noneconomic assumptions, the actuarial cost method, and the asset valuation method—all key
elements in the valuation of pension obligations. The evolution of actuarial practice in this area
and the adoption of related ASOPs since ASOP No. 4 was adopted have made it necessary to
update the guidance contained in ASOP No. 4.
The ASB has provided coordinated guidance through a series of ASOPs for measuring pension
obligations and determining pension plan costs or contributions:
1. This revision of ASOP No. 4, which ties together the standards below, provides guidance
on actuarial cost methods, and addresses overall considerations for measuring pension
obligations and determining plan costs or contributions;
2. ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations;
3. ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for
Measuring Pension Obligations; and
4. ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations.
iv
ASOP Nos. 27 and 35 originally contained statements to the effect that, in case of a conflict
between the guidance in those standards and ASOP No. 4, those standards would govern. At the
same time that it adopted this standard, the ASB adopted revisions of those standards to make it
clear that in case of conflicts ASOP No. 4 will govern.
This ASOP is intended to accommodate the concepts of financial economics as well as

traditional actuarial practice.
First Exposure Draft
The first exposure draft of this revision was issued in December 2002, with a comment deadline
of June 15, 2003. Twenty-two comment letters were received and considered in developing the
second exposure draft.
Second Exposure Draft
The second exposure draft of this revision was issued in March 2005 with a comment deadline of
October 31, 2005. Eighteen comment letters were received and considered in developing the
third exposure draft.
Third Exposure Draft
The third exposure draft of this revision was issued in August 2006 with a comment deadline of
March 1, 2007. The Pension Committee carefully considered the seven comment letters received.
The key changes made to the final standard in response to these comment letters are as follows:
1. Sections 2.1, Actuarial Accrued Liability, and 2.13, Normal Cost, were revised to
indicate that under certain actuarial cost methods, the actuarial accrued liability and
normal cost depend upon the actuarial value of assets.
2. Section 3.2.2, Inability to Evaluate Prescribed Assumption or Method, was revised.

Instead of considering the actuary’s expertise, the section exempts an actuary from
evaluating a prescribed assumption or method selected by the plan sponsor if the actuary
is unable to do so without performing a substantial amount of additional work beyond the
scope of the assignment.
3. Section 3.5.1, Adopted Plan Changes, was revised to better describe generally accepted
practice among actuaries who practice in the public-plan sector as well as those who
work with corporate pension plans.
v
4. Section 3.9, Interrelationship Among Procedures, Assumptions, and Plan Provisions, was
revised to clarify the intent.
5. Section 4.2, Disclosure About Prescribed Assumptions or Methods, was revised for
consistency with the changes in section 3.2.2. The section does not require the actuary to
disclose the reason for any inability to evaluate a prescribed assumption or method
selected by the plan sponsor.
In addition, a number of clarifying changes were made to the text. Please see appendix 2 for a
detailed discussion of the comments received and the reviewers’ responses.
Note that the section on Prescribed Statement of Actuarial Opinion (formerly section 4.3) has
been deleted due to the amended Qualifications Standards for Actuaries Issuing Statements of
Actuarial Opinion in the United States promulgated by the American Academy of Actuaries.
The Pension Committee thanks everyone who took the time to contribute comments and
suggestions on the exposure drafts.
The Pension Committee thanks former committee members Thomas P. Adams, Arthur J.
Assantes, David L. Driscoll, Bruce C. Gaffney, Lawrence A. Golden, Marilyn F. Janzen, Daniel
G. Laline Jr., John F. Langhans, Michael B. Preston, William A. Reimert, Phillip A. Romello,
and Ruth F. Williams for their assistance with drafting this ASOP.
Pension Committee of the ASB
David R. Fleiss, Chairperson

Mita D. Drazilov A. Donald Morgan
David P. Friedlander Timothy A. Ryor
Peter H. Gutman Frank Todisco

vi
ASOP No. 4—September 2007
MEASURING PENSION OBLIGATIONS

AND DETERMINING PENSION PLAN COSTS OR CONTRIBUTIONS
1.1 Purpose—This actuarial standard of practice (ASOP) provides guidance to actuaries

when performing professional services with respect to measuring pension obligations and
determining plan costs or contributions. Throughout this standard, the term plan refers to
a defined benefit pension plan. Other actuarial standards of practice address actuarial
assumptions and asset valuation methods. This standard addresses actuarial cost methods
and provides guidance for coordinating and integrating all of these elements of an
actuarial valuation of a plan.
1.2 Scope—This standard applies to actuaries when performing professional services with
respect to the following tasks:
a. measurement of pension obligations. Examples include determinations of funded

status, assessments of solvency upon plan termination, and measurements for use
in cost or contribution determinations;
b. assignment of the value of plan obligations to time periods. Examples include

contributions, accounting costs, and cost or contribution estimates for potential
plan changes;
c. development of a cost allocation procedure used to determine costs for a plan;
d. development of a contribution allocation procedure used to determine

contributions for a plan;
e. determination as to the types and levels of benefits supportable by specified cost

or contribution levels; and
f. projection of pension obligations, plan costs or contributions, and other related

measurements. Examples include cash flow projections and projections of a
plan’s funded status.
1
Throughout this standard, any reference to selecting actuarial assumptions, actuarial cost
methods, asset valuation methods, and amortization methods also includes giving advice
on selecting actuarial assumptions, actuarial cost methods, asset valuation methods, and
amortization methods. In addition, any reference to developing or modifying a cost or
contribution allocation procedure includes giving advice on developing or modifying a
cost or contribution allocation procedure.
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).
This standard does not require the actuary to evaluate the ability of the plan sponsor or
other contributing entity to make contributions to the plan when due.
1.3 Cross References⎯When this standard refers to the provisions of other documents, the
1.4 Effective Date—This standard will be effective for any actuarial valuation with a
measurement date on or after March 15, 2008.
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, which 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.
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 (sometimes referred to as a funding
method).
2
2.3 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.
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).
2.5 Actuarial Valuation—The measurement of relevant pension obligations and, when

applicable, the determination of periodic costs or contributions.
2.6 Amortization Method⎯A method under a contribution or cost allocation procedure for
determining the amount, timing, and pattern of recognition of the difference between the
actuarial accrued liability and the actuarial value of assets.
2.7 Contribution⎯A potential payment to the plan determined by the actuary. It may or may
not be the amount actually paid by the plan sponsor or other contributing entity.
2.8 Contribution Allocation Procedure⎯A procedure for determining the periodic

contribution for a plan. It may produce a single value, such as normal cost plus
twenty-year amortization of the unfunded actuarial accrued liability, or a range of values,
such as that from the ERISA minimum required contribution to the maximum
tax-deductible amount.
2.9 Cost⎯The portion of plan obligations assigned to a period for purposes other than
funding.
2.10 Cost Allocation Procedure⎯A procedure for determining the periodic cost for a plan (for
example, the procedure to determine the net periodic pension cost under Statement of
Financial Accounting Standards (SFAS) No. 87, Employers’ Accounting for Pensions).
2.11 Expenses—Administrative or investment expenses expected to be borne by the plan.
2.12 Measurement Date⎯The date as of which the values of the pension obligations and, if
applicable, assets are determined (sometimes referred to as the valuation date).
2.13 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.
2.14 Participant—An individual who satisfies the requirements for participation in the plan.
2.15 Plan Provisions—(a) Relevant terms of the plan document; and (b) relevant
administrative practices known to the actuary.
3
2.16 Prescribed Assumption or Method—A specific assumption or method that is mandated or

that is selected from a specified range that is deemed to be acceptable by law, regulation,
or other binding authority. For purposes of this standard, the plan sponsor would be
considered a binding authority to the extent that law, regulation, or accounting standards
give the plan sponsor responsibility for selecting such an assumption or method.
3.1 Overview—Measuring pension obligations and determining plan costs or contributions

are processes in which the actuary may be required to make judgments or
recommendations on the choice of actuarial assumptions, actuarial cost methods, asset
valuation methods, and amortization methods.
The actuary may have the responsibility and authority to select some or all actuarial
assumptions, actuarial cost methods, asset valuation methods, and amortization 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 assumptions or methods prescribed by applicable law or
selected by others.
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 actuarial assumptions.
ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations,
provides guidance concerning asset valuation methods. ASOP No. 4 addresses actuarial
cost methods and provides guidance for coordinating and integrating all of these elements
of an actuarial valuation of a plan. In the event of a conflict between the guidance
provided in ASOP No. 4 and the guidance in any of the aforementioned ASOPs, ASOP
No. 4 would govern.
3.2 Prescribed Assumption or Method Selected by the Plan Sponsor⎯The actuary should
evaluate whether a prescribed assumption or method selected by the plan sponsor is
reasonable for the purpose of the measurement, except as provided in section 3.2.2. The
actuary should be guided by Precept 8 of the Code of Professional Conduct, which states,
“An Actuary who performs Actuarial Services shall take reasonable steps to ensure that
such services are not used to mislead other parties.” For purposes of this evaluation,
reasonable assumptions or methods are not necessarily limited to those the actuary would
have selected for the measurement.
3.2.1 Evaluating Prescribed Assumption or Method⎯When evaluating a prescribed

assumption or method selected by the plan sponsor, the actuary should consider
whether the prescribed 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
4
conflict, the actuary should disclose this conflict in accordance with section
4.2(a).
3.2.2 Inability to Evaluate Prescribed Assumption or Method—If the actuary is unable to

evaluate a prescribed assumption or method selected by the plan sponsor without performing a
substantial amount of additional work beyond the scope of the assignment, the actuary should
disclose this in accordance with section 4.2(b).
3.3 General Procedures—When measuring pension obligations and determining plan costs or
contributions, the actuary should perform the following:
a. identify the purpose and nature of the measurement;
b. identify the measurement date (section 3.4);
c. identify plan provisions applicable to the measurement (section 3.5);
d. gather data necessary for the measurement (section 3.6);
e. select actuarial assumptions pertinent to the measurement, if applicable (section

3.7);
f. select an asset valuation method, if applicable (section 3.8);
g. consider the interrelationship among procedures, assumptions, and plan

provisions (section 3.9);
h. consider the relationship between procedures used for measuring assets and
obligations (section 3.10);
i. apply an actuarial cost method to produce a normal cost and actuarial accrued
liability, if applicable (section 3.11);
j. apply a procedure to allocate costs or contributions to past and future periods, if

applicable (section 3.12); and
k. consider whether the actuarial cost method and amortization method are
significantly inconsistent with the plan accumulating adequate assets to make
benefit payments when due, if applicable (section 3.13).
3.4 Measurement Date Considerations—When measuring pension obligations and

determining plan costs or contributions as of a measurement date, the actuary should
consider the following:
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
furnished as of another date. In these circumstances, the actuary should make
5
appropriate adjustments to the data. Alternatively, the actuary may calculate the
obligations on the date as of which the data were furnished and then adjust the
obligations to the measurement date (see section 3.16 for additional guidance).
The actuary should conclude that any such adjustments are reasonable in the
actuary’s professional judgment, given the purpose and nature of the
measurement.
3.4.2 Events after the Measurement Date—The treatment of events known to the
actuary that occur subsequent to the measurement date and prior to the date of the
actuarial communication should be appropriate for the purpose of the
measurement. Unless the purpose of the measurement requires the inclusion of
such events, they need not be reflected in the measurement.
3.5 Plan Provisions—When measuring pension obligations and determining plan costs or
contributions, the actuary should take into account plan provisions as appropriate for the
purpose and nature of the measurement.
3.5.1 Adopted Plan Changes—The actuary should take into account adopted plan
provisions consistent with the following when determining costs or contributions
for a period, unless contrary to applicable law:
a. Provisions adopted on or before the measurement date should be reflected

for at least the portion of the period during which the provisions are in
effect.
b. Provisions adopted after the measurement date may, but need not, be
reflected.
3.5.2 Proposed Plan Changes—The actuary should reflect proposed plan changes as
appropriate for the purpose and nature of the measurement.
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. In addition, the
actuary should consider the following:
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/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 the assumed demographic characteristics of individuals not yet in
covered employment.
6
3.7 Actuarial Assumptions—With respect to the selection of actuarial assumptions, the

actuary should also refer to ASOP Nos. 27 and 35 for guidance.
3.8 Asset Valuation—The actuary should also refer to ASOP No. 44 for guidance on the
selection and use of an asset valuation method.
3.9 Interrelationship Among Procedures, Assumptions, and Plan Provisions—Some plan

provisions may create pension obligations that are difficult to measure using
deterministic procedures and assumptions selected in accordance with ASOP Nos. 27 and
35. In such circumstances, the actuary may consider using alternative procedures, such as
stochastic modeling or option-pricing techniques, or alternative assumptions that include
adjustments to reflect the plan provisions that were not explicitly valued.
If, in the actuary’s professional judgment, such plan provisions are significant and have
not been reflected in the measurement, the actuary should so disclose in accordance with
section 4.1(d).
An example of such a plan provision is one that provides future benefits based on the
actual experience of the plan that will vary asymmetrically relative to the estimated
projected benefits based on a particular set of actuarial assumptions, such as the
following:
a. the use of favorable investment returns to provide cost-of-living increases

automatically to retirees; or
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.
3.10 Relationship Between Procedures Used for Measuring Assets and Obligations⎯The
actuary should measure assets and obligations on a consistent basis as of the
measurement date. Following are some examples of such consistency:
a. if a participant was due a lump sum before the measurement date, but such lump
sum had not been paid from plan assets as of the measurement date, the actuary
should either include the participant’s benefit due in obligations, or exclude it
from the asset value, used in the measurement;
b. if a plan has a dedicated portfolio of non-callable bonds specifically designed so

that emerging interest and principal payments meet specific emerging benefit
payments, the actuary could value the bond portfolio at market value and value
the specific emerging benefit payments using an interest rate equal to the internal
rate of return of the bonds on a market value basis. Alternatively, the actuary
could determine a composite valuation interest rate that reflects a weighted
average of the internal rate of return of the bonds on a market value basis and the
expected return on the remainder of the assets; and
7
c. if the actuary values bonds at amortized cost, as permitted under ASOP No. 44
when the plan’s investment policy provides that such bonds are expected to be
held to maturity and holding such bonds to maturity is not inconsistent with the
plan’s investment practice and expected cash flow needs, the actuary could value
an appropriate portion of the pension obligation using an interest rate equal to the
internal rate of return of the bonds on an amortized cost basis. Alternatively, the
actuary could determine a composite valuation interest rate that reflects a
weighted average of the internal rate of return of the bonds on an amortized cost
basis and the expected return on the remainder of the assets.
3.11 Actuarial Cost Method—When assigning costs or 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 should begin
no earlier than the date of employment and should 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 should bear a reasonable relationship to some

element of the plan’s benefit formula or the participants’ 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 should be considered when assigning costs or 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.
d. The sum of the actuarial accrued liability and the actuarial present value of future
normal costs should equal the actuarial present value of projected benefits and
expenses, to the extent expenses are included in the liability and normal cost. For
purposes of this criterion, under an actuarial cost method that does not directly
calculate an actuarial accrued liability, the sum of the actuarial value of assets and
the unfunded actuarial liability, if any, shall be considered to be the actuarial
accrued liability.
8
3.12 Cost or Contribution Allocation Procedure—The cost or contribution allocation

procedure typically combines the normal cost under an actuarial cost method and an
amortization method to determine the cost or contribution for the period. When selecting
an actuarial cost method or an amortization method, the actuary should consider factors
such as the timing and duration of expected benefit payments and the nature and
frequency of plan amendments. In addition, the actuary should consider relevant input
received from the principal, such as a desire for stable or predictable costs or
contributions, or a desire to achieve a target funding level within a specified time frame.
3.13 Consistency Between Contribution Allocation Procedure and the Payment of

Benefits⎯In some circumstances, a contribution allocation procedure selected in
accordance with section 3.12 may not necessarily 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 3.11 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 funding 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

contributions would be scheduled to occur too late to make plan benefit payments
when due.
3.13.1 Actuary Selects Actuarial Cost Method or Amortization Method—When

performing professional services with respect to contributions for a plan, the
actuary should not select an actuarial cost method or amortization method that, in
the actuary’s professional judgment, is significantly inconsistent with the plan
accumulating adequate assets to make benefit payments when due, assuming that
all actuarial assumptions will be realized and that the plan sponsor or other
contributing entity will make contributions when due.
3.13.2 Actuary Does Not Select Actuarial Cost Method or Amortization Method—In
some circumstances, the actuary’s role is to determine the contribution, or range
of contributions, using an actuarial cost method or amortization method
prescribed by applicable law or selected by others. If, in the actuary’s professional
judgment, such an actuarial cost method or amortization method is significantly
inconsistent with the plan accumulating adequate assets to make benefit payments
when due, assuming that all actuarial assumptions will be realized and that the
plan sponsor or other contributing entity will make contributions when due, the
actuary should disclose this in accordance with section 4.1(j).
9
This standard does not require the actuary to evaluate the ability of the plan sponsor or
other contributing entity to make contributions to the plan when due.
3.14 Measuring the Value of Accrued or Vested Benefits—Depending on the scope of the
assignment, the actuary may measure the value of accrued or vested benefits as of a
measurement date. The actuary should consider 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- 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 accrued benefits provide an appropriate

attribution pattern for the purpose of the measurement (for example, it may not be
appropriate if the plan’s benefit accruals are severely backloaded); and
g. if the measurement reflects the impact of a special event (such as a plant

shutdown or plan termination), the actuary should consider factors such as the
following:
1. the effect of the special event on continued employment;
2. the impact of the special event on employee 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.
3.15 Volatility—If the scope of the actuary’s assignment includes an analysis of the potential
range of future pension obligations, costs, contributions, or funded status, the actuary
should consider sources of volatility that, in the actuary’s professional judgment, are
significant. Examples of potential sources of volatility include the following:
10
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 cost or funding regulations, 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 cost expected when using a particular actuarial cost
method for the plan population.
In analyzing potential variations in economic and demographic experience or

assumptions, the actuary should exercise professional judgment in selecting a range of
variation in these factors and in selecting a methodology by which to analyze them,
consistent with the scope of the assignment.
3.16 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 an appropriate result for
purposes of the measurement. To determine whether adjustment is appropriate, the
actuary should consider 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; and
d. changes in economic and demographic expectations.
For example, when adjusting obligations from a prior measurement date, the actuary
should consider whether the interest rate or other assumptions used to determine the
obligations should be revised.
3.17 Approximations and Estimates—The actuary should use professional judgment to

establish a balance between the degree of refinement of methodology and materiality.
The actuary may use approximations and estimates where circumstances warrant.
Following are some examples of such circumstances:
11
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 benefits being valued to
represent only a minor part of the overall pension obligation, cost, or contribution.
3.18 Reliance on Data, Plan Provisions, or Other Information Supplied by Others⎯When

relying on data, plan provisions, or other information supplied by others, the actuary
should refer to ASOP No. 23 for guidance.
3.19 Documentation—The actuary should prepare and retain documentation in compliance

with the requirements of ASOP No. 41, Actuarial Communications. The actuary should
also prepare and retain documentation to demonstrate compliance with the disclosure
4.1 Communication Requirements—Any actuarial communication prepared to communicate

the results of work subject to this standard must comply with the requirements of ASOP
Nos. 23, 27, 35, 41, and 44. In addition, such communication should contain the
following elements, where relevant and material:
a. a statement of the intended purpose of the measurement and a statement to the

effect that the measurement may not be applicable for other purposes;
b. the measurement date;
c. a description of adjustments made for events after the measurement date under
section 3.4.2;
d. an outline or summary of the benefits included in the actuarial valuation and of

any significant benefits not included in the actuarial valuation;
e. the date(s) as of which the participant and financial information were compiled;
f. a summary of the participant information;
g. if hypothetical data are used, a description of the data;
h. a description of the actuarial cost method and the manner in which normal costs
are allocated, in sufficient detail to permit another actuary qualified in the same
practice area to assess the material characteristics of the method (for example,
12
how the actuarial cost method is applied to multiple benefit formulas, compound
benefit formulas, or benefit formula changes, where such plan provisions are
significant);
i. a description of the cost or contribution allocation procedure, including a

description of amortization methods and any pay-as-you-go component (i.e., the
intended payment by the plan sponsor of some or all benefits when due);
j. if applicable in accordance with section 3.13.2, a statement indicating that the

actuarial cost method or amortization method is significantly inconsistent with the
plan accumulating adequate assets to make benefit payments when due;
k. if the actuary measured the value of accrued or vested benefits, a description of

the types of benefits regarded as vested and accrued 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;
l. a statement, appropriate for the intended audience (as defined in ASOP No. 41),
indicating that future measurements (for example, of pension obligations, costs,
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.”
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;
m. a description of known changes in assumptions and methods from those used in

the immediately preceding measurement prepared for a similar purpose;
n. a description of adjustments of prior measurements used under section 3.16; and
13
o. if, in the actuary’s professional judgment, the actuary’s use of approximations or

estimates could result in a significant margin for error relative to the results if a
detailed calculation had been done, a statement to this effect.
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 audience (as defined in ASOP No. 41), such as
an annual actuarial valuation report.
4.2 Disclosure About Prescribed Assumptions or Methods—The actuary’s communication

should state the source of any prescribed assumptions or methods. In addition, with
respect to prescribed assumptions or methods selected by the plan sponsor, the actuary’s
communication should identify the following, if applicable:
a. any prescribed assumption or method that significantly conflicts with what, in the
actuary’s professional judgment, would be reasonable for the purpose of the
measurement (section 3.2.1); or
b. any prescribed assumption or method that the actuary is unable to evaluate for
reasonableness for the purpose of the measurement (section 3.2.2).
4.3 Deviation—If, in the actuary’s professional judgment, the actuary has deviated materially
from the guidance set forth elsewhere in this standard, the actuary can still comply with
this standard by applying the following sections as appropriate:


14
Appendix 1
practice.
Background
Actuarial standard of practice (ASOP) No. 4, Recommendations for Measuring Pension

Obligations, was first adopted by the Interim Actuarial Standards Board in January 1988. This
standard superseded Pension Plan Recommendations A, B, and C, which the American Academy
of Actuaries adopted in the period 1976 to 1983. The Interpretations of those Recommendations
were incorporated as appendices in the standard. The ASB adopted a reformatted version of
ASOP No. 4, renamed Measuring Pension Obligations and incorporating several clarifying
revisions, in October 1993 (prior ASOP No. 4).
Since the prior ASOP No. 4 was adopted, the ASB has adopted the following standards that
provide more detailed guidance regarding specific elements of the process of measuring pension
obligations:
1. ASOP No. 23, Data Quality;
Measuring Pension Obligations;
4. ASOP No. 41, Actuarial Communications; and
5. ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations.
The prior ASOP No. 4 contained general recommendations for selecting economic and
noneconomic assumptions, actuarial cost methods, and asset valuation method—all key elements
in the measurement of pension obligations. The ASB decided to revise ASOP No. 4 to create an
“umbrella” standard to tie together these existing and proposed standards and address overall
considerations for the actuary when measuring pension obligations. In addition, because the prior
ASOP No. 4 and this revision cover the determination of plan costs or contributions, the name of
the standard was changed to Measuring Pension Obligations and Determining Pension Plan
Costs or Contributions.
Because the prior ASOP No. 4 contained guidance that is now covered in other standards, ASOP
No. 4 has been revised to remove any guidance that is now contained in those standards and to
add references to those standards. Some of the material in the prior ASOP No. 4 was educational
15
rather than guidance on actuarial practice and consequently was not included in this revised
standard.
The revision of ASOP No. 4 has been written to reflect that at times the actuary may have the
responsibility and authority to select actuarial assumptions, actuarial cost methods, asset
valuation methods, and amortization methods, but in other circumstances the actuary may only
advise, or may not even have an opportunity to advise, the individuals who have that
responsibility and authority. For instance, the actuary may advise the plan administrator or plan
sponsor on selecting an actuarial cost method for purposes of determining minimum funding
requirements under ERISA, but the plan administrator or plan sponsor is ultimately responsible
for selecting the method.
Current Practices
This standard and the related standards listed above cover actuarial practices that are central to
the work regularly performed by actuaries in the pension field. The actuarial tasks covered by the
standards are performed for a number of purposes, examples of which are discussed below:
1. Cost, Contribution, and Benefit Recommendations—Calculations may be performed for

purposes of determining actuarial cost, contribution, and benefit recommendations and
related information. Examples are calculations related to the following:
a. recommendations as to the assignment of costs or contributions to time periods

for defined benefit plans;
b. recommendations as to the type and levels of benefits for specified cost or

contribution levels;
c. contributions required under minimum funding standards imposed by statute or

regulations;
d. maximum contributions deductible for tax purposes;
e. information required with respect to plan design; and
f. determination of progress towards a defined financial goal, such as funding of

vested or accrued benefits.
2. Evaluations of Current Funding Status—Calculations may be performed for purposes of

comparing available assets to the actuarial present value of benefits specified by the plan.
Examples are calculations related to the following:
a. actuarial present value of accrued benefits;
b. actuarial present value of vested benefits;
16
c. actuarial present value of benefits payable in the event of plan termination; and
d. information required with respect to plan mergers, acquisitions, spin-offs, and

business discontinuances.
3. Comparison of Actuarial Present Values—Calculations may be performed to compare the

actuarial present values of different pension obligations, such as optional benefit forms or
commencement dates.
17
Appendix 2
Comments on the Third Exposure Draft and Responses
The third exposure draft of this proposed ASOP was issued in August 2006 with a comment
deadline of March 1, 2007. 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 Pension Committee carefully considered all comments received,
and the ASB reviewed (and modified, where appropriate) the proposed changes. Summarized
to each. The term “reviewers” includes the Pension Committee and the ASB. Unless otherwise
noted, the section numbers and titles used below refer to those in the third exposure draft.
GENERAL COMMENTS
Comment Several commentators suggested various editorial changes in addition to those addressed specifically
below.
Response The reviewers implemented such changes if they enhanced clarity and did not alter the intent of the
section.
Section 1.4, Effective Date
Comment One commentator believed the effective date should be extended until regulations are issued under the
Pension Protection Act of 2006.
Response The reviewers disagree and made no change. Section 1.2 addresses how to reconcile any discrepancies
between applicable law and this standard.
Section 2.1, Actuarial Accrued Liability, and 2.13, Normal Cost
Comment One commentator pointed out that the definition of normal cost was misleading for actuarial cost
methods in which the normal cost varies with the funded status of the plan.
Response The reviewers agree and revised the definition to indicate that under certain actuarial cost methods, the
normal cost depends upon the actuarial value of plan assets. The reviewers made a corresponding change
to the definition of actuarial accrued liability.
18

Section 3.2, Prescribed Assumption or Method Selected by the Plan Sponsor
Comment Two commentators opposed the requirement that the actuary consider whether a prescribed assumption
or method selected by the plan sponsor significantly conflicts with what, in the actuary’s professional
judgment, would be reasonable for the purpose of the measurement. They felt that the section
represented an inappropriate expansion of the role of the actuary.
Two commentators supported the general requirement of this section.
Response The reviewers believe that this guidance is appropriate, but edited the section for clarity.
Comment Three commentators wrote that instead of requiring the actuary to evaluate a prescribed assumption or
method, the standard should require disclosure concerning the actuary’s role regarding those prescribed
assumptions or methods.
Two commentators suggested that the actuary be required to disclose the actuary’s role, if any, in
selecting the prescribed assumptions or methods. The third commentator recommended that the actuary
be required to disclose, when appropriate, that the actuary did not review the prescribed assumptions or
methods and expresses no opinion concerning their reasonableness.
Response The reviewers believe these concerns have been addressed with the revision of section 3.2.2, Inability to
Evaluate Prescribed Assumption or Method.
Section 3.2.2, Inability to Evaluate Prescribed Assumption or Method
Comment Two commentators expressed concern that exempting an actuary from evaluating a prescribed
assumption or method if the actuary does not possess the necessary expertise might lead some plan
sponsors to seek less-qualified actuaries and punish actuaries who develop additional expertise. One
commentator wrote that this section would create different requirements for different actuaries,
depending on their skills, for performing the same assignment.
Response The reviewers agree and revised this section. Instead of considering the actuary’s expertise, the section
exempts an actuary from evaluating a prescribed assumption or method if the actuary is unable to do so
without performing a substantial amount of additional work beyond the scope of the assignment.
Consistent with the changes in this section, the reviewers removed from section 4.2 the requirement that
the actuary disclose the reason for any inability to evaluate a prescribed assumption or method selected
by the plan sponsor.
Comment One commentator suggested that the standard exempt an actuary from evaluating a prescribed
assumption or method if the actuary relies on the work of another expert retained by the plan sponsor to
select the assumption or method, so long as the actuary makes appropriate disclosure.
Response With the revision of this section, the reviewers do not believe such an exemption is necessary.
Section 3.5.1, Adopted Plan Changes
Comment One commentator wrote that the phrase “adopted plan provisions” was not clear.
Response The reviewers believe that the actuary should exercise professional judgment when considering which
plan provisions are appropriate to take into account for the purpose and nature of the measurement and
made no change.
However, while reviewing this section the reviewers learned that its guidance was inconsistent with
generally accepted practice among actuaries who practice in the public-plan sector. As a result, the
reviewers revised this section to describe practice among actuaries in both the private and public sectors.
19
Section 3.9, Interrelationship Among Procedures, Assumptions, and Plan Provisions

Comment One commentator believed this section was overly broad and suggested that it can be argued that all
pension provisions create contingent pension obligations that are difficult to measure using deterministic
assumptions. The commentator also noted that the term “deterministic assumptions” is not defined.
Response The reviewers revised this section to clarify the intent.

Section 3.13, Ability to Pay Benefits When Due (now Consistency Between Contribution Allocation Procedure
and the Payment of Benefits)
Comment One commentator expressed concern that this section placed the responsibility for a plan’s solvency on
the actuary and would require actuaries to perform cash flow testing. The commentator recommended
that the section be deleted; if it was retained, the commentator suggested that it be limited to assignments
in which the scope explicitly included an assessment of future solvency.
Response The reviewers believe that this section neither places the responsibility for a plan’s solvency on the
actuary nor requires the actuary to perform cash flow testing. However, the reviewers renamed the
section to be more consistent with its content, and re-arranged the text to clarify its intent.
Section 3.15, Volatility

Comment One commentator, concerned about the possibility of after-the-fact litigation, suggested adding a
statement that the standard does not presume that the scope of actuarial services includes considerations
of volatility unless specifically included in the actuary’s assignment.
Response The reviewers believe the section as written is sufficiently clear that analyses about volatility depend
upon the scope of the assignment and made no change.
Section 4.1, Communication Requirements
Comment One commentator wrote that the phrase “funded in whole or in part on a pay-as-you-go basis” in
paragraph (k) was not clear.
Response The reviewers revised the phrase and added a clarifying parenthetical comment. The reviewers also
moved this disclosure requirement to paragraph (i), where they believe it is more appropriate.
Comment One commentator suggested that the disclosure regarding variability of future measurements in
paragraph (m) (now paragraph (l)) could apply to all areas of actuarial practice and might be more
appropriate in ASOP No. 41, Actuarial Communications, than in a pension standard.
Response The reviewers believe it is appropriate for ASOP No. 4, which ties together the other pension standards,
to require this disclosure and made no change. The comment has been passed on to the General
Committee for its review of ASOP No. 41.
Comment One commentator wrote that the disclosure in paragraph (m) (now paragraph (l)) might not be necessary
in all circumstances and suggested that the actuary should consider the audience in determining whether
such disclosure is necessary.
Response The reviewers agree and changed the wording accordingly.
20
Actuarial Standard
of Practice
No. 5
Incurred Health and Disability Claims
Revised Edition
Developed by the
Adopted by the
December 2000
(Doc No. 076)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Block of Business 1
2.2 Capitation 2
2.3 Development (or Lag) Method 2
2.4 Exposure Unit 2
2.5 Health Benefit Plan 2
2.6 Incurral Date 2
2.7 Incurred Claims 2
2.8 Material 2
2.9 Tabular Method 2
2.10 Time Value of Money 3
2.11 Trends 3
2.12 Unpaid Claims Liability 3
2.13 Valuation Period 3

3.1 Introduction 3
3.2 Considerations for Estimating Incurred Claims 3
3.2.1 Health Benefit Plan Provisions and Business Practices 3
3.2.2 Economic Influences 3
3.2.3 Organizational Claims Administration 4
3.2.4 Risk Characteristics and Organizational Practices by Block of Business 4
3.2.5 Legislative Requirements 4
3.2.6 Carve-Outs 4
3.2.7 Special Considerations for Long-Term Products 4
3.3 Analysis of Incurred Claims 4
3.3.1 Unpaid Claims Liability 4
3.3.2 Categories of Incurred Claims 5
3.3.3 Reinsurance Arrangements 5
3.3.4 Large Claim Patterns 5
3.3.5 Coordination of Benefits (COB) or Subrogation 6
ii
3.3.6 Provider Contractual Arrangements 6
3.3.7 Consistency of Basis 6
3.4 Data Requirements and Assumptions 6
3.5 Methods Used for Estimating Incurred Claims 7
3.5.1 Development Method 7
3.5.2 Tabular Method 7
3.5.3 Other Methods 8
3.6 Follow-Up Studies 8

4.1 Documentation 8
APPENDIXES

Background 10
Appendix 2—Comments on the Exposure Draft and Committee Responses 11
iii
December 2000

Actuarial Standards Board and Other Persons Interested in Incurred Health and
Disability Claims
This booklet contains the final version of the revision of ASOP No. 5, now titled Incurred Health
and Disability Claims.
Background
Under direction from the ASB, the Health Committee began revising ASOP No. 5, which in its
prior form (adopted 1991, Doc. No. 028) was titled Incurred Health Claim Liabilities. The
revision of ASOP No. 5 has a number of changes from the 1991 version, including the following:
1. The standard has been reformatted to be consistent with the current ASOP format
adopted by the ASB in May 1996 for all future actuarial standards of practice.
2. This standard discusses incurred health and disability claims in total, rather than just
unpaid health claims liabilities. Thus, the standard addresses the paid portion of incurred
health and disability claims.
3. This standard explicitly discusses long-term claim products, and the knowledge and
considerations for estimating incurred health and disability claims. Such considerations
include provider contracts, reinsurance, and testing of liabilities.
4. Claim settlement expenses are no longer included in this standard and will be addressed
in a standard under development at this time. This standard deals only with incurred
health and disability claims. In the interim, actuaries may look to the guidance in section
5.13 of the previous edition of this standard with respect to claim settlement expenses.
5. This standard explicitly excludes deficiency reserves and policy reserves, which will be
addressed in a standard under development at this time.
Exposure Draft
This standard was exposed in September 1999 with a comment deadline of March 31, 2000.
Thirty comment letters were received. All of the comments received were thoroughly reviewed.
Many of the comment letters showed thoughtful perception of the issues involved, and many
clarifying suggestions were incorporated into the final standard, including the following:
iv
1. The committee clarified several definitions and added the definition of “Exposure Unit.”
2. The definition of “Development (or Lag) Method” was expanded to reflect received
claims as well as paid claims.
3. Sections 2.10 and 3.3.1(d), Time Value of Money, were added.
4. Section 3.3.1(c), Margin for Uncertainty, was expanded to provide guidance on the size
of the margin, if one is included.
5. A reference to provider contractual arrangements not reimbursed through claims

processing was added to section 3.3.6.
6. Section 3.3.7 was added, indicating that the basis for related liabilities and reserves
should generally be consistent.
Appendix 2 contains a detailed discussion of the committee’s responses to the comments.
The Health Committee thanks all those who commented on the exposure draft.
The ASB voted in December 2000 to adopt this standard.
David F. Ogden, Chairperson

Janet M. Carstens John M. Friesen
Robert M. Duncan Jr. Robert J. Ingram
Paul R. Fleischacker Mary J. Murley
Alan D. Ford
Alan J. Stonewall, Chairperson

Phillip N. Ben-Zvi William C. Koenig
David G. Hartman Heidi Rackley
Ken W. Hartwell James R. Swenson
Roland E. King Robert E. Wilcox
v
INCURRED HEALTH AND DISABILITY CLAIMS

preparing or reviewing financial reports, claims studies, rates, or other actuarial
communications involving incurred claims within a valuation period under a health benefit
plan as defined in section 2.5 of this standard.
1.2 Scope—This standard applies to actuaries who estimate or review incurred claims under
health benefit plans on behalf of insured or noninsured entities, managed-care entities, health
care providers, government-sponsored plans or risk contracts, or regulatory agencies. This
standard does not provide guidance to actuaries regarding reserves such as policy reserves,
premium reserves, or claim settlement expense reserves, although such reserves may be
required for financial reporting. This standard does not address interpretations of statutory or
generally accepted accounting practices. If a conflict exists between this standard and
applicable law, compliance with applicable law is not considered a deviation from this
standard.
1.4 Effective Date—This standard is effective for work performed on or after May 1, 2001.
2.1 Block of Business—All policies of a common coverage type (for example, major medical,
preferred provider organization, or capitated managed care); demographic grouping (for
example, size, age, or area, group or individual policies); or other segmentation useful for
estimating incurred claims for actuarial purposes.
1
2.2 Capitation—The amount of money paid to a provider by an exposure-based payment system
to provide certain health care services to any Managed Care Health Provider members. The
payment does not vary on the basis of the number or type of services actually rendered. The
verb “to capitate” is used to indicate the act of entering into such an arrangement. Capitation
is also sometimes used to mean the total medical cost or premium per enrollee, though it is
not used in this manner in this document.
2.3 Development (or Lag) Method—A method under which historical claim data, such as the
number and amount of claims for the subject block of business, are grouped into the time
periods in which claims were incurred and the time periods in which they were processed.
The processing date is typically the date the claim is received, adjudicated, or paid by the
claim payer. The method uses these groupings to create a claims processing or development
pattern, which is used to help estimate the unprocessed portion of incurred claims.
2.4 Exposure Unit—A unit by which the cost for a health benefit plan is measured. For example,
an exposure unit may be a contract, an individual covered, $100 of weekly salary, or $100 of
monthly benefit.
2.5 Health Benefit Plan—A contract providing medical, prescription drug, dental, vision,
disability income, long-term care, or other health-related benefits, whether on a
reimbursement, indemnity, or service benefit basis, regardless of the form of the risk-bearing
organization, including benefit plans provided by self-insured or governmental plan
sponsors.
2.6 Incurral Date—The date a claim is determined to be a liability of the organization in

accordance with the terms of the health benefit plan. For health benefit plans where the claim
must exceed a minimum threshold, for example where there is a deductible or elimination
period, the incurral date may be the date claims begin to accumulate toward the threshold.
2.7 Incurred Claims—The value of all amounts paid or payable under a health benefit plan,
determined by contract to be a liability with an incurral date during the valuation period. It
includes all payments during the valuation period plus a reasonable estimate of unpaid
claims liabilities. For an organization’s income statement, incurred claims equal paid claims
plus the estimate of unpaid claims liabilities at the end of the current valuation period less the
estimate of unpaid claims liabilities at the end of the prior valuation period.
2.8 Material—Resulting in an impact, significant to the interested parties, on the affected

actuarial incurred claim estimate.
2.9 Tabular Method—The application of a factor to a volume measure (for example, number of
individual claims) based on prior experience, in order to estimate unpaid claims liabilities for
reported claims (commonly used for long-term claims).
2
2.10 Time Value of Money—The principle that an amount of money available at an earlier point
in time has different usefulness and value than the same amount of money has at a later point
in time.
2.11 Trends—Measures of rates of change, over time, of the elements affecting incurred claims.
2.12 Unpaid Claims Liability—The value of the unpaid portion of incurred claims includes (1)
unreported claims; (2) reported but unprocessed claims; and (3) processed but unpaid claims.
For an organization’s balance sheet, the unpaid claims liability includes provision for all
current and prior valuation periods.
2.13 Valuation Period—A defined period for which incurred claims are recorded.
3.1 Introduction—The estimation of incurred health and disability claims is fundamental to the
practice of health actuaries. It is necessary for the completion of financial statements; for the
analysis and projection of trends; for the analysis or development of rates; and for the
development of various management reports, regardless of the type of insurance or managed-
care contract.
3.2 Considerations for Estimating Incurred Claims—The actuary should consider how to
appropriately reflect relevant plan provisions, business practices, and environmental factors
that materially affect incurred claims or trends, such as those highlighted in sections 3.2.1–
3.2.7 below.
3.2.1 Health Benefit Plan Provisions and Business Practices—The actuary should consider
the health benefit plan provisions and business practices, including special group
contract holder requirements and provider payment arrangements, that materially
affect the cost, frequency, and severity of claims. These include elimination periods,
deductibles, preexisting conditions limitations, maximum allowances, and managed-
care restrictions. Payment allowances, incurral dating methods, or benefit
interpretations may be defined by internal business practices, plan provisions, or
both.
3.2.2 Economic Influences—Economic conditions may affect incurred claims. For

example, changes in price levels, unemployment levels, or medical practice will
affect morbidity (including both the incidence and duration of disability). The
actuary should consider items such as relevant changes in managed care contracts,
cost shifting, provider fee schedule changes, medical procedures, epidemics, or
catastrophic events, and elective claims processed in recessionary periods or prior to
contract termination.
3
3.2.3 Organizational Claims Administration—Organizations have various practices for
administering claims, which may cause fluctuations in the rates of completion or lag
factors used by the actuary to determine unpaid claims liability. The actuary should
consider how claims administration practices can be influenced by staffing levels,
process and investigation time for complicated claims, computer system changes or
downtime, seasonal backlogs of claims submitted, governmental influences, and cash
flow considerations.
3.2.4 Risk Characteristics and Organizational Practices by Block of Business—The

actuary should consider how marketing, underwriting, and other business practices
can influence the types of risks accepted. Furthermore, the pattern of growth and
relative maturity of a block of business can influence incurred claims.
3.2.5 Legislative Requirements—Governmental mandates can influence the provision of

new benefits; risk characteristics; rating, reserving and underwriting practices; and
claims processing practices. The actuary should consider relevant legislative and
regulatory changes as they pertain to determination of incurred claims.
3.2.6 Carve-Outs—Carve-outs can represent services such as prescription drugs or dental;

or condition-specific services such as cancer treatment, mental health, or substance
abuse. Carve-outs are often provided by a separate entity specializing in that type of
service. The actuary should consider the pertinent benefits, payment arrangements,
and separate reporting of these benefits in incurred claims determination and trend
analysis.
3.2.7 Special Considerations for Long-Term Products—Certain health benefit plans

provide for long-term medical or disability benefits. Some examples are cancer,
long-term care, and long-term disability policies. The plan’s benefits may not begin
for several years after policy purchase, while claims usually extend over many
valuation periods. The actuary should consider the variety of benefits available in
these policies, such as lump-sum, fixed, or variable payments for services; provisions
such as cost of living adjustments and inflation protection; payment differences
based on institutional or home-based care; social insurance integration; and the
criteria for benefit eligibility.
3.3 Analysis of Incurred Claims—After reviewing the considerations in sections 3.2.1–3.2.7

above, the actuary should follow the relevant procedures highlighted in sections 3.3.1–3.3.7
below.
3.3.1 Unpaid Claims Liability—Using incurral and processing dates, the actuary
determines unpaid claims liabilities for claims incurred during the valuation period.
a. Plan Provisions—The actuary should review the relevant plan provisions to

determine if they create liabilities for services or payments after the valuation
period (for example, completion of medical treatments, deferred maternity
4
benefits, or long-term disabilities). The actuary should determine if these
liabilities are part of the current or future period’s liability, or if these liabilities
make up a separate reserve.
b. Data and Reporting—The actuary should take into account the relevant reporting
systems for processed claims, exposure units, and premium rates, and the various
dating methods the systems use (for example, loss recognition, service rendered,
reporting, or payment status). The actuary should use professional judgment in
estimating the extent to which an adjustment to the reported data is needed, based
on the dating methodology.
c. Margin for Uncertainty—Recognizing the fact that determination of liabilities for

incurred but unpaid health and disability claims is an estimate of the true
liabilities that will emerge, the actuary should consider what margin for
uncertainty, if any, might be appropriately included. If a margin is included, the
unpaid claims liability should be appropriate, in the actuary’s judgment, under
moderately adverse conditions.
d. Time Value of Money—The actuary may consider the time value of money if
doing so will have a material effect in the determination of incurred claims. The
use of any interest discounts depends on the purpose for which incurred claims
are being calculated, and should reflect applicable statutory and accounting
standards.
3.3.2 Categories of Incurred Claims—The actuary should consider separate development

of incurred claims for each category that may exhibit different lag patterns, costs per
exposure unit, trends, or exposure unit growth rates. The actuary should define
categories of incurred claims in a manner that is appropriate to the available data and
to the task being performed. Categories may be defined broadly, such as fee-for-
service claims paid to health care providers, capitation payments to providers, or
disability income paid to insureds. Categories might be further refined to more
accurately analyze or project costs and utilization data, for example, by method of
payment (such as electronic vs. manual), type of contract, place of service, premium
rating method, demographic factors, distribution method, and provider risk-sharing
arrangements.
3.3.3 Reinsurance Arrangement—The actuary should recognize the impact of reinsurance

arrangements on the data and should appropriately reflect the effect of such
arrangements in estimating the incurred claims. In particular, the actuary should
recognize the different lag patterns due to the extended reporting or recovery periods
often associated with certain types of reinsurance.
3.3.4 Large Claim Patterns—The actuary should take into account any relevant change in
the pattern of large claims. Specifically, large claims can distort claim payment
patterns or historical per-unit claim levels that the actuary considers when estimating
5
incurred claim estimates. The actuary should consider how large claims impact the
particular method being employed to determine incurred claim estimates and make
appropriate adjustments. For example, incurred claim estimates may be overstated if
completion factors are applied to processed claims levels that include an unusually
high number or amount of large claims.
3.3.5 Coordination of Benefits (COB) or Subrogation—The actuary should take into

account the relevant organizational practices and regulatory requirements related to
COB or subrogation. In particular, the actuary should consider how these items are
reflected in the data (for example, negative claims or income) and make appropriate
adjustments for COB, subrogation, or other adjustments or recoveries.
3.3.6 Provider Contractual Arrangements—The actuary should take into account the
relevant contractual arrangements with providers and any changes in such
arrangements. These arrangements can affect trends, claim cost levels, and claims
processing. The actuary should consider any relevant variation in these arrangements
by region or product, and any provider contractual arrangements that do not provide
for reimbursement through the claim payment process, for example, capitation.
The arrangements will also typically specify what portion of the risk (if any) has
been shifted to the providers. If the providers bear a substantial portion of the risk,
the actuary should consider the overall ability of the provider to meet its obligations.
Depending on the purpose of the analysis, the actuary should take into account any
statutory limitations on the credits for such transfers of risk.
Additional amounts may be owed to providers for supplemental payments for high-
cost medical treatment beyond capitation, return of payment withholds, or incentive
payments based on financial results. Certain contractual arrangements may also
result in amounts due from providers based on financial results. The actuary should
consider the impact of unpaid medical costs resulting from failed contractors under
capitation or losses incurred by contractors deemed to be related parties.
3.3.7 Consistency of Basis—The actuary should consider the basis for determining related
liabilities and reserves, including those not covered by this standard, such as claim
settlement expense reserves. The basis for these items generally should be consistent.
3.4 Data Requirements and Assumptions—The expansion of health benefit coverages and the
greater variety of organizations offering or administering health benefit coverages have
increased the volume, type, precision, and the frequency of data needs by the actuary.
Consistent with ASOP No. 23, Data Quality, the actuary should make appropriate efforts to
obtain accurate data from claim processing reports, accounting systems, and other relevant
internal organization sources in order to determine incurred claims. External sources may be
needed to provide reasonableness checks on limited data.
6
3.5 Methods Used for Estimating Incurred Claims—Various methods may be used to estimate
incurred claims. Some methods are based on statistical analysis and projection of the costs or
rates at which claims were processed in recent periods. Such projection of the costs is usually
done by category of incurred claims for greater accuracy. However, the adequacy of incurred
claim estimates is determined in the aggregate for financial statements.
Because no single method is necessarily better in all cases, the actuary should consider the
use of more than one method. The actuary should evaluate the method(s) chosen and the
results obtained in light of the credibility of the data. The actuary should also consider the
effect of trends both in previous periods and the current period for estimating incurred
claims. The actuary should choose the outcome that, in the actuary’s professional judgment,
is the most reasonable provision for incurred claims, whether from a single method or a
combination of several methods. Sections 3.5.1–3.5.3 below discuss some of the more
common methods for estimating incurred claims.
3.5.1 Development Method—This method is appropriate and widely used for short-term
benefits having processed claims (i.e., not capitation) and may also be appropriate for
long-term claims. It typically requires monthly (or quarterly) claim summary reports
split by period of incurral and period of processing. There should be similar reports
of earned rates and exposure units for the same periods. With these data, the actuary
estimates the percentage or amount of completion needed to project all future yet
unrecorded claims accruable to the valuation period, for each block of business. The
actuary should consider processing fluctuations due to seasonality, claims processing
practices, inflation, or significant changes in medical practices. The summary of all
the months’ estimates of (1) unreported claims; (2) reported but unprocessed claims;
and (3) processed but unpaid claims represents the unpaid claims liability.
When the estimates are completed and added to known payments for each time
period, the total incurred claims should be matched and compared to earned rates and
exposure units for reasonableness. The actuary should test alternatives to gain
understanding of their use and reliability depending on the block of business or
accuracy desired.
3.5.2 Tabular Method—The tabular method is generally used for known long-term claims
and may be required by regulatory standards to estimate the unpaid claims liability
using life annuity values, continuance probabilities, or commutation function tables.
This method applies factors to items such as individual claims, waived rates, or other
volume measures based on previous experience in order to estimate the unpaid
claims liability for known claims. The factors are often based on the age and sex of
the insured, elimination period, cause of claim, length of disablement on the
valuation date, and remaining benefit period, as appropriate to the coverage.
7
The actuary should take into account specified benefit changes throughout the
lifetime of the claim and the assumptions used to develop the table; and should select
the appropriate table(s) to estimate the unpaid claims liability given the risk
characteristics of the policy.
For long-term disability, the actuary should recognize the specific impacts that
recovery, mortality, and government offsets have on tabular factors.
The tabular method is not appropriate for estimating unknown claims. When the
tabular method is used, the actuary should consider whether an additional adjustment
is necessary to reflect unreported incurred claims.
3.5.3 Other Methods—Other methods the actuary may consider to estimate incurred claims
include (but are not necessarily limited to) multiplying the number of reported claims
by the average size of previously closed claims; multiplying projected cost per unit
by exposure units; multiplying projected cost per service by service counts; and
multiplying earned premium by an estimated loss ratio. Other methods may be
necessary when organizational data are limited or not credible, particularly for new
blocks of business.
3.6 Follow-Up Studies—Follow-up studies involve performing tests of reasonableness of the

prior period incurred claims estimates and the methods used over time. The results are
required in some financial statements and may be required in actuarial reports. The actuary
should, to the extent practicable, acquire the data to perform such studies; perform studies in
the aggregate and for pertinent blocks of business involving rating concerns; and utilize the
results, if appropriate, in preparing current incurred claims estimates.
4.1 Documentation—The actuary should document the methods, assumptions, procedures, and
the sources of the data used. The documentation should be in a form such that another
actuary qualified in the same field could assess the reasonableness of the work. For further
guidance, the actuary is referred to ASOP No. 23, Data Quality; ASOP No. 25, Credibility
Procedures Applicable to Accident and Health, Group Term Life, and Property/Casualty
Coverages; and ASOP No. 31, Documentation in Health Benefit Plan Ratemaking.
communication prepared under this standard, and as a result, such actuarial communication
may be a prescribed statement of actuarial opinion.
8
4.3 Deviation from Standard—An actuary must be prepared to justify the use of any procedures
that depart materially from those set forth in this standard and must include, in any actuarial
communication disclosing the results of the procedures, an appropriate statement with
respect to the nature, rationale, and effect of such departures.
9
Appendix 1
practice.
Background
The determination of incurred claims is an integral, fundamental part of the work of most health
actuaries. It is necessary to set proper financial statements for ratemaking, planning, and
projections.
Incurred claims determination has become more challenging with the proliferation of provider
contracts that share risk in different ways. Having accurate data continues to be an issue.
Current Practices
A reformatted version of this standard has been in place since January 1991; the original
standard since March 1988. The committee believes that current practices are generally in
keeping with the current standard. While there is no reason to believe current practices are
inappropriate, the revisions to this standard keep it consistent with the changing times.
10
Appendix 2
Comments on the Exposure Draft

and Committee Responses
The proposed standard was exposed for review in September 1999, with a comment deadline of
March 31, 2000. Thirty comment letters were received. The Health Committee of the ASB
carefully considered all comments received. Summarized below are the significant issues and
questions contained in the comment letters, printed in standard type. The Health Committee’s
responses to these issues and questions appear in boldface.
General Observations
Many helpful ideas and comments were offered in the comment letters and are reflected in this
standard, as appropriate.
Several commentators believed that only unpaid claims liabilities should be addressed. The
committee continues to believe that broadening the definition to include all incurred claims
results in a better overall approach.
One commentator believed the standard was a ratemaking standard. The standard applies to the
estimation of incurred claims. Therefore, it applies to ratemaking only to the extent that
incurred claim estimation is a part of the ratemaking process.
One commentator was concerned that methods, approaches, or formulas should not be
prescribed. The committee believes the standard does not prescribe any of these items.
Several commentators believe the standard should discuss the need for claim settlement expense
liabilities, or the effective date of the standard should be delayed until another standard is written
and approved that includes them. Claim settlement expense liabilities will be covered in a
separate standard, which is under development.
Several commentators believed that the time value of money should be explicitly discussed. The
committee agreed and added sections 2.10 and 3.3.1(d) to discuss it.
One commentator recommended that the standard should discuss using either paid or received
claim data in the development method. The committee agreed and changed several parts of
the standard to refer to processed claims, rather than paid only.
One commentator stated that the descriptions of the development method was too specific and
should be generalized. The committee disagrees, believing that only a broad outline of the
development method is included.
11
Transmittal Memorandum
The committee posed four questions in the transmittal memorandum of the exposure draft:
1. Is the proposed revision too specific or too general with its discussion of background issues
(see section 3.2, Considerations for Estimating Incurred Claims) and specific methods and
practices (see sections 3.3–3.6)? If too specific, what should be deleted? If too general,
what should be added?
2. Is it clear that the proposed revision refers to the determination of incurred health and
disability claims only and does not address practices concerning policy reserves, premium
deficiency reserves, or claim settlement expense reserves—which may be necessary for
statutory reporting? If the standard is not clear, what should be revised?
3. Is it clear that the proposed revision applies to government actuaries?
4. Is it appropriate that the proposed revision does not specifically address the time value of
money, but instead leaves such decisions to the professional judgment of the actuary?
Comments on these four questions and the committee’s responses follow:
Question #1: Several commentators stated that the amount of specificity is about right. Two
commentators believed parts were too general; these comments are discussed in the specific
sections.
Question #2: Four commentators believed the standard was clear.
Question #3: Several commentators believed the standard was clear; one commentator suggested
wording changes to the scope. The committee retained the proposed wording, as it does not
believe the suggestion was a material improvement.
Question #4: As discussed above, the standard has been changed to discuss the time value
of money.
Section 1.2, Scope—One commentator suggested the scope specifically include or exclude rate
stabilization reserves. Another commentator believed that the scope could be improved by
defining for what the standard does not provide guidance. The committee revised the definition
to be more general by removing specific reference to accidental death and dismemberment
reserves and changing premium deficiency reserves to premium reserves. The committee
12
does not believe rate stabilization reserves or other reserves need to be noted specifically.
One commentator suggested inclusion of a description of the three different categories of

reserves from the NAIC minimum reserve standard model. The committee believes such a
description is not necessary in this standard.
One commentator suggested that the scope be expanded to specifically include actuaries who
estimate or review incurred claims on behalf of employers who sponsor self-insured health care
and disability plans for employees. The committee believes reference to actuaries performing
this work for non-insured entities is sufficient to include actuaries working for
employer-sponsored plans.
Section 2.1, Block of Business—One commentator suggested that “expected claim runout
pattern” be added to the list of segmentation criteria. Another commentator suggested inclusion
of “significant benefit variations” (for example, deductibles and coinsurance/copays and
maximum limits) as a criterion for segmentation. The committee believes the current
definition is adequate and additional criteria do not need to be included.
Section 2.3, Development (or Lag) Method—One commentator suggested the definition be
revised for clarity as well as to recognize the use of received date. The committee agreed and
revised the definition based on the commentator’s suggestion.
Another commentator suggested inclusion of the words “or health benefit plan” after “block of
business” to recognize employers. The committee believes the current definition is sufficient
to recognize employers and does not believe this change is necessary.
Section 2.4, Exposure Unit—One commentator suggested including a definition for exposure.
The committee agreed and included a definition for “exposure unit.”
Section 2.5, Health Benefit Plan—Two commentators suggested specific clarification regarding
whether workers’ compensation and auto insurance coverages are intended to be covered.
Another commentator suggested clarification regarding whether associations, MEWAs, and Taft-
Hartley plans are intended to be covered. The committee believes the current definition is
adequate and that these items do not need to be addressed specifically.
One commentator suggested the inclusion of examples of self-insured plan sponsors. The
committee does not believe specific examples are necessary.
Another commentator suggested distinguishing between a contract with an insured and a contract
13
with a provider. The committee believes the current definition includes all these items and
that additional information is not necessary.
Section 2.6, Incurral Date—One commentator suggested the current definition for incurral date is
not appropriate for stop-loss coverage. Another commentator did not believe the definition was
appropriate for disability income. The committee agreed and revised the definition for these
types of accumulation claims.
One commentator suggested that additional information as to how to determine the incurral date
be included. Another commentator suggested providing examples of the documents to be used to
determine the incurral date (including, but not limited to, individual or group insurance policies,
plan documents, managed care contracts, etc.). The committee does not believe that these
types of examples should be included in the definition.
Section 2.7, Incurred Claims—Several commentators noted that the current definition was
confusing and some thought the definition did not include the change in estimated incurred
claims for the current valuation period. The committee agreed that the definition was
confusing and has revised the definition.
One commentator suggested including the words “as defined in [section 2.12] of this standard”
after “unpaid claims liability.” The committee believes the current definition is adequate and
that the additional reference is not necessary.
One commentator suggested changing “incurred claims” to “accounting claims,” “booked

claims,” “reported claims,” or “accrual claims” to be more indicative of accounting terminology.
The committee does not believe this change should be made.
One commentator was concerned with the definition in conjunction with the current definition
for incurral date with respect to stop-loss or other accumulated benefits. The committee believes
this issue has been addressed by changing the definition of incurral date.
Section 2.9, Tabular Method—One commentator suggested changing the definition from
“estimate unpaid claims liability for” to “develop.” Another commentator indicated that the term
“tabular method” is generally used to refer to a subset of the “exposure method,” and that the
tabular method is more limiting since the exposures are claims data. The exposure method would
allow use of exposures other than claims data. The committee believes that the current
definition is consistent with the term listed in the Definitions from ASOPs and ACGs of the
ASB, and made no change to the definition.
Section 2.10, Time Value of Money—Several commentators indicated that the ASOP should
reflect the time value of money. The committee agreed and added a definition of the “Time
Value of Money.”
14
Section 2.11, Trends—One commentator indicated the definition was too vague. The committee
believes the definition is consistent with ASOP No. 31, Documentation in Health Benefit
Plan Ratemaking, and made no change to the definition.
Section 2.12, Unpaid Claims Liability—One commentator suggested that the second sentence in
the definition should read, “For an organization’s balance sheet, the unpaid claims liability
includes provision for all current and prior valuation periods.” The committee agreed with the
suggestion and modified the definition.
One commentator indicated that it might be useful to recognize the separation between claim
liabilities (for amounts due prior to the end of the valuation date) and claim reserves (for
amounts due after the end of the valuation date), given the importance of statutory accounting for
health claims. The committee believes it is clear in the current definition that the unpaid
claims liability includes both and that separate definitions are not necessary.
Section 2.13, Valuation Period—Two commentators indicated that the definition was not clear
that a valuation period could represent a period other than a calendar year. The committee
agreed and modified the definition. One commentator indicated that “accounting period”
should be used instead of “valuation period” when the reference is to a time period rather than to
a point in time. The committee believes that the current definition is clear and made no
change to the definition.
Section 3.1, Introduction—One commentator indicated that the word “determination” should be
changed to “estimation” since actuaries estimate incurred health and disability claims. The
committee agreed with the suggestion and changed the wording in section 3.1 and other
sections.
One commentator indicated that although section 3 covers “issues,” it does not appear to address
directly the issue of conservatism. The committee believes that the issue of conservatism is
adequately addressed in section 3.3.1(c), Margin for Uncertainty.
One commentator suggested that language be inserted to clarify that the section applies to both
insurers and plan sponsors. The committee believes this is adequately addressed in section
1.2, Scope.
One commentator suggested removal of the parenthetical comment in the first paragraph since it
was somewhat misleading. The committee agreed and removed the parenthetical comment.
15
Two commentators indicated that the paragraph suggesting that the actuary keep current
regarding advances in generally accepted actuarial practice was either duplicative with current
educational requirements, might be used in malpractice litigation, or could be difficult to
ascertain compliance. The committee agreed and removed the paragraph.
Section 3.2, Considerations for Estimating Incurred Claims—One commentator indicated that
the word “determining” should be changed to “estimating” in the title since incurred claims are
estimated. The committee agreed and changed the title.
One commentator indicated that the actuary should not only consider relevant plan provisions,
business practices, and environmental factors that materially affect incurred claims or trends, but
should also reflect the item when it is material. The committee agreed and changed the first
sentence to read, “the actuary should consider how to appropriately reflect.”
One commentator indicated that the list of considerations was not all-inclusive and that a
reference should be made to phenomena on the operations side. The committee agreed and
added the phrase “such as” to refer to the list of considerations.
Section 3.2.1, Health Benefit Plan Provisions and Business Practices—One commentator
indicated that a statement should be included indicating that the actuary should consider how the
claims administrator reports the incurral dates for a series of claims derived from a common
condition or injury. The committee believes that incurral dating methods are adequately
covered in the last sentence but modified the first sentence in 3.2.1 to read, “the actuary
should consider the health benefit plan provisions and business practices” for clarification
purposes.
One commentator indicated that although provider payment arrangements are considerations for
determining incurred claims, they were not mentioned. The committee agreed and inserted the
words “and provider payment arrangements” in the first sentence.
One commentator indicated that the potential for over-insurance, especially as it relates to
disability income, should be covered. The committee believes that the concept of over-
insurance is adequately covered.
Several commentators indicated that the section on benefit characteristics was vague or
overlapping. The committee agreed and removed the section.
Section 3.2.2, Economic Influences—One commentator recommended changing the first

sentence to refer directly to changes in medical practice methods, not just expense levels and
morbidity, since average costs can change even if the overall sickness and price levels remain the
same. The commentator also suggested changing the reference to inflation to a reference to price
levels. The committee agreed with these suggestions and incorporated the changes.
16
One commentator did not like the reference to “claims done in recessionary periods.” The
committee agreed and eliminated the word “done.”
Two commentators suggested adding references to disability incidence and termination rates and
one commentator suggested adding a reference to elective claims. Another commentator
indicated that specific reference to epidemics or catastrophic events should be included. The
committee added a specific reference.
Section 3.2.3, Organizational Claims Administration (formerly titled, Organizational Claim

Processing Methods and Reports)—Several commentators noted that description of claims
processing was limited, and suggested that “internal” did not include third party payor methods.
The committee agreed and modified the wording to refer to administering claims rather
than simply processing and to remove the reference to internal.
One commentator stated that this list of influences did not include management reorganization as
a factor. The committee modified the language to make it clear that the list is not intended
to be exhaustive.
Section 3.2.4, Risk Characteristics and Organizational Practices by Block of Business (formerly
titled, Risk Characteristics and Underwriting Practices by Block of Business)—Several
commentators pointed out that there were other items in addition to marketing and underwriting,
such as competition that could influence the types of risks accepted. The committee agreed and
modified the section to include “other business practices” in order to reflect items that
would include the influence of competitive practices on risk characteristics of a block of
business.
One commentator suggested that the risk characteristics be enumerated, such as age, sex, and
medical conditions. The committee believes that this is common knowledge and that it is not
necessary to include such an enumeration in the standard.
Several commentators pointed out that the term “loss ratio” was introduced in this section and
should either be explained or deleted. The committee chose to replace the term with
“incurred claims” in keeping with the rest of the standard.
Section 3.2.5, Legislative Requirements—One commentator indicated that the statement that the
actuary should consider relevant legislative and regulatory changes was redundant with language
elsewhere in the document. The committee believes that it is appropriate to retain the
sentence in this section.
Section 3.2.6, Carve-Outs—Several commentators noted that this section was not clear as to
what was intended to be included as carve-outs. The committee modified the language to
17
clarify that carve-outs include services such as prescription drug, mental health treatment,
or dental. The list is not intended to be exhaustive.
One commentator noted that capitation might be included here in the case of mixed (partially
capitated) plans. The committee believes that capitation could indeed be considered as a
carve-out in certain circumstances. Capitation is also covered by section 3.3.6, Provider
Contractual Arrangements.
One commentator suggested that this section noted the need to review liability for coverage in
the event of provider failure to perform. The committee believes that this is covered under
section 3.3.6.
Section 3.2.7, Special Considerations for Long-Term Products—Two commentators noted that
the term “factors” was used in two different ways in the section. The first usage was to reference
items influencing incurred claims and the second reference was to reference tabular values. The
committee determined usage of the term was not pertinent to the meaning of the section
and also determined that the reference in the second paragraph to the use of judgment was
not needed in the standard.
Two commentators suggested that additional influences be included in the list. The committee
agreed and added cost-of-living, inflation protection, social insurance integration, and
benefit eligibility criteria to the section.
One commentator suggested that a section on nonrecurring or catastrophic events such as

weather, labor disputes, epidemics, terrorism, or earthquakes be added to the standard. The
committee believes this is not necessary, as these items could be considered economic
influences and are covered by section 3.2. Modifications to this section described elsewhere
broaden the scope of the section to include such factors.
Section 3.3, Analysis of Incurred Claims—Several commentators noted that this “Procedures for
Analyzing Incurred Claims” was not an appropriate title for this section. The committee agreed
and changed the title.
Several comments suggested that a discussion of the time value of money should be included.
The committee agreed and added new section 3.3.1(a) to address the issue.
One commentator noted that certain items such as case management, capitations, and other items
associated with direct delivery of services should be included. The committee agreed but
determined that this should be addressed elsewhere, and modified section 3.3.6 to reference
this.
18
One commentator suggested that reference be made to the practice of commuting long-term
claim payment liabilities with lump-sum settlements. The committee agrees that this practice
has an impact on incurred claims and assumptions used to determine them, but believes
that this level of detail is not appropriate for this standard. Section 3.2.3 briefly addresses
this issue.
Section 3.3.1, Unpaid Claims Liability—One commentator suggested that the section be split
into three parts for clarity. The committee agreed, labeled each of the three sections in the
document separately, and added a fourth section on the time value of money.
One commentator noted that this section seemed to require the use of a lag method, and pointed
out that data to determine an unpaid claims liability on this basis may not always be available.
The committee agreed and modified the draft to incorporate language recognizing that
point.
One commentator also noted that the term “payment date” was limiting and did not allow for the
variety of definitions associated with payment and processing of claims, particularly with respect
to disability claims and hospitalizations. The committee agreed and modified the language to
use the term “processing date” in section 3.3.1, and similar wording in new sections 3.3.1(b)
and 3.3.1(c).
Two commentators suggested that the last sentence in new section 3.3.1(a) be expanded to
describe what to do under each situation. The committee considered this point and concluded
that adequate guidance was provided elsewhere and no modification was necessary.
One commentator noted that the term “enrollment” was undefined. The committee agreed and
substituted the term “exposure units” in new section 3.3.1(b).
One commentator noted that the term “rates” was unclear. The committee agreed and added
the word “premium” before “rates” in new section 3.3.1(b).
Several commentators noted that the paragraph on margin should be expanded to provide more
guidance. One suggested that language similar to ASOP No. 28 be included. The committee
agreed and added some language to the new section 3.3.1(c) for this purpose. It should be
noted that the standard does not require that an actuary include a margin, but rather
defines the level of margin that should be included if a margin is indeed determined.
Section 3.3.2, Categories of Incurred Claims—Two commentators suggested that the categories
of incurred claims should make reference to the different methods of payment, with pharmacy
claims being the example used by both commentators. The committee agreed with the
suggestion and added the phrase “method of payment (for example, electronic vs.
manual).”
19
Section 3.3.3, Reinsurance Arrangements—One commentator expressed the concern that this
section seemed to apply only to reinsurers and another commentator suggested adding the phrase
“stop-loss claim” to the section. The committee believes the original wording does apply to
direct writers as well as reinsurers, including stop-loss coverage.
One commentator suggested that the section was too restrictive with regard to varying actuarial
techniques, if applied to rate making. The committee believes the wording “reflect the effect
of such arrangements in estimating the incurred claims” does not restrict actuarial rating
techniques.
Section 3.3.4, Large Claim Patterns—One commentator suggested that the example used in this
section also should have addressed the possibility of understatement of incurred claims
estimates. Another commentator suggested adding “unusually high” to the phrase “number or
amount of large claims.” The committee agreed and changed the wording to include
“unusually high” to address both comments.
Section 3.3.5, Coordination of Benefits (COB) or Subrogation—One commentator suggested

adding a reference to adjustments or recoveries other than COB or subrogation. The committee
agreed and added the phrase “other adjustments or recoveries.”
One commentator expressed concern about adjustments not overly reducing the level of
conservation otherwise assumed. The committee believes this is adequately addressed in the
revised section 3.3.1(c).
Section 3.3.6, Provider Contractual Arrangements—One commentator believed that a reference

to provider arrangements not reimbursed through the claim payment process, for example,
capitation, should be added. The committee agreed and added a sentence to that effect.
Section 3.3.7, Consistency of Basis—Several commentators believed that a reference to claim

settlement expense reserves should be added to ensure consistency in determining all liabilities
and reserves. The committee agreed and added section 3.3.7.
Section 3.4, Data Requirements and Assumptions—One commentator believed that the variety
of organizations providing administrative services would affect the data needs of the actuary.
The committee agreed and added the phrase “or administering” to address these situations.
Section 3.5, Methods Used for Estimating Incurred Claims—Several commentators expressed
concern about the phrase “not an average of the methods” being too limiting in how to use
alternative methods of estimating incurred claims. The committee agreed and deleted the
phrase.
20
One commentator believed that the phrase “early part of the current valuation period” was
confusing. The committee agreed and deleted the phrase.
One commentator expressed concern that the phrase “most reasonable provision” was not
adequately defined with regard to various levels of conservatism that are appropriate. The
committee believes this is adequately addressed in the revised section 3.3.1(c).
One commentator believed that the concept of credibility should be defined or discussed more
fully as it relates to selection of an appropriate method of estimating incurred claims. The
committee believes that the current wording is adequate for guidance to the actuary.
Section 3.5.1, Development Method—One commentator suggested the possibility of using the
development method for long-term claims. The committee agreed and added the wording
“development methods may also be appropriate for long-term claims.”
One commentator suggested removing the sentence redefining claims lag. The committee
agreed and deleted the sentence.
One commentator suggested changing the wording from “the actuary should analyze” to “the
actuary should consider” as it pertains to fluctuations. The committee agreed and changed the
wording.
One commentator suggested making the wording more stringent about considering fluctuations
by requiring that an adjustment be made if deemed to have a significant impact. The committee
believes the original wording is adequate to provide guidance to the actuary.
One commentator believed that the use of paid loss ratios by incurred period should not be
considered a development method. The committee agreed and deleted the wording.
One commentator expressed the opinion that the references to “paid dates” would be better
referenced as “processed dates.” The committee agreed and changed the wording throughout
the standard of practice.
Section 3.5.2, Tabular Method—Three commentators suggested that the tables might be dictated
by regulations. The committee believes that this is adequately covered under section 3.2.5,
Legislative Requirements.
One commentator suggested that the list of factors included in the last sentence of the first
paragraph be broadened to include cause of claim. The committee agreed with this and also
generalized the list to apply to any type of contract, not just to long-term disability. Also,
the committee added wording to section 3.2.7, Special Considerations for Long-Term
Products, to incorporate these concepts.
21
One commentator requested that wording be added regarding the impacts of recovery, mortality
and government offsets on tabular factors for long-term disability. The committee agreed with
this request and added the suggested wording.
Another commentator suggested expansion of the last sentence of this section to state that “the
actuary should consider whether an additional adjustment is necessary to reflect unreported
incurred claims.” The committee agreed with this and added the wording.
Section 3.5.3, Other Methods—Two commentators suggested that “Other Methods” be expanded
to include methods frequently used by managed care plans, such as hospital logs and pre-
authorization data. The committee agreed with this and expanded the examples to include
these. It should be noted that this list of examples is not intended to be exhaustive.
Section 3.6, Follow-Up Studies—Several commentators suggested expanding the wording in this
section to include other items to study, for example, lag patterns, seasonality patterns, trends, and
duration of unpaid claims liability. The committee believes that the wording used in this
section sufficiently covers these.
One commentator expressed concern that the measures of “reasonableness” seemed to focus on
“accuracy” of prior estimates, which “leaves the actuary open to second-guessing by regulators
and others when the estimates are less than 100% accurate.” The committee disagrees with this
interpretation and thus made no change in this section.
Two commentators stated that the wording implied that “all” financial statements require follow-
up studies. The committee agreed and modified the statement to state “some financial
statements.”
One commentator suggested adding a new section 3.7, Other Considerations; section 3.7.1,
Materiality; and section 3.7.2, Cost Effectiveness. The committee agreed to expand on the
definition and issue of “Materiality” elsewhere in the standard. The committee did not
believe it necessary to add a separate section on “Cost Effectiveness,” since the committee
believes these concepts are adequately addressed elsewhere in the standard.
Section 4.2, Prescribed Statement of Actuarial Opinion (PSAO)—One commentator suggested

eliminating this section since the actuary is required to be familiar with all relevant standards,
and thus this is redundant. The committee believes this section should remain since this
language is included in ASOPs that include a Communications and Disclosures section.
22
Section 4.3, Deviation from Standard—One commentator suggested eliminating reference to
“procedures set forth in this standard” since there are no references to “procedures” in the
standard. The committee made no change in the wording since this is standard wording for
this section used in other ASOPs.
Appendix 1. Background and Current Practices
One commentator stated that under current practice the term “changing times” in the last line
might more appropriately be called “current or changed times.” The committee believes the
current wording is appropriate.
Another commentator suggested adding reference to the NAIC Statutory Reserve Guidance
Manual in the appendix. The committee decided that such reference was not appropriate for
this appendix.
23
Actuarial Standard
of Practice
No. 6
Measuring Retiree Group Benefit Obligations
Revised Edition
Developed by the
Task Force on Retiree Group Benefits of the
Adopted by the
December 2001
(Doc. No. 084)

TABLE OF CONTENTS
Transmittal Memorandum v

1.1 Purpose 1
1.2 Scope 1
2.2 Adverse Selection 2
2.3 Contingent Participant 2
2.4 Contributions 2
2.5 Cost Allocation Policy 2
2.6 Covered Population 2
2.7 Dedicated Assets 3
2.8 Dependents 3
2.10 Measurement Period 3
2.11 Medicare-Eligible Participant 3
2.12 Medicare Integration 3
2.13 Normative Database 3
2.14 Participant 3
2.15 Retiree Group Benefits 3
2.16 Spouse 3
2.17 Stop-Loss Coverage 4
2.18 Survivor 4
2.19 Trend 4

3.1 General Overview 4
3.2 Modeling Plan Provisions 5
3.2.1 Components of the Modeled Plan 5
3.2.2 Historical Practices 6
3.2.3 Reviewing the Modeled Plan 7
3.2.4 Measurement Results by Category 7
3.3 Modeling the Covered Population 7
3.3.1 Census Data 7
3.3.2 Employees Currently Not Accruing Benefits 8
3.3.3 Contingent Participants 8
3.3.4 Spouses and Survivors of Participants 8
3.3.5 Dependents 8
ii
3.3.6 Appropriateness of Pension Plan Data 8
3.3.7 Use of Grouping 9
3.4 Modeling Initial Per Capita Health Care Rates 9
3.4.1 Net Aggregate Claims Data 10
3.4.2 Exposure Data 10
3.4.3 Use of Multiple Claims Experience Periods 11
3.4.4 Credibility 11
3.4.5 Use of Premium Rates 11
3.4.6 Impact of Medicare and Other Offsets 12
3.4.7 Age-Specific Claims Rates 12
3.4.8 Adjustment for Plan Design Changes 12
3.4.9 Adjustment for Administrative Practices 12
3.4.10 Adjustment for Large Individual Claims 13
3.4.11 Adjustment for Trend 13
3.4.12 Adjustment When Plan Sponsor is Also a Provider 13
3.4.13 Use of Other Modeling Techniques 13
3.4.14 Administrative Expenses 13
3.5 Modeling the Cost of Death Benefits 14
3.6 Model Consistency and Data Quality 14
3.6.1 Coverage and Classification Data 14
3.6.2 Consistency 14
3.6.3 Sources of Data 15
3.6.4 Reliance on Data Supplied by Others 16
3.7 Administrative Inconsistencies 16
3.8 Projection Assumptions 16
3.8.1 Economic Assumptions 16
3.8.2 Demographic Assumptions 18
3.8.3 Coverage Assumptions 19
3.8.4 Effect of Plan Changes on Assumptions 20
3.8.5 Assumptions Considered Individually and in Relation to Other Assumptions 21
3.8.6 Reviewing Assumptions 21
3.8.7 Changes in Assumptions 21
3.9 Selecting a Cost Allocation Policy 21
3.9.1 Criteria for Acceptable Actuarial Cost Methods 21
3.9.2 Dedicated Assets 22
3.9.3 Amortization Methods 22
3.9.4 Cash Flow Adequacy 22
3.10 Use of Roll-Forward Techniques 23
3.10.1 Full and Partial Roll-Forward 23
3.10.2 Limitation 23
3.10.3 Appropriateness 23
3.10.4 Disclosure 23
3.11 Prescribed Assumptions, Cost Allocation Policies, or Other Model Components 23
3.12 Reasonableness of Results 23
3.12.1 Modeled Cash Flows Compared to Recent Experience 23
3.12.2 Results Compared to Last Measurement 24
iii
3.13 Sensitivity of Results to Chosen Assumptions 24
3.14 Reliance on a Collaborating Actuary 24

4.2 Disclosure 25
APPENDIXES

Background 26
Appendix 2—Supplementary Information 29

Normative Databases 29
Measurements Using Premium Rates 29
Health Care Trend Rate 30
Interaction Between Trend and Plan Provisions 31
Participant Contributions 32
Assets 33
Compliance with Other Requirements 34
iv
March 2001

Actuarial Standards Board and Other Persons Interested in Measuring Retiree
Group Benefit Obligations
This booklet contains the final version of the revision of ASOP No. 6. The original title,
Measuring and Allocating Present Values of Retiree Health Care and Death Benefits, has been
changed to Measuring Retiree Group Benefit Obligations. This standard supersedes Actuarial
Compliance Guideline (ACG) No. 3, For Statement of Financial Accounting Standards No. 106,
Employers’ Accounting for Postretirement Benefits Other Than Pensions, which has been
repealed.
Background
The original ASOP No. 6 was effective October 17, 1988. ACG No. 3 was originally effective
December 1, 1992. During the time these documents were being developed, the Financial
Accounting Standards Board was raising the visibility of financial issues related to retiree group
benefits with its development of Statement of Financial Accounting Standard (SFAS) No. 106,
Employers’ Accounting for Postretirement Benefits Other Than Pensions. Prior to the issuance of
SFAS No. 106, most plan sponsors provided and accounted for retiree group benefits on a pay-
as-you-go basis. The move to accrual accounting necessitated greater actuarial involvement.
ASOP No. 6 and ACG No. 3 were written with a high level of educational content because the
measurement of retiree group benefit obligations was an emerging practice area that would be
new to many actuaries.
In the 1990s, the ASB adopted standards related to data quality (ASOP No. 23), credibility
procedures (ASOP No. 25), documentation in health benefit plan ratemaking (ASOP No. 31),
and the selection of pension assumptions (ASOP Nos. 27 and 35). As provided in this ASOP,
these other ASOPs have application to actuaries measuring retiree group benefit obligations.
Although the measurement of retiree group benefit obligations continues to develop as an

actuarial field within the profession, the ASB believes that practice in this field has developed
sufficiently to permit codification of acceptable current practices in a revised ASOP No. 6. Thus,
in 1999, the ASB convened a special task force of knowledgeable practitioners in the retiree
group benefits field to draft the revision of this standard. The Task Force on Retiree Group
Benefits was charged with (1) updating ASOP No. 6 to provide guidance to actuaries regarding
acceptable practices and to reduce the amount of educational material; (2) determining whether
there was a continuing need for ACG No. 3; and (3) evaluating the applicability to retiree group
benefits of ASOPs written since the original adoption of ASOP No. 6.
v
Key Issues
As discussed in the exposure draft, this standard not only replaces the previous ASOP No. 6, but
also supersedes ACG No. 3. In addition, this revised standard represents the following changes
from the original ASOP No. 6:
1. This standard uses a model-building approach to the measurement of retiree group benefit
obligations, as representative of contemporary practice.
2. The measurement model described in this standard includes the following three key
components:
a. the modeled plan provisions;
b. the modeled population expected to receive retiree group benefits; and
c. the model of current and projected benefit costs.
3. The standard requires that each of these three components be appropriately developed so
as to sustain the integrity of the measurement. This generally requires the following:
a. expertise in both the development of health care claims rates and the long-term
projection of the covered population; and
b. exclusion of very simplified methods or assumptions used in modeling complex

plans and processes.
4. The standard emphasizes the use of the plan’s experience for health care measurements,
but allows for the use of appropriately adjusted premium rates or normative claim
databases when the plan’s experience is not fully credible.
5. The standard requires the actuary(s) issuing the actuarial opinion to take professional
responsibility for overall appropriateness of the analysis, assumptions, and results.
6. The standard requires the actuary to use appropriate age bands if the claim rates are
expected to vary significantly by age.
7. The standard allows the use of roll-forward measurement techniques to measurement

dates that are less than three years after the original measurement date.
8. The standard places increased emphasis on the modeling of participant contributions in

retiree group benefit measurements.
vi
9. The standard calls for the application of ASOP Nos. 25, 27, 31, and 35 to the
measurement of retiree group benefits.
10. The standard requires the actuary to compare projected claims to recent actual claims.
11. The standard includes guidance on the handling of differences between actual
administrative practices and stated plan provisions.
12. The standard places increased emphasis on considering expected changes in plan design
and covered population.
13. The standard requires the actuary to consider using different trend assumptions by line of
coverage.
Exposure Draft
The exposure draft of this standard was issued in October 2000 with a comment deadline of
March 31, 2001. The Task Force on Retiree Group Benefits carefully considered the twenty-two
comment letters received. For a summary of the substantive issues contained in these comment
letters, please see appendix 3.
The changes since the exposure draft that were incorporated into this standard include the
following significant items:
1. The language regarding the appropriateness of the use of premium rates in setting the
initial per capita claim rates was changed to allow more flexibility in using this approach,
and the material on premium rates in appendix 2 was revised.
2. The requirement to use five-year age bands in the initial per capita health care rate was
replaced by a more flexible requirement.
3. The language regarding the actuary’s responsibility when actual administrative practices
are not consistent with stated plan procedures was clarified to remove any apparent
burden on the actuary to audit administrative practices.
4. The effective date of the standard was clarified, especially with respect to roll-forward
measurements.
5. Several subsections of section 3 regarding the use of roll-forward techniques and the use
of prescribed assumptions, methods, and other model components were moved to
different areas of section 3.
The task force thanks all those who commented on the exposure draft. The task force also thanks
John Stenson for his assistance during the drafting of this standard.
vii
Task Force on Retiree Group Benefits
Carl D. Smith, Chairperson

Barbara S. Bald Jeffrey P. Petertil
Joseph K. Beeler Adam J. Reese
Richard F. Fisher Dale H. Yamamoto

David G. Hartman Michael A. LaMonica
Ken W. Hartwell Heidi Rackley
Roland E. King James R. Swenson
William C. Koenig Robert E. Wilcox
viii
MEASURING RETIREE GROUP BENEFIT OBLIGATIONS

when measuring obligations under a retiree group benefits plan.
1.2 Scope—This standard applies to actuaries when measuring any type of retiree group
benefit obligation. Included in the scope of this standard are measurements made for the
following purposes:
a. financial reporting, such as measurements made for purposes of compliance with

SFAS No. 106;
b. cash-flow analyses;
c. plan funding, including the determination of participant contributions when such

contributions are based on expected retiree group benefit costs;
d. cost projections, including those made in conjunction with establishing or

modifying the plan’s design; and
e. determinations of actuarial present values.
This standard highlights health and death benefits because they are the most common
forms of retiree group benefits. This standard can provide guidance in situations
involving other types of benefits, but does not apply to measurements of pension
obligations or social insurance programs.
Throughout this standard, any reference to selecting assumptions, selecting a cost

allocation policy, or to modeling also includes giving advice on selecting assumptions,
selecting a cost allocation policy, or modeling. For instance, the actuary may advise the
plan sponsor on selecting assumptions for Statement of Financial Accounting Standards
(SFAS) No. 106, but the plan sponsor is ultimately responsible for selecting these
assumptions. This standard applies to the actuarial advice given in such situations, within
the constraints imposed by the relevant accounting standards.
If applicable law, regulation, or accounting standards contain requirements for a

measurement of retiree group benefit obligations that conflict with this standard, the
1
actuary should comply with the requirements of such applicable law, regulation, or
accounting standards. Compliance with such applicable law, regulation, or accounting
standards is not considered to be a deviation from this standard, provided the actuary
discloses that the measurement was performed in compliance with applicable law,
regulation, or accounting standards. Most of the current applicable laws, regulations, or
accounting standards that may apply to specific measurements of retiree group benefit
obligations are listed in appendix 2 under “Compliance with Other Requirements.”
1.4 Effective Date—This standard will be effective for measurements of retiree group benefit
obligations with measurement dates on or after January 1, 2003 or, if roll-forward
techniques are used, three years after the last full measurement before January 1, 2003.
The definitions below are defined for use in this actuarial standard of practice.
2.1 Actuarial Cost Method—A procedure for allocating the actuarial present value of future
plan costs over time periods.
2.2 Adverse Selection—The actions of plan participants who are motivated directly or
indirectly to take financial advantage of plan provisions, such as the choice of plan.
2.3 Contingent Participant—An individual who is not currently a participant but who may
reasonably be expected to become a participant through his or her future action.
2.4 Contributions—A payment made by a participant to support a retiree group benefit plan.
While plan sponsors and employers will contribute funds to subsidize retiree group
benefits, in this standard contributions refer to periodic payments required from
participants for their plan coverage.
2.5 Cost Allocation Policy—An actuarial cost method combined with defined procedures to
account for plan assets (if any) and amortization of changes in plan obligations (such as
those arising from plan changes, experience gains and losses, assumption changes, or
changes in actuarial cost methods).
2.6 Covered Population—Active and retired participants, participating spouses and surviving
spouses of participants who are eligible for benefit coverage under a retiree group benefit
plan. The covered population may also include dependents and contingent participants.
2
2.7 Dedicated Assets—Assets designated by the plan sponsor for the exclusive purpose of
satisfying the retiree group benefit obligations.
2.8 Dependents—Individuals, other than spouses, who are covered under a retiree group
benefits plan by virtue of their relationship to a participating employee or retiree.
2.9 Measurement Date—The date as of which the retiree group benefit obligation is
determined (sometimes referred to as the valuation date).
2.10 Measurement Period—The period subsequent to the measurement date during which the
chosen assumptions or other model components apply.
2.11 Medicare-Eligible Participant—A participating individual who is entitled to Medicare

benefits.
2.12 Medicare Integration—The approach to determining the portion of a Medicare-eligible

claim that is paid by the plan, after adjustment for Medicare reimbursements for the same
claim. Types of Medicare integration include the following:
a. Full Coordination of Benefits (Full COB)—The plan pays the difference between
total eligible charges and the Medicare reimbursement amount, or the amount it
would have paid in the absence of Medicare, if less.
b. Exclusion—The plan applies its normal reimbursement formula to the amount

remaining after Medicare reimbursements have been deducted from total eligible
charges.
c. Carve-Out—The plan applies its normal reimbursement formula to the total

eligible charges, then subtracts the amount of Medicare reimbursement.
2.13 Normative Database—Data compiled from sources that are expected to be typical of the
retiree group benefit plan, rather than from plan-specific experience. Examples of
normative databases include published mortality and disability tables, proprietary
premium rate manuals, and experience on similar retiree group benefit plans.
2.14 Participant—An individual who (a) is currently receiving benefit coverage under a retiree
group benefit plan, or (b) is reasonably expected to receive benefit coverage under a
retiree group benefit plan upon satisfying the plan’s eligibility and participation
requirements.
2.15 Retiree Group Benefits—Health, death, and other benefits (excluding retirement income
benefits) that are provided during retirement to a group of individuals, on account of an
employment relationship.
2.16 Spouse—A husband, wife, or domestic partner eligible for retiree group benefits.
3
2.17 Stop-Loss Coverage—Insurance protection providing reimbursement of all or a portion
of claims in excess of a stated amount. Stop-loss coverage may be either individual or
aggregate (sometimes referred to as excess loss coverage).
2.18 Survivor—A spouse or dependent who continues as a participant under the retiree group
benefit plan following the death of a participating employee or retiree.
2.19 Trend—A measure of a rate of change, over time, of the per capita health care rates.
3.1 General Overview—When measuring retiree group benefit obligations, the actuary
should do the following:
a. develop a model that represents the following:
1. known plan provisions as they currently exist and as they are anticipated
in the measurement period (see section 3.2);
2. the population covered by the benefits in question, which should reflect

the current population and the anticipated population in the measurement
period (see section 3.3); and
3. current and projected benefit costs (see sections 3.4 and 3.5).
b. evaluate the quality and consistency of data used in construction of the model, and
make appropriate adjustments (see section 3.6);
c. identify any significant administrative inconsistencies and make appropriate

adjustments in the model or disclose the unresolved inconsistency (see section
3.7);
d. select projection assumptions in addition to the assumptions developed as part of

step (a) above (see section 3.8);
e. measure the obligations and, when allocating costs to time periods, use an
appropriate cost allocation policy (see section 3.9); and
f. review and test the results of the calculations (see sections 3.12 and 3.13).
Additionally, the standard contains guidance on using roll-forward techniques (see

section 3.10), using prescribed assumptions, methods, or other model components (see
section 3.11), and reliance on a collaborating actuary (see section 3.14).
4
Retiree health cost projections generally can be expected to vary within a large range of
reasonableness. Notwithstanding the variability of reasonable results, the actuary should
select each element of the model to sustain the integrity of the measurement.
3.2 Modeling Plan Provisions—In modeling the known provisions of the plan, the actuary
should give appropriate consideration to the written plan documents, historical practices,
administrative practices of the plan sponsor, governmental programs, communications to
participants, and, depending on the purpose of the measurement, plan sponsor decisions
and expected future benefit plan designs, as described in sections 3.2.1 and 3.2.2 below.
3.2.1 Components of the Modeled Plan—The actuary should incorporate the significant
elements of the known plan provisions into the model. The major components of
the modeled plan include, but are not limited to, covered benefits; benefit
limitations, exclusions, and cost-sharing provisions; participant contributions;
health care delivery system attributes; and optional benefits. In some cases, it may
also be appropriate to consider future changes and limits on plan sponsor costs.
These considerations are discussed in more detail below.
a. Covered Benefits—Covered benefits may include reimbursements for

covered services, fixed-dollar payments for covered events (such as death
benefits), and other monetary benefits (such as Medicare premiums or
defined dollar benefits).
b. Benefit Limitations, Exclusions, and Cost-Sharing Provisions—Benefit

limitations and exclusions (such as a lifetime maximum benefit in a
medical plan) may affect plan payments, and such effects will change over
time. The actuary should also consider participant cost-sharing provisions
(such as deductibles, copayments, coinsurance, and out-of-pocket limits).
c. Participant Contributions—Many plans require contributions from

participants as a condition for their continued eligibility for plan coverage.
The actuary should reflect the participant contributions in the model, as
discussed below. In addition, participant contributions may affect both
participation rates and adverse selection, thus affecting per capita claim
rates.
1. Contribution Formula—In modeling the plan, the actuary should

reflect actual contribution levels. There is a wide variation in how
plan sponsors determine participant contributions (examples
include flat amounts, amounts based on credited service at
retirement, amounts based on retiree claims costs, and amounts
based on combined active and retiree costs).
2. Contribution Reasonableness—The actuary should compare for

reasonableness the stated basis for participant contributions to what
5
has been implemented. See section 3.7, Administrative
Inconsistencies, for further guidance.
3. Preretirement Active Employee Contributions—A plan may

require preretirement contributions from active employees for
them to earn eligibility for retiree group benefits. The actuary
should consider how this may affect future benefit eligibility and
plan sponsor costs.
4. Contributions as Defined by Limits on Plan Sponsor Costs—Some

plans place an upper limit on the plan sponsor cost by designating
a maximum average per capita amount to be paid in a year (these
limits are commonly known as “caps”). Other plans limit total plan
sponsor cost in any current or future period. The actuary should
consider whether the limits will have a significant impact on the
obligation. The actuary should consider how the plan sponsor is
expected to implement these limits, when these limits are expected
to be reached, their impact on participant contributions, and, thus,
future participation, and, if appropriate, incorporate these limits
into the modeled plan.
d. Health Care Delivery System Attributes—The actuary should consider

that various health care delivery system attributes can affect costs
differently. For example, certain delivery systems may “lock in” costs for
an extended period of time because of their provider contracts.
e. Optional Benefits—The actuary should consider the effect of optional

benefits. Optional benefits include coverage options (for example, choice
of medical plans) and additional coverages (for example, contributory
dental coverage). Optional benefits may require participant contributions,
but also incur plan sponsor costs.
f. Anticipated Future Changes—After discussion with the plan sponsor, and

depending upon the purpose of the measurement, the actuary may take
into account future changes that the plan sponsor has represented an
intention to implement or that are required by law to be implemented
within a specified period. However, for some purposes, such as for
compliance with SFAS No. 106, the actuary may consider only changes
that have been communicated to plan participants or that result from the
continuation of a historical pattern.
3.2.2 Historical Practices—When appropriate, the actuary should consider historical

practices of the plan in developing the model. Historical practices include the
following:
6
a. Claims Payment Practices—The actuary should consider whether there is
significant inconsistency between the benefits provided and the plan
sponsor’s representation to the actuary of the terms of the plan. See
section 3.7 for further guidance.
b. Cost-Sharing and Contribution Levels—The actuary should consider the

plan sponsor’s past pattern of cost-sharing and participant contributions.
c. Pattern of Plan Changes—The actuary should consider the plan sponsor’s

past practice or a pattern of regular changes in the retiree group benefit
plan (such as benefits, cost-sharing, and participant contribution levels).
Depending on the purpose of the measurement, the continuation of such
past practices or patterns may warrant inclusion in the model.
d. Governmental Programs—For some purposes, to the extent that the plan

integrates with Medicare and other governmental programs, the actuary
should consider the historically enacted legislative and administrative
policy changes in these programs.
3.2.3 Reviewing the Modeled Plan—For each measurement, the actuary should
consider whether the model continues to reflect actual known plan provisions and
practices. If the administration of the plan has significantly deviated from the plan
as modeled, the actuary should consider whether this deviation is temporary or
should be treated as a permanent plan change.
3.2.4 Measurement Results by Category—The actuary should consider whether the

measurement results may need to be examined by category (for example, medical
vs. dental, union vs. nonunion, retiree vs. spouse; plan paid vs. participant paid;
payments before Medicare eligibility age vs. payments after Medicare eligibility
age). This need may arise from either the nature of the assignment or from
assessing the integrity of the measurement model.
3.3 Modeling the Covered Population—The projected size and demographic composition of
the covered population has a significant impact on the measurement. The actuary should
consider the need to model variations in the covered population (for example, when
benefit eligibility varies by type of coverage). This standard does not require the use of
open group measurements, although such measurements may be used when appropriate.
These issues are discussed below.
3.3.1 Census Data—The actuary should collect sufficient census data in order to make a
reasonable estimate of the obligation. In certain circumstances, grouped data may
be appropriate; in others, individual census data are required. For example, to
ascertain the optional benefits elected by the retiree, the actuary may need to
collect individual census data, including retiree contribution amounts.
7
3.3.2 Employees Currently Not Accruing Benefits—Depending on the purpose of the
measurement, the actuary should consider whether some or all of the employees
currently not accruing service toward retiree group benefit eligibility may accrue
service in the future and whether some or all of the employees currently not
making required preretirement contributions may contribute in the future, and
make appropriate allowance for them in the modeled population.
3.3.3 Contingent Participants—The actuary should examine the census data and take
appropriate measures to reflect individuals who are not current participants, but
may reasonably be expected to become participants through their future actions.
For example, the actuary may need to make a reentry assumption in situations
where retirees have opted out of coverage at the time of retirement, but may later
reenter the plan.
3.3.4 Spouses and Survivors of Participants—The actuary should include in the

modeled population participating spouses and survivors who are eligible for
coverage. In doing so, the actuary should take into account that the plan’s
eligibility conditions and benefit levels for spouses and survivors may differ from
the plan’s eligibility conditions and benefit levels for retirees. Benefit coverage
for the spouse of a retiree may continue subject to a contribution, continue for a
limited period (for example, until Medicare eligibility or one year after the death
of the retiree), or cease when the retiree dies. The actuary should generally model
spouses separately from retirees because of differences in the timing of Medicare
eligibility and in mortality between the retiree and spouse.
3.3.5 Dependents—The actuary should consider whether the dependent obligation is

significant and, if so, model dependents appropriately. For example, for plans that
have liberal early retirement eligibility conditions, dependent coverage can
significantly increase the overall number of covered individuals and, therefore,
have a significant effect on the size of the covered population.
3.3.6 Appropriateness of Pension Plan Data—Plan sponsors who do not maintain

separate retiree group benefit plan databases may furnish pension plan data to
represent the retiree group benefit plan covered population. In such cases, the
actuary should make appropriate edits and adjustments. Examples of the types of
edits and adjustments that may be required are discussed below.
a. Retirees Covered for Retiree Group Benefits but Not Receiving Pension
Benefits—Employees may be participants in the retiree group benefits
plan, but may no longer be participants in the pension plan (such as
employees who received lump-sum pension payments). Spouses,
dependents, and survivors of retirees may be eligible for retiree group
benefits, but may not be in the pension plan census data.
b. Retirees Receiving Pension Benefits but Not Covered for Retiree Group
Benefits—Employees may be participants in the pension plan, but may not
8
be covered for retiree group benefits (such as employees who terminated
with vested pension benefits now in payment status). Employees may be
eligible for pension benefits upon retirement or disability, but may not
satisfy the eligibility conditions or may have waived coverage for retiree
group benefits.
c. Provisions Affecting Certain Employees—The pension plan may be

frozen for a certain group of employees or may exclude employees due to
age or service eligibility requirements, which might not affect their
eligibility for other retiree group benefits.
3.3.7 Use of Grouping—The actuary may use grouping techniques when, in the
actuary’s judgment, grouping is not expected to unreasonably affect the
measurement results. One such technique is to group participants based on
common demographic characteristics (for example, age and service), where the
obligation for each participant in the group is expected to be similar for
commonly grouped individuals.
Another technique is to group plans with similar expected costs and features. A
plan sponsor with multiple plan designs (for example, through various collective
bargaining agreements) may not require separate measurement for each individual
plan. Under such circumstances, the actuary, after evaluating the eligibility
conditions and range of benefits provided, may decide it is appropriate to combine
plans that have similar expected costs and group the covered populations of those
plans. The actuary should disclose such combining of plans and grouping of
populations.
3.4 Modeling Initial Per Capita Health Care Rates—The actuary should develop assumed per
capita health care rates to be the basis of the initial annual benefit costs for estimating the
future health care obligations. The accuracy of the measurement model depends in large
part on its ability to forecast annual claims costs for the plan. In the actuarial
development of health care rates, plan experience is generally considered the best
predictor of future claims experience, preferable to sole reliance on normative claims
databases or other measures. Therefore, preferred methods involve development of
annual per capita health care rates from the claim experience of the retiree group benefit
plan. In the absence of credible retiree group benefit plan experience data, the actuary
may use other methods (such as methods that use premium rates and normative claims
databases) to develop the per capita rates.
The ratemaking process generally involves (a) quantifying aggregate claims costs; (b)
quantifying a measure of exposure to risk, usually the count of participants who were
eligible for the plan during the period the claims were incurred; and (c) applying other
information such as normative databases and premium rates as appropriate.
Multiple initial per capita health care rates may be appropriate due to the modeling of
known plan provisions (section 3.2) and covered population (section 3.3) as well as
9
claims experience (for example, different rates by gender, healthy vs. disabled, retirees
vs. spouses or dependents).
The actuary should document the methods and procedures followed in developing the
initial per capita health care rates, such that another actuary qualified in this practice area
could assess the reasonableness of the initial per capita health care rates. The actuary
should also document any significant actuarial judgments applied during the modeling
process. ASOP No. 31, Documentation in Health Benefit Plan Ratemaking, provides
relevant guidance to the actuary.
The sections that follow address aspects of ratemaking that are particularly important
when projecting benefit costs for a long period. The actuary should consider the
following elements, but is not required to include all these elements in the model.
3.4.1 Net Aggregate Claims Data—In most cases, the actuary’s objective is the
development of a net incurred claims rate. The actuary should, however,
recognize the factors involved in distinguishing net claims from gross claims and
incurred claims from paid claims, as discussed below.
a. Paid Claims—Aggregate claims data received by the actuary will usually

be grouped by the dates of payment, not by the dates on which claims
were incurred. The actuary should analyze the data for the likely
difference between the level of paid claims for a period and the level of
incurred claims for the same period. When the differences are significant,
the actuary should make an adjustment, either to the historical paid claims
or to the initial claims assumption, to account for the likely future level of
claims activity. To the extent the difference may be due to the trend or the
time value of money, the significance of the difference to the measurement
of retiree group benefit obligations may be reduced, because the plan
sponsor will usually have the use of the money between the time a claim is
incurred and when it is paid.
b. Gross Claim Components—Aggregate claims data received by the actuary

may show only net payments or may include cost-sharing components
(such as deductibles and copayments), reimbursements, costs not covered,
or other elements of gross claims. The actuary may determine the initial
claims rate assumption from the net payments or the gross amounts.
3.4.2 Exposure Data—In developing an initial per capita health care rate, the actuary
should obtain exposure data for the same time periods as the claims experience
data that will be used. Since exposure data are historical in nature, the exposure
data typically will be different from the census data used in modeling the future
covered population. If the differences are significant, the actuary should review
the data sets for consistency (see section 3.6).
10
It may be appropriate to segment the exposure data by age and gender or by
retiree, spouse, or dependent. The actuary should obtain information to properly
segment the population or employ reasonable assumptions as appropriate.
3.4.3 Use of Multiple Claims Experience Periods—The actuary should consider the use
of multiple claims experience periods and adjust the experience of the various
periods to comparable bases as described in sections 3.4.8, 3.4.10, and 3.4.11.
When combining multiple experience periods, the actuary should consider the
applicability of each period based upon elapsed time and changes required to
adjust to comparable bases.
The actuary may consider smoothing the results to account for historical
irregularities. The actuary may weight the experience periods as appropriate.
3.4.4 Credibility—There will be times when plan data are not available or wholly
credible. In those instances, the actuary should make use of relevant normative
databases or active plan experience on the same group, adjusted for age and
expected differences in such items as utilization and plan design. The actuary may
use these supplementary data and professional judgment to validate, adjust, or
replace the plan experience data.
ASOP No. 25, Credibility Procedures Applicable to Accident and Health, Group
Term Life, and Property/Casualty Coverages, provides guidance to the actuary
when assigning credibility to sets of experience data.
3.4.5 Use of Premium Rates—Although an analysis of the plan sponsor’s actual claims
experience is preferable, the actuary may use premium rates as the basis for initial
per capita health care rates, with appropriate analysis and adjustment for the
premium rate basis. The actuary who uses premium rates for this purpose should
adjust them for changes in benefit levels, covered population, or program
administration. The actuary should consider that the actual cost of health
insurance varies by age (see section 3.4.7), but the premium rates paid by the plan
sponsor may not. For example, the actuary may use a single unadjusted premium
rate applicable to both active employees and non-Medicare-eligible retirees if the
actuary has determined that the insurer would offer the same premium rate if only
non-Medicare-eligible retirees were covered.
If, in the actuary’s professional judgment, the unadjusted premium rate

significantly understates or overstates the expected claim cost for retirees, the
actuary should disclose this possibility in any communication regarding a
measurement using an unadjusted premium rate as an initial per capita health care
rate.
If premium rates, adjusted or unadjusted, are used as the basis for initial per capita
rates in the measurement, the actuary should make an appropriate disclosure and
consider the factors described in other sections of 3.4.
11
3.4.6 Impact of Medicare and Other Offsets—Where Medicare as the primary payer has
a significant impact on the per capita health care rates, the actuary should develop
separate rates for Medicare-eligible participants. Such rates should reflect the
plan’s Medicare integration approach or how the plan supplements Medicare. The
actuary should also adjust for other offsets, such as workers’ compensation and
auto insurance, if their impact is considered to be significant.
The actuary should consider whether there is a significant inconsistency between

the Medicare integration approach being applied by the claims administrator and
the plan sponsor’s representation to the actuary of the terms of the plan. See
section 3.7 for further guidance.
Medicare and other governmental programs are subject to continual legislative

revisions. The actuary should be aware of significant changes and make
adjustments as necessary to fit the purposes of the measurement.
3.4.7 Age-Specific Claims Rates—The actuary should consider the variation in rates by
age for the benefits being modeled and use appropriate age bands if the rates vary
significantly. The age bands should not be overly broad, based on the expected
rate variations within the bands. If rates vary significantly by age, it is
inappropriate to assume a single per capita rate that does not vary by age. The
relationship between the rates at various ages is an actuarial assumption that may
be based on normative databases.
3.4.8 Adjustment for Plan Design Changes—The actuary should adjust the claims rates
to reflect significant differences, if any, between the benefit plan designs in effect
for the experience period and those in effect during the initial year of the
measurement period.
3.4.9 Adjustment for Administrative Practices—Changes in plan administrative

practices affect how costs emerge. The actuary should make appropriate
provisions in the model for changes in administrative matters such as the
following:
a. Claims Adjudication—The actuary should consider how overall costs and

utilization rates may be influenced by the method by which enrollees and
providers submit claims (for example, provider electronic submission vs.
enrollee paper submission of claims) and the manner in which claims are
reviewed.
b. Enrollment Practices—The actuary should consider the effect enrollment

practices (for example, the ability of participants to drop in and out of the
plan) have had on participation and health care costs.
12
3.4.10 Adjustment for Large Individual Claims—The actuary should recognize the
significance that large claims may have with respect to claims experience and
make appropriate adjustments. The actuary should review the frequency and size
of large claims when data are available and consider whether the prevalence of
large claims is expected to be significantly different in the future. Future periods
may have a higher or lower incidence of such claims than past experience periods
under examination. The actuary should review both stop-loss coverage and other
large claims, as described below.
a. Stop-Loss Coverage—The actuary should consider the financial impact of

stop-loss insurance in all projections.
b. Other Large Claims—The actuary should also consider large claims that
may be below the stop-loss coverage level.
3.4.11 Adjustment for Trend—When adjusting earlier claim period experience to the
initial year of the measurement, the actuary should reflect the effect of past trend.
An adjustment of the initial per capita health care rate to reflect recent past trends
may include experience from outside the plan.
The actuary should consider using separate historical trend rates for major cost
components (for example, hospital, physician, drug costs, and plan
administration).
3.4.12 Adjustment When Plan Sponsor is Also a Provider—The retiree group benefits
plan sponsor may also be a provider under the plan, as may happen in cases where
the plan sponsor is a hospital, medical office, clinic, or other health care provider.
In these situations, the plan sponsor pays itself, in effect, for services it provides
its own members. Therefore, the actuary should analyze the charges incurred and
reimbursements received by the plan sponsor-provider and make appropriate
adjustments in the measurement model to properly reflect the underlying
transactions.
3.4.13 Use of Other Modeling Techniques—Health care costs may be modeled and
projected using techniques in addition to those mentioned above. When using an
alternative approach, the actuary should disclose the method used and comment
on its applicability. Examples of alternative approaches include models that
project a distribution of expected claims with an associated probability
distribution and models that assign different claims costs for the last year of life.
3.4.14 Administrative Expenses—In addition to the cost of claims, the plan sponsor is
usually responsible for the cost of administering the retiree group benefit plan.
The actuary should consider administrative expenses when performing the
measurement. The actuary may model administrative expenses in various ways.
For example, administrative expenses may be included in claims rates or
expressed on a per capita basis, as a percentage of claims, or as fixed amounts.
13
3.5 Modeling the Cost of Death Benefits—Death benefits may be provided directly by the
plan sponsor upon the death of a retiree or may be paid by an insurance company through
a life insurance program. The life insurance program may be either participating or
nonparticipating with respect to policy dividends. The modeled death benefit cost should
appropriately reflect the financial arrangement through which the benefits are provided,
including dividends, retiree contributions, carrier administrative expenses, and risk
charges.
When selecting assumptions and measurement methods regarding death benefits, the
actuary should consider that the actual cost of life insurance varies by age, but the
insurance rates paid by the plan sponsor may not. The actuary should reflect appropriate
costs by age in the projection model.
3.6 Model Consistency and Data Quality—Before proceeding with the measurement, the
actuary should review the modeled plan provisions, covered population, per capita health
care rates, and death benefit costs as a whole to evaluate their consistency. The actuary
should evaluate the relevancy of any data received and the significance of all data used
for actuarial purposes. ASOP No. 23, Data Quality, provides guidance on selecting and
reviewing data and making appropriate disclosures regarding the data. Additional data
quality requirements that are particularly applicable to the retiree group benefit area are
mentioned below.
3.6.1 Coverage and Classification Data—The actuary should consider the importance
of coverage distinctions (such as HMO vs. indemnity plans) and classification
distinctions (such as hourly vs. salaried, or benefits that vary among different
groups of retirees) that result in variations in the benefit availability among
participants. The actuary should consider whether such differences are significant
enough to require further refinement of the model. The actuary should document
the coverage and classification distinctions incorporated in the model.
3.6.2 Consistency—If the actuary finds data elements that appear to be significantly
inconsistent with known plan provisions, other data elements, or data used for
prior measurements, the actuary should take appropriate steps to address such
apparent inconsistencies before proceeding with the measurement, as discussed
below. To the extent that significant inconsistencies cannot be reconciled, the
actuary should disclose them.
a. Plan Operations—The actuary should determine whether eligibility and

payment data received conflict significantly with information received
about known plan provisions or administration. See section 3.7 for further
guidance. Examples of inconsistencies include the following:
1. Average claims costs that are secondary to Medicare are very high
in relation to average costs that are primary. This might reveal that
the carve-out method of integration with Medicare may not have
14
been used, despite the sponsor’s indication of that method, or that
the classification of the covered spouse is based on the retiree’s
age.
2. Individual contribution amounts for participation before Medicare

eligibility are so low as to make it unlikely that plan sponsor
subsidies are as limited as the sponsor may indicate.
3. The ratio of spouses to retirees in total or for a subgroup (for

instance, those who are not eligible for Medicare) is inconsistent
with expectations. This might mean that it is unlikely surviving
spouse coverage is as stated, that coding of spouse ages is
inaccurate, or that survivors were coded as “retirees.”
4. Known plan provisions include benefit maximums, but the

actuary’s analysis of claims data indicates a likelihood that claims
are in excess of the maximum.
b. Medicare-Related Data—Data concerning Medicare eligibility and age

may be inaccurately and inconsistently coded for both claims and covered
population. The actuary should make and document any appropriate
adjustments in this regard.
c. Demographic Distinctions—The actuary should consider demographic

breakdowns (such as age, gender, geography, and hourly/salaried
classifications), which may reveal results that are inconsistent with prior
data or the actuary’s prior expectations.
d. Data for Spouses, Survivors, and Dependents—The actuary should

scrutinize coverage and classification information for spouses and
survivors and, if significant, for dependents, with as much care as for
employees and retirees due to the significant impact they may have on the
results of the measurement.
3.6.3 Sources of Data—The actuary should consider the various types and sources of
data available for the covered population, for the coverage and classification of
participants, and for benefit costs, as discussed below.
a. Census Data—In most cases, the plan sponsor or administrator will supply
the eligibility and demographic information about participants in the plan.
A participant census used for underwriting or pension purposes may
contain useful information about the covered population. The actuary
should determine whether these sources represent plan participation with
sufficient accuracy (see sections 3.3.6 and 3.4.2) and, if not, seek more
accurate census information.
15
b. Claims Payment Data—Various sources of data are available for
establishing per capita rates, including normative claims databases and
experience data specific to the plan sponsor. The actuary should review
plan experience relative to normative ranges of value, but also recognize
the legitimacy of plan sponsor experience, to the extent it is credible, and
the limitations of applying normative data to an unrelated situation. ASOP
No. 25 provides guidance in the assignment of credibility values to data.
c. Data Quality at Each Level of Usage—Data that may be of appropriate

quality for determination of certain assumptions within a model may not
be of appropriate quality for determination of other assumptions. When
data are combined or separated, the actuary should review the data for
suitability to the purpose. For example, data from an individual employer
may be sufficient for setting an aggregate per capita health care rate, but
not be of sufficient size to set per capita health care rates by location.
3.6.4 Reliance on Data Supplied by Others—ASOP No. 23 provides guidance

regarding the use, review, and disclosure of reliance on data supplied by others.
3.7 Administrative Inconsistencies—In the course of performing the measurement, the

actuary may find that the plan is being administered in a manner that is inconsistent with
the plan documents, stated plan sponsor policies, or participant communications.
Inconsistencies most often arise with respect to participant contribution determination
(see section 3.2.1(c)(2)), claims payment practices (see section 3.2.2(a)), Medicare
integration (see section 3.4.6), and plan operations (see section 3.6.2(a)). When the
actuary becomes aware of a significant inconsistency between administrative practice and
plan documents, stated plan sponsor policies, or participant communications, the actuary
should do the following:
a. discuss the inconsistency with the plan sponsor or administrator;
b. adjust the model appropriately, consistent with the purposes of the measurement
(in making these adjustments, the actuary may rely on the plan sponsor’s
representations);
c. document the resulting steps taken by the actuary in developing the model; and
d. disclose any significant unresolved inconsistency.
3.8 Projection Assumptions—In selecting projection assumptions, the actuary should

3.8.1 Economic Assumptions—With respect to any particular measurement, each

economic assumption selected by the actuary should be consistent with every
other economic assumption selected by the actuary to be used over the
measurement period. The actuary should reflect the same general economic
16
inflation component in each of the economic assumptions selected by the actuary.
The relationships among economic assumptions should be reasonable relative to
the underlying economic conditions expected throughout the projection period.
The actuary should comply with the guidance contained in ASOP No. 27,
Selection of Economic Assumptions for Measuring Pension Obligations, when
selecting the inflation assumption, discount rate, investment return assumption,
and compensation scale (when needed for benefits such as life insurance) to be
used in measuring retiree group benefit obligations. In applying ASOP No. 27, the
actuary should take into account the purpose and nature of the measurement, and
the differences between the characteristics of retiree group benefit obligations and
the characteristics of pension benefit obligations. For example, the discount rate
selected for measuring pension benefit obligations for purposes of SFAS No. 87
(Employers’ Accounting for Pensions) may not be appropriate for measuring
retiree group benefit obligations for the purposes of SFAS No. 106, because the
payment patterns may be different.
Economic assumptions not covered by ASOP No. 27 that are typically required
for measuring retiree group benefit obligations include the following:
a. Health Care Cost Trend Rate—The health care cost trend rate reflects the
change in per capita health claims rates over time due to factors such as
medical inflation, utilization, plan design, and technology improvements.
The actuary should consider separate trend rates for major cost
components such as hospital, prescription drugs, other medical services,
Medicare integration, and administrative expenses. Even if the actuary
develops one aggregate trend rate, the actuary should consider these cost
components when developing the rate. The actuary should consider the
following key components in setting the health care cost trend rate:
inflation, medical inflation, definition of covered charges, frequency of
services, leveraging caused by plan design features not explicitly modeled,
and plan participation. The actuary should not consider aging of the
covered population when selecting the trend assumption for projecting
future costs.
b. Other Cost Change Rates—The actuary should consider other costs that
may change in the future, such as the cost of life insurance and long-term
care insurance.
c. Participant Contribution ChangesDepending on the modeled plan, the

measurement may require an assumption for the rate of change in
participant contributions. For some plans, this may be a function of health
care trend rate or other economic assumptions. For some other plans, there
may be no contributions currently but plan limits and assumed trend rates
may make it likely that contributions will be required in future years. In
those cases, and depending upon the purposes of the measurement, the
17
actuary should determine when contributions are expected to be required
during the measurement period, and model subsequent increases
accordingly.
d. Adverse Selection and Changing ParticipationWhen a retiree group

benefits plan requires a contribution as a condition of continued
participation, those choosing to participate may have a higher average
benefit cost than those not participating. When a retiree group benefits
program requires a contribution or offers a choice of plans, it can be
expected that, over time, the process of adverse selection will have an
impact on plan costs.
The actuary should consider whether adverse selection will result from
such items as decreasing participation. Because the impact of any adverse
selection is very difficult to quantify over the long periods customary in a
retiree group benefits measurement, this standard does not require the use
of assumptions about adverse selection in measurement models. But if the
measurement assumptions project a significant decrease in the proportion
of eligible retirees who participate, the actuary should consider an upward
adjustment for adverse selection in per capita health care rates, or,
alternatively, moderate the assumed decrease in participants. The actuary
should document any adjustments made for adverse selection.
3.8.2 Demographic Assumptions—With respect to any particular measurement, each

demographic assumption the actuary selects should be consistent with the other
demographic assumptions the actuary selects. For example, if the mortality
assumption anticipates increasing life spans, the actuary should consider whether
the retirement assumption should reflect the fact that individuals may choose to
retire later because they are healthier or because they may not have sufficient
accumulated savings to afford a lengthened retirement period.
The actuary should comply with ASOP No. 35, Selection of Demographic and
Other Noneconomic Assumptions for Measuring Pension Obligations, when
selecting the retirement, termination, mortality, and disability assumptions to be
used in measuring retiree group benefit obligations. In applying ASOP No. 35, the
actuary should take into account the purpose and nature of the measurement and
the differences between the characteristics of retiree group benefit obligations and
the characteristics of pension benefit obligations. More refined demographic
assumptions may be required to appropriately measure retiree group benefit
obligations than are required to measure pension obligations. In determining
whether demographic assumptions developed primarily for pension benefit
measurements are appropriate for retiree group benefit measurements, the actuary
should consider the following:
a. Assumptions Based on Pension-Liability-Weighted Experience—Pension

plan termination and retirement rates may have been developed based on
18
pension-liability-weighted experience, which will reduce the effect of
participants terminating or retiring with smaller pension benefits. The
actuary should determine whether the pension plan termination and
retirement assumptions are appropriate for retiree group benefit plans and,
if not, modify the assumptions appropriately.
b. Disability—Assumptions regarding disability incidence, recovery,

mortality, and eligibility for Social Security disability benefits should be
consistent with the coverage provided to disabled participants under the
plan. When the actuary considers disabled life coverage significant to the
measurement, the actuary should select assumptions that appropriately
reflect when benefits are payable to disabled participants, the definition of
disability, and how the benefits are coordinated with other programs.
c. Retirement—The retirement assumption is critical in retiree health plan

measurements because of the higher level of primary coverage a retiree
receives prior to becoming eligible for Medicare. The actuary should
select explicit age-related retirement rates. A single average retirement age
is generally not appropriate.
d. Mortality—When the per capita health care rates are expected to increase
during the projection period, the results of the measurement may be
sensitive to the mortality assumption. Because of this sensitivity and the
observation that life expectancies have increased significantly over the
recent past, the actuary should consider reflecting future mortality
improvements. Pension benefit measurements may use unisex mortality
tables. Use of gender-specific mortality tables, however, may be more
appropriate for retiree group benefit measurements, depending on the
levels of retiree, spouse, and surviving spouse benefits as well as the
demographic composition of the covered population.
3.8.3 Coverage Assumptions—In addition to covering eligible retirees, many plans also
cover the spouse and dependents of retirees. Also, plans may offer some or all
participants a choice of coverages such as HMOs, PPOs, and POS plans. The
magnitude of the retiree group benefit obligation can vary significantly as a result
of the coverage assumption. The actuary should therefore consider historical
participation rates and trends in coverage rates when selecting the coverage
assumptions.
a. Plan Participation—For plans that require some form of contribution to

maintain coverage, some eligible individuals may not elect to be covered,
particularly if they have other coverage available. Empirical data on plan
participation, where available and credible, should be considered when
selecting the participation assumption for future retirees. When developing
the participation rates, the actuary should consider how plan eligibility
rules, plan choices, or retiree contribution rates have changed over time.
19
Furthermore, plan participation may be different in the future due to
participants’ response to changes in retiree contribution levels and plan
choices (for example, Medicare+Choice). For plans that anticipate changes
in retiree contributions the actuary should consider the appropriateness of
participation rates that vary over the projection period for both current and
future retirees. The actuary should consider plan eligibility rules governing
dropping coverage and subsequent reenrollment when selecting
participation rates.
b. Spouse and Dependent Coverage—The actuary should consider who is

eligible for coverage under the plan and make appropriate assumptions
regarding the coverage of spouses and dependents. The actuary should
also consider the impact of plan rules governing changes in coverage after
retirement, such as remarriage, if significant. The actuary should review
historical data on spouse and dependent coverage rates when selecting the
assumption to be used in the projection. If the gender mix of future retirees
and retired plan participants differs, the actuary should consider
developing separate spouse coverage rates for males and females.
c. Spouse and Dependent Age—Wherever practical, the actuary should use

actual data for the age of the spouse and dependents of retired participants.
If actual data is not available for all retired participants the actuary should
review the empirical data and develop an appropriate assumption for the
spouse age difference and dependents’ ages. The spouse and dependents
of an active employee today may not be the same spouse and dependents
covered at retirement, therefore the actuary should generally select an
assumed spouse age difference for purposes of projecting future spouse
coverage and assumed dependents’ ages for projecting dependent
coverage.
3.8.4 Effect of Plan Changes on Assumptions—When selecting projection assumptions,

the actuary should consider the impact of relevant plan design changes during the
measurement period. Whenever a plan design change is being modeled, the
actuary should consider whether or not assumptions, which in combination are
appropriate for measuring overall plan costs, are also appropriate for valuing the
element under study. For example, if a plan sponsor adds or advises the actuary of
its intent to add HMO coverage for a portion of its retiree group, the actuary
should consider how that affects the cost of current coverage, future cost trends,
and participation (including changes in coverage between plans).
Assumptions selected for purposes of estimating short-term cost increases or

decreases arising from a plan change may not be appropriate for developing the
long-term cost implications. For example, a change to the contribution level may
change participation in the plan, which may, in turn, have an impact on per capita
health care rates due to adverse selection after the change. A change in benefits or
cost-sharing may have a similar impact for a plan requiring participant
20
contributions. The actuary should exercise professional judgment about the
impact on long-term assumptions, but this standard does not require explicit
assumptions about changing participation rates or adverse selection.
Many plan sponsors have reserved the right to unilaterally change or terminate
their retiree welfare plans. When appropriate for the purpose of the measurement,
the actuary may include assumptions in the measurement model that attempt to
quantify the probability that the current plan will change significantly in the
future, beyond the changes already included in the modeled plan. For example,
the actuary might assume a probability of plan termination or assume a discount
rate with an additional risk premium that implicitly reflects the participants’
financial risk in receiving benefit coverage that is not guaranteed. The actuary
should disclose that such an assumption has been used. Such assumptions are not
appropriate for all measurement purposes. For example, SFAS No. 106 requires
that the actuary assume that the substantive plan will continue indefinitely.
3.8.5 Assumptions Considered Individually and in Relation to Other Assumptions—

The actuary should consider the reasonableness of each actuarial assumption
independently on the basis of its own merits and its consistency with the other
assumptions selected by the actuary. When selecting assumptions, the actuary
should consider the degree of uncertainty, the potential for fluctuation, and the
consequences of such fluctuation.
3.8.6 Reviewing Assumptions—The actuary is not required to do a complete

assumption study at each measurement date. However, at each measurement date
the actuary should consider whether the selected assumptions continue to be
reasonable. If the actuary determines that one or more of the previously selected
assumptions are no longer reasonable, the actuary should select reasonable new
assumptions in accordance with this section.
3.8.7 Changes in Assumptions—Whenever a change in an assumption is considered,

the actuary should review other assumptions to assess whether they remain
consistent with the changed assumption. For example, if the actuary is
anticipating more disabled participants due to recent experience, consideration
should be given to the impact on plan costs of the health risk of this group.
3.9 Selecting a Cost Allocation Policy—When the measurement involves the allocation of an
obligation to different time periods (including measurements that take into account plan
assets, plan amendments, or actuarial gains and losses), the actuary should select a cost
allocation policy, based on the following considerations:
3.9.1 Criteria for Acceptable Actuarial Cost Methods—The actuary should select an
actuarial cost method that meets the following requirements:
a. Limits on Allocation Period—The period over which the allocation is

made for an active participant should begin no earlier than the date of
21
employment and should not extend beyond the last assumed retirement
age. This period may be determined for each participant individually or for
the active participant group as a whole.
b. Reasonableness of Allocation Basis—The allocation basis should be

reasonable and produce an orderly allocation of the actuarial present value
of future plan benefit costs.
3.9.2 Dedicated Assets—In measuring the unfunded obligation and allocating costs to
time periods, the actuary should take into account dedicated plan assets, if any.
a. The actuary should collect data regarding the amounts and types of
dedicated assets held.
b. In general, the actuary should value the dedicated assets using a method
that takes into account market value, unless constrained to use an asset
valuation method prescribed by law or regulation. Asset valuation
methods include market value; market-related methods that smooth out the
effects of short-term volatility in market value; and methods that discount
the future cash flow of the underlying investments. The use of book or
cost value may be prescribed for some specific purposes (for example, in
determining tax on trust income under Section 512 of the Internal Revenue
Code).
c. The actuary should obtain sufficient details regarding insurance polices

held as dedicated assets to determine an appropriate value, reflecting the
nature of the contractual obligations upon early termination of the policies,
as well as the costs of continued maintenance of the policies. If the cash
surrender value of the policies is not readily determinable, the actuary
should rely on his or her professional judgment to develop an appropriate
value, depending on the purpose of the measurement.
3.9.3 Amortization Methods—Unless already reflected in the actuarial cost method, the
actuary should select a reasonable and systematic amortization method to
recognize changes in plan obligations arising from plan amendments (including
plan initiation), actuarial gains and losses, changes in assumptions, or changes in
the actuarial cost method.
3.9.4 Cash Flow Adequacy—Absent regulatory or legal restrictions, where a cost

allocation policy is used to determine funding requirements, the actuary should
select a policy that accumulates assets such that, absent experience losses,
adequate funds are on hand to pay benefits included in the measurement when
due.
Notwithstanding the above criteria, the actuary may be required to use a prescribed cost
allocation policy for a particular purpose (for example, for financial reporting purposes
under SFAS No. 106 the actuary is required to use the Projected Unit Credit Cost Method
22
and a defined approach to recognize changes in obligation arising from plan amendments
and actuarial gains or losses (see section 3.11)).
3.10 Use of Roll-Forward Techniques—The actuary may determine that it is appropriate to

use prior measurement results, using a roll-forward technique, rather than conduct a new
measurement.
3.10.1 Full and Partial Roll-Forward—Roll-forward techniques include full roll-forwards

of both claims and census data, as well as partial roll-forward techniques. For
example, the actuary may use partial roll-forward techniques that use health care
claim rates developed for the prior measurement trended forward to the current
measurement date coupled with updated census data.
3.10.2 Limitation—The actuary may use roll-forward techniques to reduce the frequency
of full measurements. In general, the actuary should not rely on prior
measurement results if the measurement date is three or more years earlier than
the current measurement date. For example, a January 1, 2000 measurement could
be used to develop roll-forward results as of January 1, 2001 and 2002, but should
not be relied upon for measurements or cost allocations after December 31 , 2002.
3.10.3 Appropriateness—Generally, the actuary should not use full roll-forward

techniques when the population, plan design, or other key model component has
changed significantly since the last full measurement.
3.10.4 Disclosure—Whenever the actuary uses a roll-forward technique, the actuary

should disclose such use in the actuarial communication.
3.11 Prescribed Assumptions, Cost Allocation Policies, or Other Model Components—When

the actuary uses assumptions, cost allocation policies, or other model components
prescribed by the plan sponsor or other binding authority, the actuary’s communication
should state the source of the prescribed elements. Examples are the initial per capita
health care rates prescribed by the plan sponsor and the discount rate basis and cost
allocation policy prescribed by SFAS No. 106.
3.12 Reasonableness of Results—The actuary should review the measurement results for
reasonableness. For example, the actuary could compare the overall measurement results
to benchmarks such as measurement of similar plans, or could review the results for
sample participants for reasonableness.
3.12.1 Modeled Cash Flows Compared to Recent Experience—The actuary should

compare the expected claims produced by the model for the first year from the
measurement date to actual claims over a recent period of years. If the expected
and actual claims are significantly different, the actuary should consider the likely
causes of such differences (for example, cost trends, large claims, a change in the
demographics of the group, or the volatility of experience in small plans), and
consider the impact of those differences on the reasonableness of the
measurement results.
23
3.12.2 Results Compared to Last Measurement—The actuary should compare the overall
results to the last measurement’s results when available and applicable. If the
results are significantly different from results the actuary expected based on the
last measurement, the actuary should consider the likely causes of such
differences. If another actuary performed the prior measurement, some allowance
may be made for differences due to different actuarial techniques or modeling.
The actuary should, if practicable, review the prior actuary’s documentation and,
if necessary, seek further information.
3.13 Sensitivity of Results to Chosen Assumptions—There can be a broad range of reasonable

results when measuring the present value of retiree health benefit obligations because
projected benefit payments are often uncertain and based on assumptions about future
claims. The combination of different present value factors applied to projected future
benefit payments produces wide variations in present values. For example, if a 1%
change in the discount rate produces a 20% change in the present value, and a 20%
change in initial per capita health care rates produces a 20% change in present value, then
changing both assumptions could produce a 44% change in the present value, or a 4%
change.
In light of the sensitivity of the results to key assumptions, the actuary should consider
the purpose of the measurement and use professional judgment when advising the plan
sponsor and presenting present values. In some instances the actuary may develop
alternative results using a range of reasonable assumptions.
3.14 Reliance on a Collaborating Actuary—The various elements of a retiree group benefit

measurement require expertise in the two different actuarial fields of health data analysis
and long-term projections. In recognition of the complexities involved, two or more
actuaries with complementary qualifications in the health and pension practice areas may
collaborate on a project. While each actuary may concentrate on his or her area of
expertise during the project, the actuary (or actuaries) issuing the actuarial opinion must
take professional responsibility for the overall appropriateness of the analysis,
assumptions, and results.
4.1 Documentation—The actuary should maintain appropriate documentation regarding the

analysis of the known plan provisions, covered population, and claims and expenses, as
well as documenting the measurement model and the use of the model output.
Documentation should demonstrate how the actuary has met the requirements of sections
3.2–3.14 above. The methodology and assumptions used in the measurement should be
documented and, in some cases, made available for disclosure. In particular, ASOP No.
31 provides guidance on documenting the work of section 3.4 and 3.6–3.8 as applied to
ratemaking.
24
4.2 Disclosure—The actuary’s communication of the results of the measurement should
identify the data, assumptions, and methods used in the measurement with sufficient
clarity that another actuary qualified in this practice area could make an objective
appraisal of the reasonableness of the actuary’s work. In particular, this standard calls for
disclosure of the following:
a. information about known significant plan provisions, including anticipated future

changes (section 3.2.1(f)), any combining of plans (section 3.3.7) for
measurement purposes, and a description of any known significant plan
provisions not reflected in the model;
b. significant information about the covered population;
c. the initial per capita health care rate assumptions (including the use of normative
data or premium rates), assumed future trends, and all other significant projection
assumptions;
d. significant modeling techniques and methods, such as those mentioned in sections

3.4.12, 3.4.13, 3.8.4, and 3.10;
e. identification, including the source, of any assumptions, methods, or other model

components prescribed by the plan sponsor or other binding authority;
f. significant and unresolved inconsistencies in data or administration, such as those

mentioned in sections 3.6 and 3.7; and
g. information significant to interpreting measurement results.
To the extent the disclosures identified above have been described in a previous actuarial
communication available to the intended audience, such disclosures, if appropriate for the
circumstances, may be incorporated by reference.
statement of actuarial opinion (PSAO) as described in the Qualification Standards for
Prescribed Statements of Actuarial Opinion promulgated by the American Academy of
Actuaries. However, law, regulation, or accounting requirements may also apply to an
actuarial communication prepared under this standard, and as a result, such actuarial
communication may be a PSAO.
4.4 Deviation from Standard—An actuary must be prepared to justify the use of any
in any actuarial communication disclosing the results of the procedures, an appropriate
statement with respect to the nature, rationale, and effect of such departures.
25
Note: The following appendixes are provided for informational purposes, but are not part of the
standard of practice.
Appendix 1
Background
Actuarial Standard of Practice (ASOP) No. 6, originally titled Measuring and Allocating
Actuarial Present Values of Retiree Health Care and Death Benefits, was adopted by the ASB in
October 1988. Because measuring retiree health and death benefits was a new and emerging field
and because it would become a new practice area for many actuaries, this standard was needed to
provide guidelines regarding what was acceptable actuarial practice. The original ASOP No. 6,
however, purposely provided a high degree of flexibility to allow for emerging understanding in
this developing practice area.
In December 1990, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 106, Employers’ Accounting for Postretirement Benefits
Other Than Pensions. SFAS No. 106 generally requires plan sponsors to recognize the cost of
providing retiree group benefits over an employee’s service period. Before the implementation of
SFAS No. 106, most plan sponsors accounted for retiree group benefits on a pay-as-you-go
basis. Therefore, at the time SFAS No. 106 was implemented, few actuaries had any experience
measuring retiree group benefit obligations and practices for performing such measurements
were not consistent.
Actuarial Compliance Guideline No. 3, For Statement of Financial Accounting Standards No.
106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, was adopted in
October 1992. ACG No. 3 was written with a great level of detail and with a high level of
educational content for the same reasons as ASOP No. 6.
Since the adoption of ASOP No. 6, ACG No. 3, and SFAS No. 106, both the design of retiree
group benefits and the actuarial practices for measuring retiree group benefit obligations have
evolved. Faced with the recognition of large unfunded liabilities for retiree health care benefits,
many plan sponsors have taken steps to reduce their retiree group benefit obligations. Often, this
has meant introducing or increasing participant contributions (including placing fixed dollar
limits on the average plan sponsor obligation per person, with the balance to be paid by
participant contributions). Participant contributions have not always been implemented
consistent with the plan sponsor’s objectives. For example, participant contributions may, in
practice, have been set based on combined active and retiree claims, resulting in “hidden” plan
sponsor subsidies (see “Participant Contributions” in appendix 2 for more detail).
Other types of plan design changes intended to reduce plan sponsor obligations include
restricting eligibility for plan benefits (including requiring preretirement contributions), reducing
26
annual or lifetime benefit limits, and changing the way the plan integrates with Medicare. But
here again, actual plan operation may not be fully consistent with the plan sponsor’s intent. For
example, the claims payer may not have the data or systems necessary to implement lifetime
limits on plan benefits.
The actuary may be in the best position to identify such discrepancies between the plan sponsor’s
stated intent and actual plan operation. Often the plan sponsor has divided internal responsibility
for administration of the retiree group benefit plan between different departments. The actuary
may be the only person to have seen data elements and plan provisions as a whole. Plan sponsor
policy may not have considered subsequent changes in future eligibility, cost levels, medical
practice, health care delivery systems, or other plan elements that have a significant effect on
financial obligations. Written provisions regarding aspects of dependent coverage, contribution
levels required from participants, and integration with Medicare may be absent. As a result, data
that the actuary receives may conflict significantly with information received about known plan
provisions or administration.
Current Practices
Actuarial practices for measuring retiree group benefit obligations have evolved since
SFAS No. 106 was implemented. As noted above, actuaries have recognized the importance of
evaluating information about plan operations (including actual participant contribution levels,
participation rates, and retiree claims data) as well as plan documents and plan sponsor policies
to resolve any inconsistencies. As a result of the trend toward greater retiree cost-sharing, the
modeling of participant contributions has become increasingly important. This includes
appropriately reflecting the effect of increased participant contributions on plan participation and
per capita health claims rates of those electing to participate.
Measuring retiree group benefit obligations generally requires expertise in both the development
and projection of health care claims rates and the long-term projection of the covered population.
Therefore, it is common for two actuaries with complementary qualifications (such as a pension
actuary and a health care actuary) to collaborate on a measurement. In some cases, it may not be
clear which actuary has taken professional responsibility for the overall appropriateness of the
analysis, assumptions, and results.
The models used to value retiree health care benefit obligations have become increasingly
sophisticated. Models commonly use age-specific initial per capita health care rates within the
retired population (for example in individual age brackets). Some of these models are based on
net incurred claims, while other models are based on gross expenses incurred reduced by
amounts paid outside the plan or not covered by the plan. Some models project a distribution of
expected claims with an associated probability distribution, while other models use separate age-
specific per capita claim rates for the last year of life and for survivors.
Despite the development of these more sophisticated approaches, some actuaries continue to use
highly simplified models. Examples include using pension census data as the basis for the
measurement, using only two initial per capita health care rates (for Medicare eligible
27
participants and for participants who are not yet eligible for Medicare), and developing initial per
capita health care rates based solely on premiums or normative databases. Such simplified
approaches may result in significantly understated or overstated retiree group benefit obligations
for the following reasons:
1. Retiree group benefit eligibility requirements are often different from pension benefit
eligibility requirements, so pension census data may not appropriately reflect retiree
group benefit plan participation;
2. Significant discrepancies between the plan sponsor’s stated policy and actual plan
operation may not be identified and “hidden” subsidies may not be valued;
3. Normative databases may be applied inappropriately, or may be outdated;
4. The effects of aging of the retired population on future per capita claim rates may not be
appropriately taken into account; or
5. The impact of expected future participant contribution increases on future participation

and projected per capita claim rates of participants may not be appropriately reflected.
28
Appendix 2
Supplementary Information
Normative Databases
In the absence of credible plan experience, a normative database can provide support for
assumptions about the probability of future events or likely relationships between variables.
Examples of normative databases include published mortality and disability tables, proprietary
rate manuals, and experience on similar retiree group benefit plans. However, normative
databases also have limitations, including the following:
1. normative databases lose relevancy over time;
2. a normative database may not be appropriate for the particular situation at hand; and
3. many normative databases have not been subject to rigorous development and review.
Measurements Using Premium Rates
A premium is the price charged by a risk-bearing entity, such as an insurance or managed care
company, to provide risk coverage. The premium usually has a basis in the expected value of
future costs, but the premium will also be affected by other considerations, such as marketing
and profit goals, competition, and legal restrictions. Because of these other considerations, a
premium for a coverage period is not the same as the expected cost for the coverage period.
The demographics of the group for which the premium was intended may be different from the
demographics of the group being valued. When these two groups are different, the premiums are
unlikely to reflect the expected health care costs for the group being valued, even if it is a subset
of the total group for which the premium was determined. In particular, the expected value of
future costs for a group of retirees is unlikely to be the same as for a group consisting of actives
and the same retirees. Examples of this are shown in the “Participant Contributions” section
below.
This standard notes numerous ways the demographics of two groups can differ, but a difference
that is quite likely to have an effect on rates is a difference in average age, or age distributions, of
two groups. This, of course, is particularly likely to occur when one group contains retirees and
active employees while a second group consists only of retirees. But differences can also be
significant within a group made up entirely of retirees, even retirees who are all eligible for
Medicare. When a rate applies over a broad age range, it may misrepresent the average cost at
applicable ages much older or younger than the central age of the range to which the rate applies.
Consequently, many actuaries use a separate initial per capita health care rate assumption for
each age within a range where there are wide variations, such as rates that differ for every age
29
from 60 to 75 or from 55 to 80. (This also may have an effect on costs in future years and is
addressed again below in the “Health Care Trend Rate” section.)
The term “premium rate” is used for both insured group plans and self-insured group plans. In
the case of self-insured plans, the “premium rates” may also be referred to as “budget rates” or
“phantom premiums.” Future changes in insured premiums are frequently affected by the
experience of the insured group. When they are not directly affected by the experience of any
one group, but rather by experience of a community of groups, the plans are referred to as
“community-rated.” Further comments about these common types of retiree group benefit plan
premiums follow:
1. Self-Insured Premiums—Some self-insured plans have expenditures that the plan sponsor
refers to as “premium rates.” These rates may reflect the experience of retirees, active
employees, or both. Also, the rates may reflect only expected claims experience, or may
include other adjustments (such as administrative expenses and stop-loss claims and
premiums). Furthermore, the rates may reflect the effect of the plan sponsor's
contribution or managed care strategy.
2. Community-Rated Premiums—In some regulatory jurisdictions, community-rated

premium rates are required by statute for some fully insured plans. There is variation in
the structure of community-rated premium rates. For example, retirees not eligible for
Medicare may be included with active employees in a community-rated premium
category, while retirees eligible for Medicare may be included in a separate community-
rated premium category. There are also different community-rating methodologies, some
incorporating group-specific characteristics. Note that a community-rated premium
including both retirees not eligible for Medicare and active employees probably
understates the expected claim cost for the retirees alone. If the insurer appears to be
committed to continuing such subsidy for the retirees, there is some justification for
valuing future retiree costs for the postretirement plan sponsor with the community rate
as the basis, although the plan sponsor may want to know of the apparent subsidy and the
possibility that it might not be available in the future. There is also some justification for
valuing future retiree costs with the higher expected claim cost for retirees as the basis,
since the subsidy may disappear.
3. Other Fully Insured Plans—In addition to community-rated plans, there are other types of
fully insured plans and there can be some variation in how actual plan experience affects
the premiums. The same comments mentioned above for self-insured premiums apply
here.
Health Care Trend Rate
The health care trend rate reflects the change in per capita health claims cost over time. The trend
rate may differ by major cost components such as hospital, prescription drugs, other medical
services, Medicare offsets, and administrative expenses. The health care trend rate is affected by
the following interdependent factors:
30
1. Inflation—General economic inflation defined as price changes over the whole economy.
2. Medical Inflation—Changes in the per-unit prices of medical supplies and services

covered by the plan.
3. Covered Charges—The definition of charges that are covered by the plan will determine
how inflation and medical inflation affect per capita health care claims cost. For example,
if the plan pays benefits based on a fixed schedule of benefits, the cost of services is
controlled by the plan’s schedule. If the services on the schedule and the dollar amounts
are not changed, the underlying cost inflation of the plan will be zero.
4. Utilization of Services—This factor considers the change in frequency of health care by

type of services over time, as well as the nature of services due to changes in medical
practice and technology.
5. Leveraging Caused by Plan Design Features—The net plan cost under health plan
designs with fixed-dollar cost-sharing will increase faster than the total costs. For
example, for a prescription drug costing $50 today and a plan design with a $20 copay
per prescription, a 20% increase in the cost of the drug (from $50–$60) will increase the
net plan cost by 33%, from $30 ($50–$20) to $40 ($60–$20).
6. Aging—The aging of the covered population may have contributed to historical health
care cost changes. The use of age-graded per capita health care rates for projecting future
health care costs removes this aging component from the future trend assumption.
7. Participation—If a lower percentage of eligible individuals elect coverage (for example,

because of increasing participant contribution rates or competing plans such as HMOs),
per capita health care claims costs may increase due to adverse selection.
Interaction Between Trend and Plan Provisions
Plan provisions and health care trend rates in combination impact the projected net per capita
health care rates. Examples of the interaction of plan provisions and health care trend rates
include the following:
1. Covered charges can be affected by limits on allowable provider fees and the plan’s
Medicare integration approach. Benefit plan provisions may help in identifying these
limits, as well as what services are covered.
2. Health plan deductibles may or may not be set at a fixed-dollar amount. Health care trend
will, over time, erode the relative value of a fixed-dollar deductible.
3. Coinsurance payments may be expressed as a percentage or fixed-dollar amount. Again,

over time, trend will erode the relative value of a fixed-dollar coinsurance.
31
4. The Medicare program provides coverage for most U.S. retirees over age 65; however,
the retiree group benefits plan may cover a different mix of services than Medicare.
Trend rates may differ between Medicare-covered services and the retiree group benefit.
5. Other payments or offsets may exist, such as subrogation recoveries or plans other than
Medicare. These payments or offsets may change in the future.
6. Lifetime and other maximum dollar limits also affect claims costs, and the effect can
change over time.
Participant Contributions
Participant contributions are very important to the financial understanding of how retiree health
plans work. Plan sponsors must advise participants and plan administrators as to the specific
dollar amounts of currently required contributions. Plan sponsors usually have administrative
policies for determining future contributions (formulas, subsidy limits, or overall contribution
philosophy). Based on the required contributions, an individual will decide whether to
participate, which may result in adverse selection.
Formulas, subsidy limits, and the contribution philosophy of the plan sponsor are subject to
different interpretations about what data and techniques are to be used in deriving the current
monthly contribution used in the measurements of retiree group benefit obligations. Here are two
examples:
1. The plan sponsor’s stated policy is that retirees who are not yet Medicare eligible will
contribute 50% of the cost of their health care benefits. However, the plan sponsor
determines a retiree contribution of $100 per month ($1,200 per year) based on average
annual per capita health care claims of $2,400 for active employees and pre-Medicare
retirees combined. When the actuary evaluates the claims experience of pre-Medicare
retirees separately from that of the active employees, the actuary determines that the
average annual claim per retiree is $4,000. So the plan sponsor subsidy is really $2,800 or
70%, not the stated 50%.
2. A “defined dollar benefit” plan sponsor will pay $2,000 annually toward retiree health
care coverage for retirees who are not Medicare eligible. The plan sponsor determines an
annual retiree contribution of $500 based on average per capita claims of $2,500 for
active employees and pre-Medicare retirees combined. However, when the actuary
evaluates the claims experience for pre-Medicare retirees, the average annual claims per
retiree is determined to be $4,500. The actual plan sponsor subsidy is $4,000 ($4,500
average claims per retiree less $500 retiree contribution)—double the “defined dollar
benefit” of $2,000.
Once the contribution is determined for the current year, future increases can then be
incorporated into the model. The contribution increase assumption is often a function of the
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claims trend assumption. If the model assumes contributions increase at the same trend as
assumed for age-specific claims rates, the projected contributions will not have a constant
relationship to projected claims, due to the aging of the population.
Some plans impose conditions such that contributions will begin a certain pattern at some
triggering point in the future. This can happen in a number of ways, but the most common may
be the use of “cost caps,” where the sponsor has limited its subsidy to an annual amount per
capita that has not yet been reached. Participant contributions may or may not be required
currently, but after the cap is reached participant contributions are to absorb all the additional
costs. After the caps have been reached, this design is akin to the defined dollar approach, but
before that point, the plan sponsor’s costs will increase. The assumptions about future health care
trend rates (interacting with the cost caps) will increase projected costs to a time when the caps
are reached, and thereafter participant contributions will increase.
Finally, participation rates may be lower when contributions are required. Assumptions about
lower participation rates can vary by small amounts and yet result in large differences in present
values. Furthermore, lower participation may result in adverse selection on the part of
participants. The combination of lower participation and adverse selection assumptions may or
may not be significant in a measurement model.
Assets
Retiree group benefits are generally not subject to minimum funding requirements; however, a
number of plan sponsors have, for various reasons, accumulated assets dedicated to fund the
retiree group benefits. These assets provide some measure of financial security for the
participants and reduce the plan sponsor's unfunded obligation, thereby reducing the future
funding needs.
1. Dedicated Assets—Certain assets set aside to provide for the plan sponsor’s modeled
benefit may partially or completely offset the retiree group benefit obligation. Examples
a. whole life insurance policies held by the plan sponsor to cover some of the plan
sponsor’s retiree death benefits;
b. welfare benefit trusts (for example, VEBAs in the U.S.); and
c. section 401(h) accounts in a qualified pension plan in the U.S.
2. Non-Dedicated Assets—Several plan sponsors have purchased life insurance policies (so
called corporate-owned life insurance or COLI policies) with the intent that the proceeds
of the policies will “fund” emerging retiree welfare benefits. Even though these policies
may have been “earmarked” for funding retiree group benefits, they remain corporate
assets and are not taken into account in measuring the plan sponsor’s unfunded
obligations.
33
Compliance with Other Requirements
The following provide guidance for the measurement of retiree group benefit obligations
performed for specific purposes. The list represents rulemaking bodies and specific references as
of the publication date of this standard, and is not intended to be exhaustive.
1. Financial Accounting Standards Board (FASB)—Accounting for financial statements for

companies that comply with U.S. generally accepted accounting principles (GAAP).
Current standards applicable to retiree group benefits include SFAS Nos. 88, 106, 132,
and 135.
2. American Institute of Certified Public Accountants (AICPA)—The AICPA provides

audit and accounting guidelines for its members. Current guidelines include the AICPA
Audit and Accounting Guide, Audits of Employee Benefit Plans, and Statements of
Position (SOP) 01-2, Accounting and Reporting by Health and Welfare Plans, and 94-6,
Disclosure of Certain Significant Risks and Uncertainties.
3. U.S. Internal Revenue Code (IRC)—Various sections of the IRC govern the funding of
retiree group benefits, including sections 401(h), 404, 419, 419A, 420, and 512, and the
regulations and other rulings that interpret the code.
4. Cost Accounting Standards Board (CASB)—The CASB is responsible for developing

accounting standards for U.S. government contracting. Current applicable standards are
CAS 412, 413, 416, and the proposed CAS 419.
5. Federal Acquisition Regulations (FAR)—The FAR are regulations governing the

acceptability of costs for U.S. government contracts. FAR 31.205-6 provides guidance
for retiree group benefit costs.
6. Government Accounting Standards Board (GASB)—The GASB promulgates accounting

standards for state and municipal governments. GASB 26 provides rules for disclosure of
retiree group benefit obligations.
7. National Association of Insurance Commissioners (NAIC)—The NAIC provides model

regulations for insurance company accounting that individual states may use directly or
modify for their particular circumstances. The NAIC has issued Statement of Statutory
Accounting Principles No. 14 that addresses rules for insurance companies with retiree
group benefits.
8. International Accounting Standards Committee (IASC)—The IASC issues international

accounting standards that each country’s accounting profession may use as its GAAP.
IAS 19 provides guidelines for retiree group benefit plans.
34
Appendix 3
The exposure draft of this actuarial standard of practice was issued in October 2000, with a
comment deadline of March 31, 2001. (Copies of the exposure draft are available from the ASB
office.) Twenty-two comment letters were received. The Task Force on Retiree Group Benefits
of the ASB carefully considered all comments received. Summarized below are the significant
issues and questions contained in the comment letters and the task force’s responses.
GENERAL COMMENTS
Comment Some commentators requested the reorganization of various sections and appendixes.
Response The task force incorporated some suggestions into the standard. Other suggestions were inconsistent
with ASB standard format and thus not implemented.
Comment Several commentators suggested slight changes to the wording in nearly all sections of the standard.
Response The task force implemented such suggestions if they enhanced clarity and did not alter the intent of the
section.
Comment Some commentators requested language to deal with specific SFAS No. 106 or SOP 92-6 accounting
issues.
Response The task force directs all readers to the accounting profession for clarification of specific accounting
issues.
TRANSMITTAL MEMORANDUM
In the transmittal memorandum of the exposure draft, the task force solicited comments on the key issues contained
in the draft. These comments and the task force’s responses to them have been incorporated in the applicable sections
below.
Comment Some commentators requested that ACG No. 3 not be replaced by this revision due to the perceived
need for the material pertaining specifically to SFAS No. 106 that is not retained in this revision.
Response The ASB’s current policy is to avoid publishing as a standard any material that is largely educational in
nature, such as ACG No. 3. Educational material is included where appropriate in the appendixes. The
task force understands the commentators’ concern and wants to encourage the further development of
educational material related to all aspects of retiree group benefits; however, we agreed with the ASB
that such material should not be codified as a professional standard.
Section 1.2, Scope

Comment One commentator asked whether plan design projects should be included in the standard’s scope.
Response The task force recognizes that not all plan design projects involve the measurement of obligations; those
that do would be within the scope of this standard. Therefore, the task force modified section 1.2(d) to
expand that part of the definitions to explicitly include plan design projects that are cost-based.
35
Comment One commentator requested a later effective date; other commentators pointed to the need to clarify the
effective date language.
Response The task force clarified the language regarding the effective date of the standard; however, the primary
effective date was not changed.
Section 2.1, Actuarial Cost Method

Comment One commentator suggested the deletion of the “more than one” phrase.
Response The task force agreed and modified the definition accordingly.
Section 2.2, Adverse Selection (previously titled “Antiselection”)
Comment One commentator suggested that “Antiselection” was a misnomer and that it be replaced with “Adverse
Selection.”
Response The task force agreed and modified the name.

Section 2.7, Dedicated Assets (previously section 2.4)
Comment One commentator stated that the definition should be expanded to include assets held in trust.
Response The task force modified the definition to broaden the scope.
Section 2.11, Medicare-Eligible Participant (previously section 2.8)
Comment One commentator thought this definition had extraneous wording.
Response The task force agreed and removed the extraneous wording.
Section 2.12, Medicare Integration (previously section 2.9)
Comment Two commentators suggested that Medicare Supplement Plans be included in this definition.
Response The task force agreed that Medicare Supplement Plans are prevalent; however, these plans are a
supplement to Medicare and do not integrate with Medicare.
Section 2.14, Participant (previously section 2.11)
Comment Several commentators suggested that the definition of participant was too broad.
Response The task force agreed and modified the definition. The task force also added a sentence to section 3.3 to
clarify that open group measurements are permitted but not required.
Section 2.15, Retiree Group Benefits (previously section 2.12)
Comment Two commentators suggested changes to this definition. One was concerned that the definition was not
clear that death benefits paid from a retirement income plan are not retiree group benefits.
Response The task force believed that the definition was sufficiently clear and made no modifications.
36
Comment One commentator questioned whether a plan is a retiree group benefits plan if all it provides is that
participants are allowed to self-pay for coverage from their retirement date until Medicare eligibility.
Response The task force intended such a plan to be a retiree group benefits plan, covered broadly in the definition,
and did not believe a change in the definition was needed to convey that intent.
Section 2.19, Trend (previously section 2.16)
Comment Several commentators were concerned that the definition did not exclude aging or age-related morbidity.
Response The task force chose not to narrow the definition, although it recognizes that “trend” can be defined to
include or exclude age-related morbidity. The task force shares the commentators’ concern that
demographic changes due to the changing makeup of a population should not be included in a trend
factor used to project the future cost when age-specific rates are being projected. Section 3.8.1(a) states
that for the purposes of projection assumptions, trend should not include the effects of aging. For the
purposes of determining the initial per capita health care rate from claim experience (section 3.4),
however, the effect of aging in past trend is difficult to separate from other factors. The task force did
not believe this standard should mandate the use of age-specific trend factors in analyzing past
experience.
Section 3.2.1, Components of the Modeled Plan
Comment One commentator thought the list of major plan provisions should be expanded. Another thought that the
list should not be included and that the actuary should determine the major plan provisions. A third
commentator was concerned that the section contradicted the SFAS No. 106 requirement that no
assumption with regard to future changes in government programs be made.
Response The task force did not intend for the list to be all-inclusive; however, the task force believed that these
are the minimum components that should always be modeled. In regard to the third commentator’s
concerns, the task force refers the commentator to section 3.2.1(f).
Comment One commentator was concerned that section 3.2.1(a) required that a “gross claim” model be used.
Response The task force modified the wording to remove such a requirement.
Comment With respect to section 3.2.1(b), one commentator suggested that the standard should provide more
discussion pertaining to the modeling of lifetime maximums.
Response The task force believes that this is not a practice area where appropriate guidance has emerged.
Comment One commentator expressed concern that section 3.2.1(c)(2) required the actuary to act as the auditor.
Response The task force agreed and modified the section heading and wording accordingly.
Comment With respect to section 3.2.1(c)(4), one commentator expressed concern about requiring the actuary to
determine the year the limit is reached and the implications of reaching it.
Response The task force disagreed with the commentator on the necessity of knowing when the limit will be
reached. Such information is crucial to appropriately determining the obligation associated with such a
cap. The task force, however, did agree that the “implications” wording was not clear and removed this
language.
37
Comment One commentator suggested that section 3.2.1(c)(5) be deleted since participation rates are covered in
section 3.8.3(a).
Response The task force agreed that participation rates are more appropriately addressed in the later section and
deleted the paragraph.
Comment With respect to section 3.2.1(f), two commentators stated that SFAS No. 106 allows for recognition of
changes other than those that have been communicated.
Response The task force agreed and modified the wording of this section to include changes that are the result of
the continuation of a historical pattern.
Section 3.2.2, Historical Practices
Comment One commentator thought that section 3.2.2(a) was too onerous and that the actuary needs to establish
only “a reasonable level of comfort” that the benefits provided are consistent with major plan provisions.
Response The task force agreed and modified the language.

Comment With respect to section 3.2.2(c), one commentator stated, “[I] do not believe it is the actuary’s
responsibility to determine whether a past practice or a pattern of regular changes indicates a
commitment by the plan sponsor to make future changes to the plan.”
Response The task force agreed that the actuary should not be responsible for determining the plan sponsor’s
“commitment.” The actuary, however, may include the continuation of such past practices in the model.
Comment One commentator thought that section 3.2.2(d) did not belong in the “Historical Practices” section.
Response The task force believed that the language on “Government Programs” was appropriately placed in the
“Historical Practices” section, but it clarified the language.
Section 3.3, Modeling the Covered Population
Comment Several commentators noted that no mention was made of open group valuations, while others were
concerned that the standard required the use of open group valuations.
Response The task force revised the text to indicate that while the standard does not require the use of open group
measurements, they may be used when appropriate.
Comment A commentator suggested that the term “covered population” be included in the set of definitions.
Response The task force agreed and added a definition.

Section 3.3.2, Employees Currently Not Accruing Benefits
Comment One commentator suggested section 3.3.2 be clarified to distinguish between employees who are not
accruing service and never expected to do so, and those who, while not currently accruing service, are
expected to do so in the future.

Section 3.3.3, Contingent Participants
Comment One commentator questioned the need to develop reentry assumptions when measuring contingent
participants. The commentator suggested that the actuary should determine if any significant obligation
exists and only when this is so should the obligation be reflected in the measurement. Otherwise, the
actuary should disclose that reentry possibilities were left out of the measurement.
Response The task force modified the language to clarify that appropriate measures should be taken when
individuals may reasonably be expected to become participants. The task force believes that additional
disclosures on this element of the model are not needed.
38
Section 3.3.4, Spouses and Survivors of Participants (previously titled “Spouses and Surviving Spouses of
Participants”)
Comment One commentator expressed concern about including spouses in the modeled population, when, based
on the commentator’s experience, these data often are not available.
Response While the task force understands that complete information on spouses may not be available for all
measurements, the importance of the spousal obligation to the measurement requires that the actuary
model spouses and surviving spouses in the covered population. The task force believes the current
language is sufficiently broad to allow the actuary to use both empirical data, where available,
supplemented by reasonable assumptions where necessary.
Section 3.3.5, Dependents
Comment Several commentators found this section confusing.
Response The task force redrafted the section to clarify the intent.
Section 3.3.6, Appropriateness of Pension Plan Data
Comment Several commentators suggested alternative language and additional examples of edits and adjustments
to pension plan data to represent the retiree group plan covered population.
Response The task force considered these suggestions and incorporated them in the revised text.
Section 3.3.7, Use of Grouping
Comment One commentator raised a concern about the requirement to disclose the use of grouping, which the
commentator did not see as standard practice. Another commentator was concerned that the requirement
to disclose the use of grouping techniques may be interpreted to imply that some imprecision results
from grouping.
Response The task force incorporated suggested text changes to clarify that grouping techniques may be
appropriate when, in the actuary’s judgment, this is not expected to unreasonably affect the
measurement results.
Section 3.4, Modeling Initial Per Capita Health Care Rates
Comment One commentator suggested that the initial paragraph of section 3.4 include the word “credible” before
“plan experience” in the third sentence.
Response The task force made no change since it believes the last sentence of the paragraph appropriately
addresses the issue of credibility.
Comment Two commentators requested guidance on the use of plan experience for small plans. One commentator
remarked that even if detailed claim information were available for small plans, it generally would not
be credible.
Response The task force did not revise the standard to address small plans specifically, but did expand the
discussion of premium rates in appendix 2. The task force also notes that while plan experience for a
small plan may not be fully credible, that does not mean the plan experience has no credibility. ASOP
No. 25 is recommended for guidance in regards to assigning credibility to experience data.
Comment One commentator noted that ASOP No. 31 also had relevance to ratemaking aspects of sections of the
standard other than section 3.4.
Response The task force agreed and modified that reference accordingly.
39
Comment The task force received several comments regarding the development of the initial per capita health care
rate and the actuary’s responsibility to document that development.
Response The task force addresses those comments below in relation to section 4.1. The task force believes
development of per capita claim rates for measuring retiree health benefit obligations should be subject
to a ratemaking process, whether the purpose is cost projections, financial reporting, or other actuarial
work within the scope of this standard. The task force also notes that ASOP No. 31 is not a standard on
ratemaking, but rather provides “guidance on documentation in the process of health benefit plan
ratemaking.”
Comment One commentator suggested that the standard address situations where another person or organization
gives the actuary the rates.
Response The task force believes the standard addresses this by noting the handling of premium rates in section
3.4.5 and reliance on a collaborating actuary in section 3.12. The development of initial per capita health
care rates for measuring retiree health obligations is an actuarial responsibility. Others will furnish
information during the measurement process and tasks in the development process may be delegated to
non-actuaries, but the professional judgment of an actuary is necessary in determining the initial per
capita health care rates (section 3.4) and ensuring its consistency with the rest of the model (sections 3.6
and 3.12).
Comment One commentator suggested that gender be added to the list of elements the actuary should consider.
Another commented that spouse rates and disabled rates should be considered.
Response The task force expanded the third paragraph to indicate examples of when multiple rates may be
appropriate. The task force also notes that section 3.4.2 mentions gender.
Comment One commentator suggested the section include material on expenses.
Response The task force made no changes, noting that the first sentence mentions benefit costs rather than claim
costs, and section 3.4.14 covers administrative costs.
Comment One commentator disagreed that the second paragraph of section 3.4 outlined a process generally used,
citing the use of actual-to-expected studies.
Response The task force believes the standard accommodates other methods, which would include the use of
normative databases and actual-to-expected studies, when plan experience is not sufficiently credible.
The task force is aware there may be differences of opinion as to when, and to what extent, plan
experience should be tempered with normative data. The task force believes this should be left to the
actuary’s judgment but that there should be a bias towards plan experience. Appendix 2 notes some of
the limitations of normative databases. The second paragraph of section 3.4 was intended to outline the
process, however, and not establish a requirement, so the task force deleted “the actuary should follow”
from the opening sentence in this paragraph. Similarly, other wording in the first two paragraphs was
modified to clarify the preference for credible historical plan claims experience and the use of alternative
methods.
40
Section 3.4.1, Net Aggregate Claims Data
Comment Two commentators questioned whether the last sentence of section 3.4.1(a) implied that differences
between paid claims and incurred claims for the same time period were always insignificant or that
factors of trend and discount always offset each other.
Response The task force believes the full paragraph adequately addresses the likely significance of the differences.
The task force also recognizes that, while the usual objective of claims analysis is the development of an
incurred rate, a valuation of future paid claims may be valid, since determination of the present value of
long-term obligations is based on the principles of discounted cash flow. The standard guides the actuary
reviewing past aggregate claims to acknowledge differences in paid and incurred claims, as well as the
effects of trend and the time value of money, and make adjustments to enhance the ability to forecast
likely future claims levels.
Comment One commentator suggested the first sentence of section 3.4.1(b) was not clear.
Response The task force clarified the language.

Comment One commentator suggested that, “To the extent that net claims are used, the actuary should consider the
effect of their use on other assumptions, (e.g., trend assumption).”
Response The task force agrees that the actuary should consider the effect of trend assumption and other
assumptions, regardless of whether the initial per capita health care rate is based on net or gross claims.
The task force believes the issue is addressed in section 3.8, particularly in section 3.8.1(a), which
mentions leveraging caused by plan design features that are not explicitly modeled.
Section 3.4.2, Exposure Data
Comment Three commentators suggested the need to compare exposure data and the census even though they are
not expected to match exactly.
Response The task force agreed and modified the language accordingly.
Section 3.4.3, Use of Multiple Claims Experience Periods
Comment Three commentators noted that more recent experience is not always more reliable.
Section 3.4.4, Credibility

Comment One commentator suggested that credibility adjustments should include those for differences in plan
design.
Section 3.4.5, Use of Premium Rates
Comment One commentator noted that the second sentence of the section did not add clarifying value to the
section.
Response The task force agreed and combined the important elements of the sentence with the initial sentence.
41
Comment One commentator suggested that section 3.4.5 pertain only to self-insured plans and that fully insured
plans need not be subject to this section, particularly if they consist solely of reimbursing insurance
premiums.
Response The task force believes there is consensus among actuaries performing retiree group benefit
measurements about the almost universal need for adjustments when using premiums as the basis for
projected future cost, regardless of whether the plan is fully insured or self-insured. The “Measurements
Using Premium Rates” section of Appendix 2 provides additional comments on this issue.
Comment The same commentator suggested that the impact of aging is often effectively included in the trend rates.
Response The task force believes that the future impact of aging on health care costs of a given population of
actives and retirees does not have a strong enough correlation to trend to be effectively included in the
trend assumption. The standard requires a separation of the impacts of age and trend through the use of
age-specific per capita claims rates (see section 3.4.7).
Comment Several comments were received about the second paragraph concerning community rates.
Response The task force discontinued the use in the standard of the concept of community-rated premium after
recognizing that the term was unlikely to have a satisfactory common definition. The task force
modified the language concerning the use of premium rates as the basis for an initial per capita health
care rate assumption to clarify the significance of age differences in determining rates and to exemplify
the limited circumstances under which an unadjusted premium rate might be used and the disclosures
appropriate for such use.
Comment One commentator raised a question about a per capita rate that had been approved by an accounting
firm.
Response The task force notes that section 3.11 (previously section 3.8.8) and section 4.4 may be relevant to this
question and that section 3.4.5 covers actuarial aspects of the use of premium rates.
Section 3.4.6, Impact of Medicare and Other Offsets
Comment Several comments were received regarding the requirement to confirm the Medicare integration
approach.
Response The task force did not intend this to be an audit requirement and deleted the confirmation wording,
believing that recognition of the Medicare integration approach and need for consistency in section 3.7
adequately address the issue.
Comment A commentator noted that while section 3.4.6 urged adjustments if Medicare changed, it was not clear
on the timing or purpose of adjustments.
Response The task force believes that adjustments for scheduled or proposed changes in Medicare are somewhat
contingent upon the purpose of the measurement and modified the standard accordingly, while leaving
to the actuary’s judgment whether to anticipate changes before they become law.
Comment A commentator noted that the requirement to develop separate rates for Medicare eligible participants
may apply to benefits unaffected by Medicare and to those eligible for Medicare before age 65 by reason
of eligibility.
Response The task force agreed and modified the language to recognize these differences.
42
Section 3.4.7, Age-Specific Claims Rates
Comment Several commentators questioned the appropriateness of requiring, at a minimum, five-year age bands
for claims rates. Most agreed with the general practice of age grading but some noted instances, such as
dental care or medical benefits above age 90, where age grading was relatively flat and five-year age
bands would not be appropriate.
Response The task force withdrew the requirement that initial per capita health care rate assumptions use claims
rates in age ranges not to exceed five years and substituted language requiring age bands that are
appropriate and not overly broad.
Comment Two commentators seemed to believe the standard required analysis of the specific claims experience to
determine the rates at each age or age band.
Response The task force clarified that the intent is not to subject claims experience to analysis by age bands but
rather to ensure that rate projections account appropriately for the possibility of significant utilization
and cost differences within small age bands. This will most likely be demonstrated by normative data.
Comment Three commentators thought it was sufficient to have only two different claims rates, for non-Medicare
eligible versus Medicare eligible ages, or for pre-age-65 and post-age-65 ages.
Response The task force disagrees that a medical benefits model is likely to be sufficient with only two different
claims rates for non-Medicare eligible versus Medicare eligible ages, or pre-age-65 and post-age-65
ages, since such wide bands would be overly broad for the likely age variation in claim rates for a retiree
group with lifetime coverage.
Comment One commentator thought that a defined dollar benefit would fall outside this requirement. Another
believed that for a premium reimbursement plan only the premium rate experience would be relevant.
Response The task force disagrees that this section will be irrelevant to the measurement process for these specific
instances and notes that other sections, such as 3.2.1(c), 3.7, 3.8.1(c), and the “Participant
Contributions” portion of appendix 2, offer guidance when sponsor financing has defined limits.
Section 3.4.8, Adjustment for Plan Design Changes
Comment A commentator suggested that this section be expanded to include plan design changes effective in the
future.
Response The task force agreed that, for some purposes, adjustment for future changes might be appropriate, but
made no changes to the requirements of this section, feeling the matter is covered adequately in section
3.2.1(f) and 3.8.4.
Section 3.4.9, Adjustment for Administrative Practices
Comment Three commentators pointed out that these adjustments were most relevant when there had been changes
in the administrative practice.
Response The task force agreed that changes in administrative practice are the relevant concern for rate
development, for both claims adjudication and enrollment practices, and changed the language
accordingly.
43
Section 3.4.10, Adjustment for Large Individual Claims
Comment Three commentators were concerned about the plan sponsor’s ability to supply large claim information,
due to privacy concerns or other reasons, or whether the additional workload was justified by additional
accuracy.
Response The task force modified the language to clarify the actuary’s duties but does not believe privacy laws
will preclude the minimum duties.
Section 3.4.11, Adjustment for Trend
Comment A commentator noted that initial per capita claim rates were not always exactly congruent with the first
year of the measurement period and suggested that language about trend adjustments should reflect that
possibility.
Response The task force agreed and modified the first sentence accordingly.
Comment One commentator indicated the effect of trend on the plan’s historic experience might not be credible.
Response The task force agreed and clarified the language.

Section 3.4.12, Adjustment When Plan Sponsor is Also a Provider
Comment Three commentators asked for additional guidance on this topic.
Response The task force believed this was not a part of the practice where appropriate guidance had emerged in
succinct form, but did add consideration for reimbursements, such as Medicare, which might be received
by the plan sponsor.
Section 3.5, Modeling the Cost of Death Benefits
Comment Two commentators pointed out that group term life premium rates often do not vary by age, which
produces a reconciliation problem between accounting charges and the true cost of coverage.
Response The task force believes that the model should still accurately measure true costs and that the accounting
issues are not within the scope of this standard.
Section 3.6.1, Coverage and Classification Data
Comment One commentator suggested the phrase “merit further refinement” be changed to “require further
refinement.”

Section 3.6.2, Consistency
Comment Several commentators believed the requirement to “evaluate the operations of the plan” went well
beyond the duties of the actuary, and that the actuary should be able to assume that the provisions are
being properly administered unless data suggests otherwise.
Response The task force did not intend the actuary to “audit” the plan operations, and has therefore amended the
requirements on plan operations. The task force believes the actuary is in a unique position to observe
the plan operations, and thus may discover inconsistencies in plan operations that affect the
measurement. In such circumstances, the actuary is directed to section 3.7 for the appropriate actions.
Comment One commentator suggested an additional example of situations where average claims costs that are
secondary to Medicare are high in relation to average costs that are primary.
Response The task force expanded the example to include the classification of covered spouses based on the
retiree’s age.
44
Comment One commentator suggested the phrase “if significant” in section 3.6.2(d) should not apply just to
dependents.
Response The task force disagreed. While the obligation for spouses and surviving spouses can generally be
expected to have a significant impact on the results, the obligation for dependents would do so only if
the dependent coverage was extensive and dependents made up a significant proportion of the total
covered population.
Section 3.7, Administrative Inconsistencies
Comment One commentator suggested that disclosure include “an illustration of the effects of recognizing such
inconsistency on either the anticipated level of future claims or the determination of any special
one-time cost.”
Response The task force did not believe this was a requirement for all measurements, although it may be
appropriate for some.
Comment One commentator suggested that section 3.7(c) be separated into two points.
Response The task force agreed and modified the structure.

Comment Four commentators were concerned that the language required an audit of the plan’s administration.
Response The task force agreed that was not its intent and modified the language of the first sentence to indicate
that it addressed guidelines for an actuary who might come across administrative inconsistencies during
the course of the measurement process.
Section 3.8.1, Economic Assumptions
Comment One commentator stressed that the consistent use of a general inflation component in each of the
economic assumptions is a necessary but not sufficient condition so as to have consistent overall
economic assumptions.
Response The task force agreed and modified the wording of the first paragraph accordingly.
Comment Another commentator suggested that since most employers have a consistent discount rate assumption
for their SFAS No. 87 and SFAS No. 106 measurements, the new standard should mandate the use of
the same discount rate for the pension and retiree welfare valuations.
Response The task force believes that such a mandate would be excessively stringent and that there are certainly
cases where varying the discount rates is quite reasonable, taking into account differences in duration
between pension benefits and retiree group benefits.
Comment One commentator suggested that educational material pertaining to health care cost trend rates be added
to this standard.
Response Actuarial standards of practice typically do not include educational material in the body of the standard,
the task force included material in appendix 2 that provides commonly used definitions and illustrations
of the factors that can affect health care cost trend rates.
Comment Three commentators suggested that practitioners be allowed to utilize a single composite trend rate
assumption.
Response The task force agreed and added the following sentence to section 3.8.1(a): “Even if the actuary
develops one aggregate trend rate, the actuary should consider these cost components when developing
the rate.”
45
Comment One commentator suggested that there be separate recognition in the actuarial model of the health care
trend rate and the plan design elements that may modify the trend.
Response The task force appreciates the commentator’s concern, but believes that the leveraging caused by plan
design features can be reflected in the health care cost trend rate if it is not explicitly modeled.
Comment One commentator suggested that there were two opposing statements in section 3.8.1(d)—that “this
standard does not require the use of explicit assumptions about antiselection” and that “the actuary
should consider an upward adjustment for antiselection.”
Response The task force modified some of the wording, but stresses that the second sentence to which the
commentator referred should be read in its entirety. The task force agrees that the standard should not
require the use of specific assumptions for adverse selection. If the actuary changes assumptions for
adverse selection such as the participation assumption, however, the actuary should be aware that other
assumptions (per capita health care rates) should be modified appropriately.
Comment Another commentator expressed concern that section 3.8.1(d) allows the actuary to reflect possible
antiselection through an implicit assumption.
Response The task force modified the wording of this section to remove any ambiguity about assumptions for
adverse selection.
Section 3.8.2, Demographic Assumptions
Comment One commentator suggested that it would be helpful to include some discussion about the potential
interdependence of the various demographic assumptions. The commentator also suggested that
discussion of the other factors that should be considered in choosing a retirement assumption be added.
Response The task force agreed and modified sections 3.8.2 and 3.8.2(c).
Comment One commentator questioned whether the ASB is mandating the use of disability assumptions.
Response The task force directs the commentator to the second sentence of section 3.8.2(b), which states that the
actuary should select disability assumptions if the actuary considers the disabled life coverage
significant to the measurement.
Comment One commentator believed that the definition of disability (and issues surrounding how it should be
reflected) is amply handled in section 3.5.4(a) of ASOP No. 35.
Response The task force agrees and notes that section 3.8.2 refers actuaries to ASOP No. 35 for guidance when
selecting any of the demographic assumptions.
Comment One commentator stated that the actuary may decide to use different mortality assumptions for medical
(i.e., annuity) and life benefits.
Response The task force agreed, but believed that no change was needed in section 3.8.2(d) to address this. The
task force did, however, add wording to suggest that gender-specific mortality rates may be more
appropriate for retiree group benefit obligation measurements rather than unisex mortality rates.
Comment Another commentator suggested that projecting future mortality improvements could be overstating
realistic expectations.
Response The task force made no change since the second sentence of section 3.8.2(d) states “the actuary should
consider.” If, after consideration, the actuary determines that future mortality improvements are
negligible, he or she should reflect this in the choice of mortality assumptions.
46
Section 3.8.3. Coverage Assumptions
Comment One commentator suggested that the guidance could include some consideration of future availability of
options, particularly the reduction in availability of Medicare Risk HMO options. This commentator also
stated that the actuary could be directed to consider the impact of plan rules on whether a spouse or
dependent could be added after retirement.
Response The task force agreed with both comments and modified the section accordingly.
Comment One commentator stated that section 3.8.3(a) seems to assume a large group with credible experience
while in many cases this will not be the situation.
Response The task force added wording to stress that group-specific data be used in selecting assumptions when
such data are available and credible.
Comment Another commentator suggested that variations in participation may occur after retirement and thus may
affect current retirees as well as future retirees.
Response The task force agreed and modified sections 3.8.3(a) and (b) accordingly.
Comment One commentator questioned whether some of the material in this section should be covered in section
3.3.
Response The task force believes that these assumptions are relevant to future years and are appropriately
discussed here.
Comment One commentator believed that section 3.8.3(a) should be clarified to state that participation can vary by
type of coverage when more than one type are available.
Comment Another commentator suggested that, in addition to appropriate age assumptions for covered spouses,
appropriate age assumptions should be made for non-spouse dependents.
Response The task force agreed and modified section 3.8.3(c) accordingly.
Section 3.8.4, Effect of Plan Changes on Assumptions
Comment One commentator believed that the concept of the additional risk premium in the discount was not clear.
Comment Another commentator expressed concern about the context in which the advice in this section is given.
Response The task force agreed and modified the language of the second paragraph.
Comment One commentator believed that the use of the term “professional judgment” in the second paragraph
implies that actuaries should never allow anticipated plan change savings to continue into the future.
Response The task force believes that the second sentence of the second paragraph does not restrict the actuary in
recognizing plan change costs/savings in future years. The sentence does require the actuary to exercise
judgment before making such a decision.
Comment Two commentators questioned whether the assumption of the probability of plan termination is an
acceptable practice.
Response The task force believes that there are certain limited circumstances where the use of an assumption of
the probability of plan termination should be permitted.
47
Section 3.8.6, Reviewing Assumptions
Comment Two commentators stated that the setting of assumptions for the measurement of costs does not always
rest with the actuary (for example, SFAS No. 106 measurements).
Response The task force agrees and refers the commentators to section 3.11, Prescribed Assumptions, Methods, or
Other Model Components.
Section 3.8.7, Changes in Assumptions
Comment One commentator believed that this section should be modified to restrict consideration to other
assumptions selected by the actuary, and that no such consideration is required for a change in
assumptions not selected by the actuary.
Response The task force believes that the actuary should review all assumptions, including client prescribed
assumptions, where the actuary was asked to give advice, for continued reasonableness.
Section 3.9, Selecting a Cost Allocation Policy (previously titled “Selecting Actuarial Cost Methods”)
Comment Several commentators suggested the section heading should be changed, as the amortization of plan
amendments and actuarial gains and losses are not necessarily part of the actuarial cost method.
Response The task force agreed, modified the section heading and wording accordingly, and added a definition of
“cost allocation policy” in section 2.
Comment One commentator suggested that cash flow adequacy criteria for selecting an appropriate cost allocation
policy should be limited to apply solely to situations where only the existing assets will be used to pay
benefits.
Response The task force disagreed.

Section 3.9.2, Dedicated Assets (previously section 3.9.3)
Comment One commentator suggested that a different example be developed for section 3.9.2(b).
Response The task force believes the example of a prescribed asset valuation method is relevant.
Section 3.10, Use of Roll-Forward Techniques (previously section 3.9.2)
Comment One commentator agreed with the limitation that roll-forwards should be limited to no more than two
years after a prior measurement. Another questioned the selection of two years, and several
commentators believed this was too restrictive, interpreting the standard to prohibit the use of a 1/1/2000
measurement for SFAS No. 106 12/31/2002 disclosures. A survey of one commentator’s firm’s clients
found that, in addition to biennial re-measurements, triennial measurements were used for a fair number
of clients. The survey did not find any situations where a measurement was performed less frequently
than once every three years.
Response The task force had intended the use of roll-forward techniques with triennial re-measurements and
modified the text and example in section 3.10.2 (previously section 3.10(b)) to clarify this.
Comment One commentator questioned the restriction on the length of the roll-forward period when the
accounting standard to which the work applies has a requirement for an actuarial study that must, at a
minimum, be updated every five years.
Response The task force recognized that special circumstances could apply and modified the language
accordingly.
48
Comment One commentator interpreted the restriction on roll-forward techniques to imply that a complete
experience analysis of every assumption and claim rate must be preformed at each re-measurement.
Response The task force refers the commentator to section 3.8.6, which states, in part, that the actuary is not
required to do a complete assumption study at each measurement date.
Comment One commentator suggested the example in section 3.10.1 (previously section 3.10(a)) be clarified so
that claim rates used at a prior measurement are trended forward.
Comment One commentator noted that the term “significantly” in section 3.10.3 (previously section 3.10(c)) may
cause debate among actuaries as to what is significant.
Response The task force recognizes this issue, but did not modify the language, as it believes it is appropriate for
the actuary to decide, based on professional judgment, whether a key model component has changed
significantly since the last full measurement.
Section 3.11, Prescribed Assumptions, Cost Allocation Policies, or Other Model Components (previously
Section 3.8.8, Prescribed Actuarial Assumptions)
Comment One commentator stated that this section should discuss what implications the prescribed assumptions
have on the need for the actuary to use consistent assumptions.
Response The requirement to use consistent assumptions, set forth in section 3.8.5, applies only to assumptions
selected by the actuary.
Comment Another commentator was pleased with the elimination of the language regarding disclosure of
exceptions (ACG No. 3, section 6.2) and suggested that this point be more emphatically stated.
Response The task force believes that the issue is adequately addressed in the fourth paragraph of section 1.2.
Comment One commentator noted that an actuary cannot be responsible for assumptions prescribed by others or be
responsible for the overall appropriateness of results where the prescribed assumption might not be
considered appropriate. This commentator cited section 3.8.8, Prescribed Actuarial Assumptions (now
section 3.11, Prescribed Assumptions, Methods, or Other Model Components).
Response The task force agreed that this may be an important distinction in some cases and modified this section
to acknowledge exceptions due to section 3.11.
Section 3.12, Reasonableness of Results (previously section 3.10)
Comment One commentator suggested the language regarding sample participants be clarified.

Comment With respect to the requirement to compare expected claims with actual claims, several commentators
believed that the requirement was excessive, that actual claims may not be credible, and that only
significant differences should be evaluated.
Response The task force agreed that the actuary should evaluate only significant differences, which may include
the volatility of experience in small plans. In response to one commentator, the task force added the
word “available.”
Section 3.13, Sensitivity of Results to Chosen Assumptions (previously section 3.11)
Comment Three commentators pointed out that a 20% increase plus a 20% decrease produces a 4% decrease, not
0%.
Response The task force agreed and made the change.
49
Section 3.14, Reliance on a Collaborating Actuary (previously section 3.12)
Comment Three commentators questioned the implications of this section. One wanted a statement to the effect
that each of two actuaries could issue an actuarial opinion with respect to the part of the valuation for
which he or she was responsible. Another wanted a statement on the role of the non-actuary who might
be qualified by the nature of his or her professional experience, education and training. A third said that
the standard implied that one actuary must have expertise in all aspects of the project.
Response The task force recognizes in section 3.14 that two or more actuaries may collaborate on a project. One
may have an expertise in health data analysis and another in long-term projections. Nothing in the
standard prevents each from issuing an actuarial opinion with respect to his or her responsibility. Each
of these expertises, however, is an actuarial expertise. Neither the task force nor the ASB is aware of any
other profession where a practitioner is qualified by the nature of his or her professional experience,
education and training to perform the health data analysis or long-term projections that are key to the
measurement of retiree group benefit obligations. For an actuary to issue a professional opinion on such
measurement and meet this standard, that actuary must take responsibility that all significant aspects
meet this standard or disclose the deviation from standard. The standard does not require that one of the
actuaries must have expertise in each and every aspect of the measurement, but does require at least one
of the actuaries to take responsibility that the results of the health data analysis used for initial rate and
other health care assumptions mesh appropriately with the assumptions and model used for long-term
projections.
Section 4.1, Documentation
Comment The task force received several comments regarding documentation of health care rate development. A
commentator questioned the applicability of ASOP No. 31 to retiree health benefits, particularly since
there seems to be a specific exemption in ASOP No. 31 for work related to SFAS No. 106.
Response The sentence referred to in ASOP No. 31 contains a contingent exemption. It states, “The standard does
not apply to work done in connection with [SFAS No. 106] unless ASOPs pertaining to SFAS No. 106
specifically call for application of this standard.” That sentence is followed by the statement, “A task
force is being created to address issues related to SFAS 106.”
The task force that was created recommended the revision of ASOP No. 6 and also believed it was
appropriate for ASOP No. 31 to apply to SFAS No. 106, as well as other retiree group benefit
measurements. The current task force agrees that ASOP No. 31 should apply to SFAS No. 106. The
ASB affirms that ASOP No. 31 does apply to work performed in connection with SFAS No. 106. The
contingent exemption in ASOP No. 31 relating to SFAS No. 106 is now erased.
Documentation is an essential component of actuarial practice. ASOP No. 31 provides guidance on

important aspects of documenting health benefit plan ratemaking. Not every issue covered by ASOP No.
31, however, applies to every development of rates. The actuary developing or using rates for a retiree
health valuation should comply with those aspects of ASOP No. 31 relevant to the case at hand.
Comment A commentator suggested that claim rates used in retiree health valuations differ from other actuarially
derived claim rates and are not subject to the same outside review as the ratemaking covered under
ASOP No. 31.
Response The task force believes this may be a misreading of the purpose of ASOP No. 31, which is not a
standard on ratemaking, but rather provides “guidance on documentation in the process of health benefit
plan ratemaking.” The task force believes development of per capita claim rates for measuring retiree
health benefit obligations clearly falls within the ratemaking process, whether the purpose is plan
design, cost projections, or financial reporting. ASOP No. 31 also clearly states that it is not a standard
on pricing, which may be subject to extensive regulatory review.
50
Comment Another commentator suggested this standard should include a requirement that documentation
regarding development of health care rates be made available to another actuary upon the client’s
request and that it not be withheld as proprietary.
Response ASOP No. 31 states that “Documentation should be available to the actuary’s client or employer, and it
should be made available to other persons when the client or employer so requests and provided such
availability is not otherwise improper.” The task force believes this accurately states the actuary’s need
to cooperate with others who have an appropriate role in determining the rationale for a particular
assumption about per capita health care rates. While there may be software that is proprietary, the
actuary’s cooperation should encompass source data and methods. Differences of opinion on what is
proprietary might be referred to the Actuarial Board for Counseling and Discipline (ABCD).
Comment One commentator noted that ASOP No. 31 also had relevance to ratemaking aspects of sections of the
standard other than section 3.4.
Response The task force agreed and modified that reference accordingly.
Comment Several commentators objected to the documentation requirements of the standard as being “excessive,”
“inappropriate,” “severe,” or “burdensome.” One commentator suggested that the proposed
requirements were beyond the normal documentation requirements.
Response Upon review, the task force believes that the extent of the documentation required by this standard is
consistent with other, contemporaneous standards. In addition, the documentation required seems to be
the minimum level necessary “so that another actuary qualified in the same field could assess the
reasonableness of the work.” Furthermore, the task force notes that some commentators appear to have
confused documentation with disclosure requirements, which is the difference between one’s work
papers and the communication of one’s work product.
Section 4.2, Disclosure
Comment One commentator questioned the meaning of the word “significant” throughout this section.
Response The task force identified the items subject to disclosure, but leaves it to the professional judgment of the
actuary to decide the appropriate extent of such disclosure, given the purpose of the measurement and
the expected use of the disclosure material.
Comment Two commentators requested a clarification of terms used in section 4.2(a).
Response The task force added references to sections in the standard.

Comment One commentator said that the last paragraph was too restricting, in that it limits external references to
only actuarial communications.
Response This paragraph is intended to reduce the repetition of previously disclosed actuarial material in a current
document; it should not be seen as limiting any other external references to commonly available
documents.
51
Actuarial Standard
of Practice
No. 7
Analysis of Life, Health, or Property/Casualty

Insurer Cash Flows
Revised Edition
Developed by the
Cash Flow Testing Task Force of the
Adopted by the
June 2002
(Doc. No. 089)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.2 Asset 2
2.3 Asset Risk 2
2.4 Cash Flow 2
2.5 Cash Flow Analysis 2
2.6 Cash Flow Testing 2
2.7 Derivative Contract 3
2.9 Insurer 3
2.10 Investment Rate-of-Return Risk 3
2.11 Liability 3
2.12 Notional Asset Portfolio 3
2.13 Other Liability Cash Flows 3
2.14 Policy Cash Flow Risk 3
2.15 Policy Cash Flows 3
2.16 Scenario 3

3.1 Analysis of Insurer Cash Flows 4
3.2 Determining the Level of Analysis of Cash Flows 4
3.2.1 Reasons for Cash Flow Testing 4
3.2.2 Cash Flow Testing is Not Always Necessary 4
3.2.3 Use of Analyses or Data Predating the Analysis Date 5
3.3 Identification of Assets 5
3.3.1 Choice of Asset Subsets to Use 5
3.3.2 Notional Asset Portfolios 5
3.3.3 Other Assets 5
ii
3.4 Projection of Asset Cash Flows 5
3.4.1 Asset Characteristics 6
3.4.2 Investment Strategy 6
3.5 Projection of Policy Cash Flows 7
3.5.1 Policy Cash Flow Characteristics 7
3.5.2 Management Policy 8
3.7 Materiality 8
3.8 Reinsurance 8
3.9 Separate Accounts 8
3.10 Modeling and Data 8
3.10.1 Scenarios 9
3.10.2 Sensitivity Testing 9
3.10.3 Internal Consistency 9
3.10.4 External Requirements 9
3.10.5 Projection Period 10
3.10.6 Limitations of Models, Assumptions, and Data 10
3.11 Negative Interim Earnings 10

4.1 Reliance on Others for Data, Projections, and Supporting Analysis 10
4.2 Actuarial Report 10
4.4 Conflict with Applicable Law 12
4.5 Retention 12
APPENDIXES

Background 13
Appendix 3—Comments on the Revised Standard as Adopted in September 2001

and ASB Responses 19
iii
June 2002
TO: Members of the American Academy of Actuaries and Other Persons Interested in the
Analysis of Life, Health, or Property/Casualty Insurer Cash Flows
This booklet contains the final version of ASOP No. 7. The original title, Performing Cash Flow
Testing for Insurers, has been changed to Analysis of Life, Health, or Property/Casualty Insurer
Cash Flows. This standard, along with a revision of ASOP No. 22, now titled Statements of Opinion
Based on Asset Adequacy Analysis by Actuaries for Life or Health Insurers, supersedes ASOP
No. 14, When to Do Cash Flow Testing for Life and Health Insurance Companies, which has been
repealed effective April 15, 2002.
Background
Development of actuarial standards of practice in the cash flow testing area was originally undertaken
separately for the life and health and the property and casualty specialties. The first to be published was
ASOP No. 7, Concerning Cash Flow Testing for Life and Health Insurance Companies. This was
developed by the American Academy of Actuaries’ Committee on Life Insurance Financial Reporting in
conjunction with the Life Committee of the ASB, and was adopted by the ASB in October 1988.
Subsequently, the Casualty Committee of the ASB, through its Valuation Subcommittee, developed a
proposed standard titled Cash Flow Testing for Property and Casualty Insurers. This draft was
presented to the ASB in April 1990. The ASB decided that the document should be revised so that
there would be one broad standard that would apply to life and health insurers as well as to prop-
erty/casualty (P/C) insurers. A Joint Casualty/Life Cash Flow Testing Task Force was appointed by the
ASB to accomplish this. The resulting standard was adopted in July 1991.
Further revisions to ASOP No. 7 are now being made for several reasons. First, practice in this area
has evolved and this proposed revised standard reflects this evolution. Second, the National Association
of Insurance Commissioners (NAIC) adopted two new model regulations, Synthetic Guaranteed
Investment Contracts Model Regulation, and Separate Accounts Funding Guaranteed Minimum
Benefits Under Group Contracts Model Regulation. These two model regulations contain language
requiring that life insurers submit an actuarial opinion and memorandum
iv
related to cash flow testing. Finally, the ASB has adopted a new format for standards, and this standard
has been rewritten to conform to that new format.
In addition to ASOP No. 7, as part of the project to look at all cash flow testing standards of practice,
ASOP No. 14 and ASOP No. 22 were also reviewed. Relevant portions of ASOP No. 14 were
incorporated within the 2001 revisions of ASOP No. 7 and ASOP No. 22.
At its September 2001 meeting, the ASB voted to adopt the revised ASOP No. 7 and ASOP No. 22
and to repeal ASOP No. 14. In April 2002, the ASB voted to defer the effective date of ASOP No. 7
to July 15, 2002 while it reviewed concerns raised by the Academy’s Casualty Practice Council
regarding the standard’s applicability to property/casualty practice. At its June 2002 meeting, the ASB
amended the scope to conform to generally accepted casualty actuarial practice. Please see appendix 3
for further information.
Exposure Draft
The exposure draft of this revised standard was issued in September 2000 with a comment deadline of
March 31, 2001. The Cash Flow Testing Task Force carefully considered the twenty-one comment
letters received. For a summary of the substantive issues contained in these comment letters, please see
appendix 2.
The most significant changes from the exposure draft were as follows:
1. In section 3.10.1, Scenarios, and 3.10.3, Internal Consistency, a few changes were made for
similar reasons to both sections to clarify the actuary’s responsibilities. In 3.10.1(a), the actuary
is now required to determine whether the tested scenarios reflect a range of conditions
consistent with the purpose of the cash flows, and, if not, the actuary should disclose any
material inconsistency in any report or communication. Similarly, in 3.10.3, the actuary is now
required to determine whether the actuarial assumptions within each scenario are consistent
where appropriate, and, if not, the actuary should disclose any material inconsistency in any
report or other communication.
2. In section 3.10.2, Sensitivity Testing, a sentence was added noting that the further into the future
that asset and policy cash flows are projected, the more potential there is for variability in future
cash flows.
3. In section 4.3, Documentation, wording was added noting that the degree of documentation of
the actuary’s cash flow analysis will vary with the complexity and purpose of the job.
v
The task force thanks all those who commented on the exposure draft. The task force also thanks
Susan Witcraft for her assistance in drafting this standard.
The ASB voted in June 2002 to adopt this standard.
Cash Flow Testing Task Force
Marc A. Cagen, Chairperson

Michael A. Cioffi Thomas A. Phillips
Owen M. Gleeson David K. Sandberg
David J. Jungk Herbert S. Wolf
Lew H. Nathan
Godfrey Perrott, Chairperson

John W. Brumbach (2001) Robert G. Meilander
Marc A. Cagen (2001) Thomas A. Phillips
Charles Carroll Alan W. Ryan
Michael Cioffi Barry L. Shemin
William C. Koenig, Chairperson

David G. Hartman (2001) Alan J. Stonewall
Ken W. Hartwell James R. Swenson (2001)
Roland E. King Karen F. Terry
Michael A. LaMonica William C. Weller
Heidi Rackley Robert E. Wilcox
vi
ANALYSIS OF LIFE, HEALTH,

OR PROPERTY/CASUALTY
INSURER CASH FLOWS
1.1 Purpose—This actuarial standard of practice (ASOP) provides guidance to actuaries who perform
professional services involving the analysis of asset, policy, or other liability cash flows for life,
health, or property/casualty insurers.
1.2 Scope—This standard applies to actuaries when performing the analysis of part or all of an
insurer’s asset, policy, or other liability cash flows for life or health insurers (including health benefit
plans). The standard also applies to actuaries when performing the analysis of cash flows involving
both invested assets and liabilities for property/casualty insurers.
Cash flow analysis subject to this standard should be considered in connection with professional
services such as the following:
a. determination of reserve adequacy;
b. determination of capital adequacy;
c. product development or ratemaking studies;
d. evaluations of investment strategy;
e. financial projections or forecasts;
f. actuarial appraisals; and
g. testing of future charges or benefits that may vary at the discretion of the insurer (for
example, policyholder dividend scales and other nonguaranteed elements of the insurer’s
liabilities).
1
This standard does not apply to actuaries when performing cash flow analysis for entities other than
life, health, or property/casualty insurers, such as pension plans, retiree group benefit plans, or
social insurance programs.
When applicable law conflicts with this standard, compliance with such applicable law shall not be
deemed a deviation from this standard, provided the actuary discloses that the cash flow analysis
was performed in accordance with the requirements of such applicable law.
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 of practice is effective for actuarial work performed after July
15, 2002.
2.1 Applicable Law—Federal, state, and local statutes, regulations, case law, and other binding
authority that may govern analysis of insurer cash flows.
2.2 Asset—Any resource that can generate revenue or reduce disbursement cash flows.
2.3 Asset Risk—The risk that the amount or timing of items of cash flow connected with assets will
differ from expectations or assumptions for reasons other than a change in investment rates of
return. Asset risk includes delayed collectibility, default, or other financial nonperformance. This has
been commonly referred to in actuarial literature as the C-1 risk or credit risk.
2.4 Cash Flow—Any receipt, disbursement, or transfer of cash.
2.5 Cash Flow Analysis—Any evaluation of the risks associated with the timing or amount of cash
flows.
2.6 Cash Flow Testing—A form of cash flow analysis involving the projection and comparison of the
timing and amount of cash flows resulting from economic and other assumptions.
2
2.7 Derivative Contract—Any security that derives its value from an underlying financial instrument.
Examples include interest rate swaps, futures, and options.
2.8 Health Benefit Plan—A contract providing medical, dental, vision, disability income, accidental
death and dismemberment, long-term care, and similar benefits, whether on a reimbursement,
indemnity, or service benefit basis, regardless of the form of the risk-bearing organization, including
benefit plans provided by self-insured plan sponsors.
2.9 Insurer—An entity that accepts the risk of financial losses or, for a specified time period, guarantees
stated benefits upon the occurrence of specific contingent events, in exchange for a monetary
consideration.
2.10 Investment Rate-of-Return Risk—The risk that investment rates of return will differ from
expectations or assumptions, causing a change in the amount or timing of asset, policy, or other
liability cash flows. This has been commonly referred to in actuarial literature as the C-3 risk or
asset/liability mismatch risk.
2.11 Liability—Any commitment by, or requirement of, an insurer that can reduce revenue or generate
disbursement cash flows.
2.12 Notional Asset Portfolio—A portfolio of assets, not owned by the insurer, which changes the risk
characteristics of either the assets or the liabilities of the insurer.
2.13 Other Liability Cash Flows—Cash flows not specifically associated with asset or policy cash flows.
Examples are corporate expenses, payables, surplus notes, shareholder dividends, or balance sheet
items that result from litigation.
2.14 Policy Cash Flow Risk—The risk that the amount or timing of cash flows under a policy or contract
will differ from expectations or assumptions for reasons other than a change in investment rates of
return or a change in asset cash flows. This has been commonly referred to in actuarial literature as
the C-2 risk.
2.15 Policy Cash Flows—All premiums and other amounts paid by policyholders or contract holders to
the insurer and all benefits, expenses, and other amounts paid to policyholders or others as required
by policy or law.
2.16 Scenario—A set of economic and other assumptions used in performing cash flow analysis.
3
3.1 Analysis of Insurer Cash Flows—The actuary may perform the analysis of part or all of an insurer’s
asset (including off-balance sheet asset), policy, or other liability cash flows.
3.2 Determining the Level of Analysis of Cash Flows—In deciding the level of analysis of insurer cash
flows, if any, appropriate for the circumstances, the actuary should consider the type of asset,
policy, or other liability cash flows and the severity of risks associated with those cash flows. As
part of that consideration, the actuary should consider those risks and options embedded in the
asset, policy, or other liability cash flows that the actuary judges to be material. In addition, the
actuary should consider the risks that are being undertaken and determine what types of deviations
from expected experience should be taken into account, if any, given the purpose of the analysis.
3.2.1 Reasons for Cash Flow Testing—The actuary should consider cash flow testing when
variations in the underlying risks are likely to have a material impact on the expected
cash flows in certain products, certain lines of business, or on the company. Situations that
might indicate a need for cash flow testing include the following:
a. where there are material asset risks (for example, below investment grade bonds,
assets with payment timing risks such as CMOs or mortgage-backed securities,
mortgages concentrated in certain regions of the country, and large illiquid assets
such as real estate);
b. where there are liabilities that have cash flows far out into the future (for example,
structured settlement annuities with a significant reinvestment
rate-of-return risk);
c. where a company has a new or rapidly growing line of business; and
d. where options have been granted to policyholders or borrowers and the likelihood
of antiselection in the exercise of these options is significant (for example, an
annuity contract holder’s option to surrender the annuity for cash at book value).
3.2.2 Cash Flow Testing is Not Always Necessary—Insurers are subject to different types and
degrees of risk. The actuary may decide that the type or degree of risk does not warrant
cash flow testing. Following are examples of situations where other types of analyses might
be sufficient.
a. If the risks to be analyzed are products with short-term liabilities (for example, the
vast majority of cash flows occurring within a few years) supported by short-term
4
assets, these risks may be more appropriately analyzed through other means. The
risks may involve a small number of large individual claims over a short-term period
and may be better addressed using risk theory techniques.
b. If, in the actuary’s judgment, a block of business, taken together with its policy
term and the associated investment strategy, is relatively insensitive to influences
such as changes in economic conditions or interest-rate scenarios, the actuary may
determine that cash flow testing is not necessary to support the opinion, report, or
recommendation, and other methods may be sufficient.
c. If the risk being evaluated is unanticipated sources of significant claims (examples in

the past include AIDS and asbestos), these risks may be analyzed with methods
other than cash flow testing.
3.2.3 Use of Analyses or Data Predating the Analysis Date—If appropriate, the actuary may use
analyses performed prior to the valuation date, an analysis performed at the time of policy
issue, modeling based on data taken from a time that predates the analysis date, or other
methods.
The actuary should document the reasonableness of such prior period data, studies,
analyses, or methods, that key assumptions are still appropriate, and that no material events
have occurred prior to the valuation date that would invalidate the analysis on which the
actuary’s opinion is based.
3.3 Identification of Assets—The actuary should identify which assets are included in the cash flow
analysis.
3.3.1 Choice of Asset Subsets to Use—The same assets should not be improperly used to
support different blocks of policy cash flows.
3.3.2 Notional Asset Portfolios—If the liability of the insurer is based on the performance of a
notional asset portfolio, such as in the case of synthetic guaranteed investment contracts, the
actuary should include the notional asset portfolio creating this liability in this analysis.
3.3.3 Other Assets—The actuary should consider whether policy loans, deferred premiums, and
other policy-related assets should be included in the cash flow analysis.
3.4 Projection of Asset Cash Flows—In projecting an insurer’s asset cash flows for a given scenario,
the actuary should consider the assets of the insurer and the insurer’s investment strategy.
5
3.4.1 Asset Characteristics—The characteristics of an asset affect the timing and amounts of its
cash flows. The cash flows of some assets are relatively immune to external factors and can
be predicted on the basis of asset structure alone (for example, high-quality noncallable
bonds). The cash flows of other assets (for example, callable bonds, mortgage-backed
securities, common stocks, derivative contracts, or premium receivables) are more sensitive
to external events, and their analysis should be based on a combination of their structure
and external factors. The actuary should consider the following issues in making cash flow
projections:
a. the sensitivity to economic factors, such as interest rates, equity, or other market
returns, and inflation rates on the insurer’s asset cash flows;
b. any limitations on the ability to use asset cash flows to support policy or other
liability cash flows, such as when a block of assets is specifically held in support of
a particular block of business by contract or regulation;
c. the impact on cash flow associated with asset quality as it relates to the risk of a
delay in asset cash flows being collected, asset default, or other financial non-
performance;
d. the associated costs of maintaining the assets or of converting the assets into cash
when necessary;
e. the historical experience of similar assets, to the extent such experience is credible
and relevant to the projection of future asset cash flows; and
f. other known factors that are likely to have a material effect on asset cash flows,
particularly those factors that are likely to have an effect on asset risk or investment
rate-of-return risk.
3.4.2 Investment Strategy—The actuary should consider the following in performing the cash
flow analysis:
a. the insurer’s strategy regarding the sale of assets prior to maturity;
b. asset segmentation in support of the insurer’s policy cash flows;
c. the insurer’s strategy regarding the sale of assets with a declining market value;
d. the insurer’s strategy for the investment of future positive or negative cash flows;
6
e. to the extent the insurer’s investment strategy contemplates borrowing to cover
negative cash flows, whether the funds borrowed pursuant to the strategy are
reasonable in relation to the insurer’s existing indebtedness, borrowing capacity,
and cost of borrowing funds;
f. the insurer’s use of derivative contracts, including strategies to mitigate asset,

policy, or other liability cash flow risk;
g. to the extent the insurer’s investment strategy contemplates capital contributions

from a parent or other source, whether the capital contributions can be sustained
and are appropriate for the type of analysis;
h. the costs or gains due to asset, policy, or other liability cash flows denominated in
foreign currencies; and
i. any other known factors that are likely to have a material effect on investment
strategy or the insurer’s ability to execute its investment strategy.
3.5 Projection of Policy Cash Flows—In projecting an insurer’s expected policy cash flows, the
actuary should consider the policy’s cash flow characteristics as well as the insurer’s policies
concerning the management of its policy cash flows.
3.5.1 Policy Cash Flow Characteristics—The characteristics of a policy affect the timing and
amounts of its cash flows. The actuary should consider the following factors in projecting
policy cash flows:
a. the risk of insolvency or other nonperformance by providers of services, including

reinsurers and other counter-parties;
b. the associated costs of maintaining, collecting, or paying out the policy cash flows;
c. the historical experience of similar policy cash flows, to the extent such experience
is credible and relevant to the projection of future cash flows;
d. the effect of external factors such as interest rates, equity or other market returns,
unemployment rates, and inflation rates on the insurer’s policy cash flows;
e. the ability of the policyholder or other party to exercise options under the policy
that have an effect on policy cash flows (for example, put options
7
subject to a predefined event occurring, or allowing the transfer of funds between
contracts or funding vehicles);
f. the effect of changes in premium (for example, rate increases) or changes in other
policy charges (for example, cost of insurance charges in universal life contracts);
and
g. other known factors that are likely to have a material effect on policy cash flows,
including off-balance sheet items.
3.5.2 Management Policy—The actuary should consider management policy concerning the
settlement or payment of liabilities, and the effect that this management policy may be
reasonably expected to have on the projection of policy cash flows. Considerations that
might affect the projection include claim settlement and benefit payment practices, expense-
control strategies, company philosophy relative to the determination of policyholder
dividends, and charges or benefits that vary at the discretion of the company, as well as
significant relationships between management policy and the scenarios analyzed.
3.6 Other Liability Cash Flows—The actuary should consider whether other liability cash flows should
be included in the analysis being conducted.
3.7 Materiality—The actuary may determine that certain asset, policy, or other liability cash flows will
not be analyzed if these asset, policy, or other liability cash flows may be reasonably expected not
to have a material impact on the overall results. The analysis need not be refined if, in the judgment
of the actuary, further refinement would not result in a materially different actuarial opinion, report,
or recommendation.
3.8 Reinsurance—The actuary should consider whether reinsurance receivables will be collectible when
due, and any terms, conditions, or other aspects that may be reasonably expected to have a
material impact on the cash flow analysis.
3.9 Separate Accounts—The actuary should consider the effect of separate account asset, policy, or
other liability cash flows on the general account. For example, the actuary should consider general
account guarantees, recoverability of unamortized expense allowances, and allowable transfers
between the separate account and the general account.
3.10 Modeling and Data—The actuary should select an appropriate model for the analysis being
performed. When the asset, policy, or other liability cash flows being analyzed are represented by
sample or hypothetical data, the cash flows used for modeling should be representative of the block
of asset, policy, or other liability cash flows being analyzed and should be consistent with the
8
intended purpose and use of the analysis.
3.10.1 Scenarios—The scenario is a key element in the analysis of cash flows. Depending on the
purpose of the analysis, more than one scenario may be used. Scenarios may be generated
by either deterministic or stochastic methods.
a. Range of Scenarios Consistent with Purpose of Analysis—The scenario(s) to be

analyzed may be specified by the client or employer, by applicable law, or by the
actuary. The actuary should determine whether the scenarios analyzed reflect a
range of conditions consistent with the purpose of the analysis of cash flows. If not,
the actuary should disclose any material inconsistency in any actuarial report
prepared pursuant to section 4.2, or in any other communication of the actuary’s
findings.
b. Number of Scenarios—Consistent with the purpose of the analysis, the actuary

should consider a sufficient number of scenarios to reasonably represent the
underlying variability of the asset, policy, or other liability cash flows.
3.10.2 Sensitivity Testing—The actuary should consider and appropriately address the sensitivity
of the model to the effect of variations in key assumptions. For example, the further into the
future that asset and policy cash flows are projected, the more potential there is for
variability in the future cash flows. In determining whether sensitivity has been appropriately
addressed, the actuary should consider the intended purpose and use of the analysis and
whether the results reflect a reasonable range of variation in the key assumptions, consistent
with that intended purpose and use.
3.10.3 Internal Consistency—The actuary should determine the following:
a. whether actuarial assumptions within each of the interest rate and other scenarios
being analyzed are consistent where appropriate; and
b. that the actuarial assumptions, methods, or models used for different segments of
business are materially consistent, and that any significant interdependencies are
modeled appropriately.
If not, the actuary should disclose any material inconsistency in any actuarial report
prepared pursuant to section 4.2 or in any other communication of the actuary’s findings.
3.10.4 External Requirements—The actuary should consider how applicable law, and other
external requirements relating to such things as financial statements and operating ratios,
9
federal income taxes, insurer capitalization, and distribution of an insurer’s earnings to
policyholders or shareholders are likely to affect future cash flows or constrain the range of
possible scenarios. These factors should be appropriately reflected in the analysis.
3.10.5 Projection Period—The time period over which cash flows are projected should be
consistent with the purpose of the analysis. Different blocks of business may require
different projection periods. If the objective is to analyze cash flows over the entire life of
the block of business, then the actuary should choose a time period over which the
underlying asset, policy, or other liability cash flows are material. If the objective is to
analyze cash flows over a period shorter than the entire life of the block of business, then
the actuary should disclose the existence of possible material cash flows beyond such a time
period in analyzing results.
3.10.6 Limitations of Models, Assumptions, and Data—Cash flow estimates can vary
considerably as a result of the model used, the assumptions selected, and the data. When
results are highly volatile, additional analysis may be appropriate.
3.11 Negative Interim Earnings—The actuary should consider the impact of any negative interim earnings
during the cash flow projection period, if it is appropriate for the purpose of the analysis.
4.1 Reliance on Others for Data, Projections, and Supporting Analysis—The actuary may rely on data,
projections, and supporting analysis supplied by others. In doing so, the actuary should disclose
both the fact and the extent of such reliance. Such disclosure may follow the forms prescribed in the
applicable NAIC model laws and regulations. The accuracy and comprehensiveness of data,
projections, or supporting analysis supplied by others are the responsibility of those who supply the
data, projections, or supporting analysis. When practicable, the actuary should review the data,
projections, and supporting analysis for reasonableness and consistency, and disclose such a
review. For further guidance, the actuary is directed to ASOP No. 23, Data Quality.
4.2 Actuarial Report—If appropriate, given the purpose for which the cash flow analysis was
performed, the actuary should issue a written actuarial report as a means of documenting the data,
assumptions, techniques, and conclusions reached.
4.3 Documentation—The degree of documentation of the actuary’s cash flow analysis will vary with the
complexity and purpose of the analysis. The documentation should be more complete for more
significant assignments such as regulatory cash flow testing than for other assignments such as
periodic income projections.
10
The actuary should document the following, as appropriate, for the cash flow analysis being
conducted:
a. whether any analyses performed prior to the valuation date were used, and, if so, the
reasonableness of the prior period data, studies, analyses, or methods;
b. the purpose of the analysis and the risks analyzed;
c. the type of analysis performed (i.e., whether cash flow testing or some other method of
analysis) for each block of business analyzed;
d. the results of the analysis;
e. the actuary’s conclusions or recommendations, if any;
f. any conclusions or recommendations related to sensitivity testing; and
g. the data, assumptions, and methods used with sufficient clarity that another actuary qualified
in the same practice area could evaluate the reasonableness of the actuary’s work. The
actuary should consider whether the documentation should contain the following:
1. the asset characteristics;
2. any limitations on the ability to use asset cash flows to support policy and other
liability cash flows;
3. the insurer’s investment strategy;
4. how the policy cash flow characteristics are reflected in the analysis, including the
insurer’s policies concerning the management of its policy cash flows;
5. any cash flows not attributable to specific asset, policy, or other liability cash flows;
6. whether any off-balance sheet items were included in the analysis;
7. relevant cash flows within the scope of the analysis that were specifically excluded
from the cash flow analysis due to immateriality;
8 the characteristics of any reinsurance agreements, and how these were reflected in
the analysis;
11
9. the effect of separate account asset, policy, or other liability cash flows on the
general account, such as general account guarantees;
10. the model used, including the sources of data and key assumptions;
11. the scenarios used, and the rationale supporting the methodology used to choose
and develop the scenarios;
12. how any external factors were included in the analysis;
13. the time period over which cash flows are projected;
14. the existence of negative interim earnings and its effect on the analysis;
15. whether the actuary relied on asset cash flow projections or other analyses of
assets supplied by others, and the extent of such reliance; and
16. any other data, assumptions, or other methods that are known to materially impact
the analysis.
4.4 Conflict with Applicable Law—When applicable law conflicts with this standard, compliance with
such applicable law shall not be deemed a deviation from this standard, provided the actuary
discloses that the opinion was rendered in accordance with the requirements of such applicable law.
4.5 Retention—The actuary, to the extent practicable, should take reasonable steps to ensure that the
documentation will be retained for a reasonable period of time (and no less than the length of time
necessary to comply with any statutory, regulatory, or other requirements). The actuary need not
retain the documentation personally; for example, it may be retained by the actuary’s employer.
4.6 Prescribed Statement of Actuarial Opinion—This ASOP does not require a prescribed statement
of actuarial opinion (PSAO) as described in the Qualification Standards for Prescribed
Statements of Actuarial Opinion promulgated by the American Academy of Actuaries. However,
law, regulation, or accounting requirements may also apply to an actuarial communication prepared
under this standard, and as a result, such actuarial communication may be a PSAO.
4.7 Deviation from Standard—The actuary must be prepared to justify the use of any procedures that
depart materially from those set forth in this standard and must include, in any actuarial
communication disclosing the results of the procedures, an appropriate statement with respect to the
nature, rationale, and effect of such departures.
12
Appendix 1
Note: This appendix is provided for informational purposes, but is not part of the standard of practice.
Background
Actuaries have been performing financial projections for many years. Various cash flow elements have
often been an integral part of these projections. The large increase in the level and volatility of investment
rates of return since the 1970s caused significant swings in asset, policy, or other liability cash flows and
present values. The sophistication of insurance products has increased during this time. In addition,
fluctuating operating results have led to increased attention to improving the measurement of the financial
security of insurers. As a result of these changes, cash flow analysis has become an increasingly
important aspect of actuarial work.
Current Practices
Common approaches to cash flow analysis typically follow these steps:
1. identify which asset, policy, or other liability cash flows are to be included in the cash flow
analysis;
2. select and validate models for asset, policy, or other liability cash flows;
3. select an appropriate scenario or set of scenarios, either deterministic or stochastic;
4. project the selected asset, policy, or other liability cash flows under each selected scenario; and
5. develop conclusions based on analysis of the cash flow projections.
There are variations on this process. For example, if cash flow analysis is used to analyze the effects of
changes in investment strategy, specific assets may not be identified in the initial step of the process. It
may be sufficient instead to analyze variations in asset portfolio characteristics such as yield and
duration.
Cash flow analysis can be used in a variety of ways, such as analyzing the performance of a particular
asset or product under certain specified scenarios or evaluating the solvency of the entire company. A
13
common current use of cash flow analysis is to meet the requirements of the NAIC’s Actuarial
Opinion and Memorandum Regulation (AOMR), including any variations to this regulation passed by
a state in adopting the model.
14
Appendix 2
The exposure draft of this revised actuarial standard of practice was issued in September 2000 with a
comment deadline of March 31, 2001. (Copies of the exposure draft are available from the ASB
office.) Twenty-one comment letters were received. The Cash Flow Testing Task Force of the Life
Committee of the ASB carefully considered all comments received. Summarized below are the
significant issues and questions contained in the comment letters and the task force’s responses.

Section 1.2, Scope
Comment A number of commentators asked for clarification whether the analysis can be for part of an insurer’s asset,
policy, or other liability cash flows. One commentator did not want the standard to allow testing of only
assets or liabilities.
Response The revised ASOP No. 7 allows testing of asset, policy, or other liability cash flows individually or only
in part, as appropriate. The task force added wording in section 1.2 to clarify the point.
Comment A few commentators believed that section 1.2 should specifically mention items that are relevant in today’s
practice, namely determination of capital adequacy (such as the C-3 RBC tests that were required for some
companies for the first time in 2000) and determination of fair value.
Response The task force agreed that capital adequacy is relevant for today’s practice, but believed that fair value is
not defined well enough, so the task force added only capital adequacy to the list of items.
Comment A few commentators asked whether ASOP No. 7 was appropriate for property/casualty insurance and
health benefit plans.
Response The task force notes that a joint property/casualty and life task force originally developed ASOP No. 7,
which continues to be appropriate for certain property/casualty work and for health benefit plans.
Comment One commentator questioned the relevance of ASOP No. 7 for non-U.S. work.
Response Annotation 3-1 of the Code of Professional Conduct requires the actuary to observe applicable standards
of practice promulgated by a recognized actuarial organization for the jurisdiction in which the actuary
renders actuarial services. ASOPs promulgated by the Actuarial Standards Board apply to actuarial
services rendered in the United States. Actuarial services rendered in a non-U.S. jurisdiction would be
subject to actuarial standards of practice promulgated by such jurisdiction’s recognized actuarial
organization, if any. Therefore, the task force made no change as a result of this comment.
Section 2.2, Asset, and 2.11, Liability
Comment Many commentators offered suggestions for changing these definitions.
Response The task force believes the definitions are appropriate. The definitions are consistent with those found in
other standards, where practical. The definitions in ASOP No. 7 are for just this standard and are
appropriate for this standard.
15
Section 2.5, Cash Flow Analysis, and 2.6, Cash Flow Testing
Comment One commentator did not like the distinctions made between “cash flow analysis” and “cash flow testing.”
Response The task force believes the definitions are appropriate, since ASOP No. 7 is now designed to make a
hierarchy of types of analysis, with “cash flow analysis” being the most general term, and “cash flow
testing” being one type of cash flow analysis.
Section 2.12, Notional Asset Portfolio
Comment A number of commentators suggested changes to this definition.
Response The task force revised the definition in response.

Section 2.13, Other Liability Cash Flows
Comment One commentator noted that the term “other liability cash flows” was used, but not defined, in the exposure
draft of ASOP No. 22. A commentator on ASOP No. 22 thought that the definition should include surplus
notes.
Response The task force agreed and added a definition of “other liability cash flows,” which includes a reference to
surplus notes, to both ASOP No. 7 and No. 22.
Section 2.15, Policy Cash Flows (previously section 2.14)
Comment One commentator noted that the definition did not treat premium taxes properly, as premium taxes are not paid
on behalf of policyholders, but rather are paid as required by law.
Response The task force agreed with this comment and changed the definition accordingly.
Section 3.2.1, Reasons for Cash Flow Testing, and 3.2.2, Cash Flow Testing is Not Always Necessary
Comment A few commentators questioned the use of the phrases “long duration” and “short-term,” and noted that
these can have meaning in a GAAP context.
Response The task force agreed that the use of those phrases could cause confusion in that regard and changed
the wording.
Section 3.2.2, Cash Flow Testing is Not Always Necessary
Comment One commentator asked that the phrase “policy term” be included as part of what the actuary should
consider as to whether a block is relatively insensitive to changes in economic conditions.
Response The task force agreed and added words to accomplish this.
Section 3.2.3, Use of Analyses or Data Predating the Analysis Date
Comment One commentator believed that the actuary should consider future material events in the analysis.
Response The task force disagreed, believing such a thing is beyond the scope of cash flow analysis.
Section 3.5.1, Policy Cash Flow Characteristics
Comment One commentator asked that the issue of changes in the premium scales be included explicitly.
Response The task force added section 3.5.1(f), which specifically identifies changes in premiums and other charges
as items for the actuary to consider.
16
Section 3.7, Materiality
Comment A few commentators wanted further guidance on materiality. Several asked that materiality be mentioned
in specific sections.
Response The task force believes that more detailed guidance on materiality is beyond the scope of this standard.
The task force notes that the guidance in section 3.7 is applicable to the entire standard, so it did not add
specific mentions in other sections.
Section 3.8, Reinsurance
Comment One commentator asked whether section 3.8 differed from section 3.5.1(a).
Response Section 3.5.1(a) specifically deals with policy cash flows, while section 3.8 is broader than that. The task
force made no changes to either section.
Section 3.9, Separate Accounts
Comment A few commentators wanted more detailed guidance on treatment of flows between the general account and
the separate account.
Response The task force believes that the level of guidance in this section is appropriate. However, the task force
agreed with a comment that the actuary should consider whether certain cash flows between the general and
separate accounts were allowable, and changed the wording accordingly.
Section 3.10.1, Scenarios
Comment A number of commentators questioned the use of the word “often” in the sentence, “Often, more than one
scenario will be analyzed.”
Response The task force removed the word “often” and substituted the words “depending on the purpose of the
analysis.”
Comment Regarding 3.10.1(b), Number of Scenarios, one commentator wanted more detailed guidance on the number of
scenarios. Another commentator wanted words that put less emphasis on the investment rate of return being
the key item of interaction with asset, policy, or other liability cash flows.
Response The task force believes that the level of guidance on the number of scenarios is appropriate. The task force
did change this section to put less emphasis, when choosing the number of scenarios, on whether asset,
policy, or other liability cash flows vary with investment rates of return.
Section 3.10.2, Sensitivity Testing
Comment A few commentators noted the issue of cash flows being more uncertain the further into the future a
projection is done.
Response The task force agreed and added words to section 3.10.2, noting more potential for variability the further into
the future the cash flows are projected.
Section 3.11, Negative Interim Earnings
Comment One commentator mentioned that negative interim earnings were an accounting issue and that, therefore, this
section should be eliminated.
Response The task force disagreed. This section emphasizes the point that, if appropriate for the purposes of the
analysis (for example, an asset adequacy test), the actuary should consider whether negative earnings in
some years (the typical concern being the early projection years) affect whether future positive earnings in
other (typically, later projection) years can be realized; i.e., the block tested may require the infusion of
additional funds before the positive earnings years start. The task force agreed that in some types of
analyses (for example, pricing and analyzing a new block of business where the company has significant
surplus) the consideration of negative earnings may not be appropriate.
17
Section 4.1, Reliance on Others for Data, Projections, and Supporting Analysis
Comment One commentator noted that wherever the term “data” was mentioned in terms of an actuary reviewing and
using the work of others, it was more appropriate to use the more comprehensive terminology “data,
projections, or supporting analysis.”
Response The task force agreed and made the recommended change.
Comment Some commentators believed that section 4.3 should be more general and not contain a list of items needing
documenting, while others liked the guidance a list gave.
Response The task force agreed to keep the list, but shortened the descriptions of some of the items.
Comment A few commentators noted that the amount of disclosure should vary based on the complexity of the project.
Response The task force agreed and added wording to note this.
Comment One commentator noted that a disclosure item should be added for analyses performed prior to the valuation
date.
Response The task force agreed and added what is now section 4.3(g).
Comment One commentator noted that section 4.3(g)(15) (previously section 4.3(u)) on documentation of negative
interim earnings should be modified to note that this should be done only if appropriate for the analysis.
Response The task force believes this issue is covered by other wording in section 4.3, which notes that documentation
should be appropriate for the analysis being done.
Section 4.5, Retention
Comment One commentator noted that there should be a section on document retention.
Response The task force agreed and added a new section 4.5, Retention.
18
Appendix 3
Comments on the Revised Standard as Adopted

in September 2001 and ASB Responses
As appendix 2 indicates, the exposure draft of this revised actuarial standard of practice was issued in
September 2000 with a comment deadline of March 31, 2001. The Cash Flow Testing Task Force of
the Life Operating Committee of the ASB, after carefully considering all comments received, presented
a proposed final revised standard to the ASB for adoption. At its September 2001 meeting, the ASB
adopted the revised standard (with minor edits) with an effective date of April 15, 2002.
In March of 2002, representatives of the Casualty Practice Council of the American Academy of
Actuaries identified concerns regarding the application of the revised standard to property and casualty
practice. Specifically, they expressed concern that the scope of the revised standard went beyond
generally accepted actuarial practice in the property and casualty area and, arguably, called for casualty
actuaries to consider cash flow testing in settings where they typically would not do so and where, in
their view, cash flow testing would not be needed.
In light of these concerns, the Casualty Practice Council formally requested that the ASB defer the
effective date of the revised standard to July 15, 2002, in order to provide the Council with an
opportunity to present its concerns and offer one or more suggested remedies. The ASB carefully
considered the Casualty Practice Council’s request and agreed to defer the effective date of the revised
standard to July 15, 2002.
Representatives of the Casualty Practice Council attended the ASB’s June 2002 meeting and presented
the Council’s concerns. The chairperson of the Life Operating Committee of the ASB was also present.
After considerable discussion and consideration, the ASB agreed that it would be appropriate to do the
following:
1. amend the scope of the revised standard to conform more closely to current, generally accepted
practice among property and casualty actuaries;
2. proceed with such amended scope without re-exposure to the membership since the scope and
content of the revised standard (as adopted at the September 2001 meeting) with respect to life
and health practice remained unaltered; and
3. inform the membership and all interested parties of these developments and the effective date of
July 15, 2002.
19
The Casualty Practice Council representatives also opined that section 3.2, Determining the Level of
Analysis of Cash Flows, in requiring the actuary to consider “all material risks and options embedded in
the asset, policy or other liability cash flows,” was unclear as to what is or is not “material.” The ASB
agreed a clarification was appropriate for all practice areas, and modified the section to require the
actuary to consider only those risks and options that the actuary believes to be material.
20
Actuarial Standard
of Practice
No. 8
Regulatory Filings for Health Plan Entities
Revised Edition
Developed by the
Adopted by the
December 2005
(Doc. No. 100)

ASOP No. 8—December 2005
TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Financial Projection 2
2.3 Health Filing 2
2.4 Health Plan Entity 3
2.5 Regulatory Benchmark 3
2.6 Time Value of Money 3

3.1 Introduction 3
3.2 Issues and Recommended Practices for Health Filings 3
3.2.1 Purpose of Filing 3
3.2.2 Assumptions 3
3.2.3 Use of Business Plans to Project Future Results 4
3.2.4 Use of Past Experience to Project Future Results 4
3.2.5 Recognition of Plan Provisions 5
3.2.6 New Plans or Benefits 5
3.2.7 Projection of Future Capital and Surplus 5
3.2.8 Regulatory Benchmark 5
3.2.9 Reasonableness of Assumptions 5
3.4 Documentation 6

APPENDIXES

Background 8
Current Practices 8
ii
December 2005

Actuarial Standards Board and Other Persons Interested in Regulatory Filings for
Health Plan Entities
This booklet contains the final version of the revision of ASOP No. 8, now titled Regulatory
Filings for Health Plan Entities.
Background
The ASB originally adopted ASOP No. 8, Regulatory Filings for Rates and Financial
Projections for Health Plans (Doc. No. 010), in 1989. Under the guidance of the ASB Health
Committee, the Task Force to Revise ASOP No. 8 has prepared this revision to be consistent
with the current ASOP format and to reflect current, generally accepted actuarial practices with
respect to regulatory filings for health plan entities.
Exposure Draft
The exposure draft of this ASOP was issued in September 2004 with a comment deadline of
March 31, 2005. Fourteen comment letters, showing thoughtful insight of the issues, were
received and considered in developing the final ASOP. For a summary of the substantive issues
contained in the exposure draft comment letters and the responses, please see appendix 2.
The most significant changes since the exposure draft were as follows:
1. The language on applicable law in section 1.2 was updated to be consistent with current
boilerplate language to be used in other ASOPs and removed from section 2.1.
2. The task force modified the language regarding section 3.2.2, Consistency with Business
Plans (now section 3.2.3, Use of Business Plans to Project Future Results), to address
commentators’ concerns regarding the actuary’s use of any relevant information from any
business plan(s) as part of the process of setting assumptions and methodologies used in the
filing. The task force also removed the requirement of consistency in assumptions between
the business plan and the filing.
3. The task force modified section 3.2.3, Reasonableness of Assumptions, in the exposure draft
and moved it to the last section within 3.2, Issues and Recommended Practices for Health
iii
Filings. The language clarifies the requirements when the actuary reviews the reasonableness
of assumptions.
4. The task force modified the language in section 3.2.6, New Plans or Benefits, to address the
issues regarding data raised by the commentators.
5. The task force modified section 3.3, Reliance on Others (now Reliance on Data or Other
Information Supplied by Others), to use language consistent with other recent ASOPs.
6. The task force changed the language in section 4.3, Deviation from Standard, to be consistent
with that used in other recent ASOPs.
The Health Committee thanks all those who commented on the exposure draft.
Paul R. Fleischacker, Chairperson

Timothy D. Courtney Julia T. Philips
John M. Friesen William H. Phillips
Michael R. Gross William R. Sarniak
James M. Gutterman John W.C. Stark
Alan D. Ford, Chairperson

Michael S. Abroe John M. Friesen
Gary L. Brace James M. Gutterman
Robert G. Cosway Mary J. Murley
Paul R. Fleischacker John W.C. Stark

William C. Cutlip Lawrence J. Sher
iv
REGULATORY FILINGS FOR HEALTH PLAN ENTITIES
1.1 Purpose⎯This actuarial standard of practice (ASOP) provides guidance to actuaries

when performing professional services with respect to preparing or reviewing required
regulatory filings for health plan entities and health benefit plans provided by health plan
entities.
1.2 Scope⎯This standard applies to actuaries when performing professional services with
respect to preparing or reviewing health filings, as defined in section 2.3, required by and
made to state insurance departments, state health departments, the federal government,
and other regulatory bodies. Health filings require projection of future contingent events
and can be categorized into two broad categories: rate or benefit filings and financial
projection filings. Some of these filings are made on behalf of health plan entities, such
as filings made in conjunction with applications for licensure. Other filings are required
for health benefit plans provided by health plan entities, such as filings for approval of
rates. Such filings may be required for new and existing health plan entities, for new
health benefit plans, and for revisions to existing health benefit plans.
The filings covered by this standard do not include filings to certify compliance with
rating methods and other actuarial practices applicable to carriers for small employer
health benefit plans (see ASOP No. 26, Compliance with Statutory and Regulatory
Requirements for the Actuarial Certification of Small Employer Health Benefit Plans);
statements of actuarial opinion relating to statutory financial statements of health plan
entities (see ASOP No. 22, Statements of Opinion Based on Asset Adequacy Analysis by
Actuaries for Life and Health Insurers, and ASOP No. 28, Compliance with Statutory
Statement of Actuarial Opinion Requirements for Hospital, Medical, and Dental Service
or Indemnity Corporations, and for Health Maintenance Organizations); and filings that
are solely experience reports and do not require projection of future contingent events.
This standard is not meant to provide a complete set of recommended practices for the
determination of health rates, financial projection entries, or other numerical information
required to be included in health filings. It represents areas of inquiry and analysis that an
actuary should consider when preparing or reviewing a required health filing for purposes
of compliance with applicable law.
The actuary should satisfy the requirements of applicable law (statutes, regulations, case
law, and other legally binding authority) and this standard. However, to the extent
1
applicable law conflicts with this standard, compliance with such applicable law shall not
be deemed a deviation from this standard, provided the actuary discloses that the actuarial
assignment was performed in accordance with the requirements of such applicable law.
1.4 Effective Date—This standard is effective for all applicable filing work performed on or
after May 1, 2006.
2.1 Financial Projection⎯A projection of covered lives, premiums, claims, expenses, capital
and surplus, or other financial quantities that may be required by applicable law.
2.2 Health Benefit Plan⎯A contract or other financial arrangement providing hospital,
medical, prescription drug, dental, vision, disability income, accidental death and
dismemberment, long-term care, or other health-related benefits, whether on a
reimbursement, indemnity, or service benefit basis, irrespective of the type of health plan
entity that provides the benefits.
2.3 Health Filing⎯A required regulatory filing, at least one element of which requires
projection of future contingent events, for rates or benefits, or financial projections.
Rate or benefit filings include, but are not limited to, the following:
a. filings of manual rates and rating factors;
b. filings of rating methodology, such as experience rating formulas and factors;
c. statements of actuarial soundness or rate adequacy, as may be defined by the

regulatory body, for future rating periods;
d. certification of benefit values; and
e. other filings of similar nature as may be required by the regulatory body.
Financial projection filings include, but are not limited to, any filings in which the
financial projections are a stand-alone requirement, such as those for licensure
2
requirements, or are a requirement of a broader filing, such as a rate filing or projections

of future capital and surplus or other regulatory benchmark requirements.
2.4 Health Plan Entity⎯An insurance company, health maintenance organization, hospital or
medical service organization, self-insured health benefit plan sponsor, governmental
health benefit plan sponsor, or any other health benefit plan sponsor from which health
filings are required.
2.5 Regulatory Benchmark⎯A measurement, such as a loss ratio or capital ratio, specified
by applicable law, which is used by the regulatory authority as a basis upon which to
evaluate a health filing.
2.6 Time Value of Money⎯The principle that an amount of money available at an earlier
point in time has different usefulness and value than the same amount of money has at a
later point in time.
3.1 Introduction—Many jurisdictions require health filings that demonstrate compliance with
applicable law, which may vary considerably as to the requirements and procedures for
these filings. In many cases, such law may be silent as to the assumptions and
methodology to be used, thus giving the actuary significant discretion to exercise
professional judgment in preparing and reviewing the filings.
3.2 Issues and Recommended Practices for Health Filings—The actuary should consider the
following:
3.2.1 Purpose of Filing⎯When preparing a filing, the actuary should include in the
filing a statement of its purpose, identifying the applicable law it is intended to
comply with. For example, the actuary might state, “The only purposes of this rate
filing are to document the rates and to demonstrate that the anticipated loss ratio
of this product with those rates meets the minimum requirements of Section XX
of the statutes of [name of state]. This filing may not be appropriate for other
purposes.”
If, in the actuary’s professional judgment, applicable law is ambiguous, the

actuary should describe how the actuary interpreted the requirements when
preparing the filing. For example, the statute may say, “Provide a business plan
demonstrating future solvency.” The actuary then might state, “This projection of
financial results is intended to demonstrate that the business plan reasonably
anticipates surplus exceeding $XX million for the following Y years.”
3.2.2 Assumptions—The actuary should consider which assumptions are necessary for
the filing. Such assumptions may include the following:
3
a. premium levels and future rate changes;
b. enrollment projections;
c. morbidity, mortality, and lapsation levels and trends;
d. expenses, commissions, and taxes;
e. investment earnings and the time value of money;
f. health cost trends;
g. expected financial results, such as profit margin, surplus contribution, and

surplus level;
h. expected impact of contractual arrangements with health care providers

and administrators; and
i. expected impact of reinsurance and other financial arrangements.
3.2.3 Use of Business Plans to Project Future Results⎯The actuary should request and
review any existing and relevant business plans for the health plan entity or health
benefit plan that is the subject of the filing. The actuary should consider the
information therein along with any other information relevant to the business plan
as a part of the setting of the assumptions and methodologies used in the filing.
3.2.4 Use of Past Experience to Project Future Results⎯When setting assumptions, the
actuary should adjust past experience for any known or expected changes that, in
the actuary’s professional judgment, are likely to materially affect expected future
results. These may include, but are not limited to, changes in the following:
a. selection of risks;
b. demographic and risk characteristics of the insured population;
c. policy provisions;
d. business operations;
e. premium rates, claim payments, expenses, and taxes;
f. trends in mortality, morbidity, and lapse; and
g. administrative procedures.
4
The actuary should make adjustments to past experience based on earned

premiums and incurred claims, as appropriate, in a way that reasonably matches
claim experience to exposure. For example, the actuary should not use ratios of
paid claims to collected premiums to project future incurred loss ratios except
with appropriate adjustment.
The actuary should update prior earned premium and incurred claim estimates to
reflect premium and claim development experience to date when, in the actuary’s
professional judgment, the difference is material.
The actuary may express past experience in terms of aggregate premium, claim,
and reserve amounts, or in terms of unit results, such as incidence rates and
average premium and claim amounts.
The actuary should consider the applicability and statistical credibility of the data
and make appropriate modifications, if necessary.
3.2.5 Recognition of Plan Provisions⎯The actuary should consider pertinent plan

documents or contracts and, as described to the actuary, established administrative
procedures, any plan interpretations that are not written in the plan documents,
and any arrangements with providers of health care.
3.2.6 New Plans or Benefits⎯The actuary should consider available data relevant to
new plans or benefits. If using a model (for example, in the absence of sufficient
data), the actuary should use a model that is reasonable and consistent with
similar benefits or plans of coverage, if any, and that, if appropriate for the plan or
benefit, takes into account the general characteristics of the health care delivery
system.
3.2.7 Projection of Future Capital and Surplus⎯As part of a health filing, the actuary
may be called upon to project future capital and surplus for the entire health plan
entity or a portion of it, such as a business unit. In doing so, the actuary should
base the projection on reasonable assumptions that take into account any internal
or external future actions as described to the actuary that, in the actuary’s
professional judgment, are likely to have a material effect on capital or surplus.
3.2.8 Regulatory Benchmark⎯The actuary may be called upon to project results in

relation to a regulatory benchmark for the entire health plan entity or a portion of
it, such as a line of business. The actuary should base the projection on
appropriate available information about the relevant book of business.
3.2.9 Reasonableness of Assumptions⎯The actuary should review the assumptions

employed in the filing for reasonableness. The assumptions should be reasonable
in the aggregate and for each assumption individually. The support for
reasonableness should be determined based on the actuary’s professional
judgment, using relevant information available to the actuary. This information
5
may include, but is not limited to, business plans; past experience of the health
plan entity or the health benefit plan; and any relevant industry and government
studies that are generally known and reasonably available to the actuary. The
actuary should make a reasonable effort to become familiar with such studies.
3.3 Reliance on Data or Other Information Supplied by Others⎯When relying on data or


with the requirements of ASOP No. 31, Documentation in Health Benefit Plan
Ratemaking, if applicable, and ASOP No. 41, Actuarial Communications. The actuary
should also prepare and retain documentation to demonstrate compliance with the
disclosure requirements of section 4.1.
4.1 Communications and Disclosures⎯When issuing actuarial communications relating to

regulatory filings for health plan entities, the actuary should refer to ASOP No. 23 and
ASOP No. 41. In addition, such actuarial communications should disclose the following:
a. the sources of information;
b. any material information supplied by others and the extent of the actuary’s
reliance on such information;
c. any unresolved concerns the actuary may have about the information that could
have a material effect on the actuarial work product;
d. limitations on the use of the actuarial work product;
e. any conflicts arising from applicable law; and
f. any assumptions or methods prescribed by applicable law.
4.3 Deviation from Standard—The actuary must be prepared to justify to the actuarial
profession’s disciplinary bodies, or to explain to a principal, another actuary, or other
intended users of the actuary’s work, the use of any procedures that depart materially
6
from those set forth in this standard. If a conflict exists between this standard and
applicable law or regulation, compliance with applicable law or regulation is not
considered to be a deviation from this standard.
7
Appendix 1
Note: This appendix is provided for informational purposes but is not part of the standard of
practice.
Background
Many jurisdictions require the filing of actuarial memoranda or similar documents in connection
with health plan entities. An actuary may be involved in the preparation or review of these
filings. The applicable laws differ as to their content, scope, and requirements. Many laws are
silent as to procedures and assumptions to be employed, thus giving the actuary significant
discretion to exercise professional judgment in these areas.
Current Practices
The previous ASOP No. 8 had been in place since 1989. Although the task force believes that the
previous standard represented generally accepted practice, this revision more accurately reflects
current practices.
8
Appendix 2
The exposure draft of this revised actuarial standard of practice (ASOP), Regulatory Filings for
Health Plan Entities, was issued in September 2004, with a comment deadline of
March 31, 2005. Fourteen 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 Task Force to Revise ASOP No. 8 carefully considered all comments received.
responses to each, which may have resulted from ASB, Health Committee, or task force
discussion. Unless otherwise noted, the section numbers and titles used below refer to those in
the exposure draft.
GENERAL COMMENTS
Comment One commentator questioned whether credit disability filings were subject to ASOP No. 8 since
typically such filings require only that the actuary conform to the state’s published “prima facie” rates
and, thus, the filings are not “projections of future contingent events.” The commentator questioned
whether ASOP No. 8 should exclude credit disability in these situations.
Response The task force did not think such a specific exclusion was appropriate and believed the general
description of inclusions and exclusions was sufficient.
Comment One commentator noted that some other standards (for example, ASOP Nos. 26 and 28) describe
specific “regulatory filings for health plan entities” and that, either the relationship between these
standards and ASOP No. 8 needed to be clarified in the latter, or that the name of the proposed standard
was too broad and needed to be replaced.
Response The task force noted that these filings are already specifically excluded in the second paragraph of
section 1.2 and that these exclusions should adequately address these concerns.
Comment One commentator was concerned that the scope of the proposed ASOP was too broad, stating individual
health insurance carriers are often asked by regulators about the benefit cost(s) of mandates and that,
depending on what the definition of a benefit filing is, almost every request could require more work or
even an actuarial memorandum. Also, in many cases, the regulatory entity has a prescribed form that
does not lend itself to many of the proposed requirements. For example, many states have electronic
forms that allow for entering only a number or a few numbers; in most cases, there is not room to
provide all of the qualifications or caveats that could be included. In addition, there is often no means to
follow up with a full report.
Response The task force believes that the definition of section 2.4 adequately addresses these concerns. The task
force does not believe requests for information regarding, for example, benefit cost(s) of mandates
would fall under the category of required filings.
Comment One commentator suggested adding materiality criteria in the section that discusses reasonableness of
assumptions.
Response The task force chose not to make a distinction between levels of materiality of assumption. The task
force did not want to include a formal definition of materiality in this standard, as materiality is a
subjective concept and often depends on professional judgment.
9

Comment One commentator stated that “required regulatory filings” is less clear than the language in the prior
standard. One of the most common types of filings is a filing for a rate increase. Most often, the filing
is made to increase rates, not to meet a regulatory requirement to file. The commentator suggested
striking the work “required” and striking it in the second to last paragraph of section 1.2.
Response The task force noted that it had previously considered this issue and concluded purposely to insert the
word “required” to differentiate between filings that are required by regulatory authorities, such as
those required when filing for a rate increase, and other information that actuaries may submit to
health regulators, such as a regulator’s request for an estimate of the cost impact of a proposed
regulation.
Section 1.2, Scope
Comment The transmittal memorandum of the exposure draft asked whether the scope was appropriate. One
commentator agreed it was but believed that the second sentence could be clearer if worded as
follows: “Health filings covered by this standard are filings that require projection of future
contingent events in order to meet the given regulatory requirements. These health filings can be
categorized into two broad categories: rate or benefit filings and financial projection filings.”
Response The task force believes that these concerns are adequately covered in sections 1.2 and section 2.3.
The task force noted that most of the commentators on the first three questions asked in the
transmittal memorandum agreed that the scope was appropriate and that the ASOP was clear as to
whom it applied and to what types of health filings were covered.
Comment The transmittal memorandum of the exposure draft asked whether the ASOP was clear that it applies
to projections relating to capital and surplus requirements, which would include, for example,
minimum risk-based capital and surplus requirements in states that have adopted the NAIC Risk-
Based Capital (RBC) for Health Organizations Model Act. One commentator stated that, if the ASB
wishes to further emphasize application to projections related to capital and surplus requirements,
then it could include the example given above.
Response The task force believed the descriptions were sufficiently clear to provide guidance on which filings
were subject to the standard, noting that two other commentators agreed with this.
Comment One commentator was concerned with the last paragraph regarding conflict with applicable law and
believed that the last phrase should be strengthened to require the actuary to disclose items such as
the nature of the departure from the requirements of the standard, the financial effects thereof, and the
specific provisions of the applicable law.
Response The task force updated the wording to be consistent with the current language to be used in other
ASOPs and believed the revised language more closely addressed some of the commentator’s
concerns. The task force did not agree that the standard should specify what the actuary’s disclosure
should contain in the event of the standard conflicting with applicable law and believed that the
revised wording, in combination with section 4, Communications and Disclosures, provided adequate
guidance.
Comment One commentator was concerned that including “case law” and “statutes” in a definition of
applicable law might unreasonably require the actuary to be knowledgeable about court
interpretations or even require the unauthorized practice of law.
Response The definition of “applicable law” was deleted since it is now defined in “boilerplate” language in
section 1.2. The task force does not believe the definition puts actuaries in the position of
unauthorized practice of law, but the standard does require actuaries to be knowledgeable of
applicable law germane to the actuarial assignment.
10
Comment One commentator suggested that a discussion of any conflict between the standard and applicable law
should be placed in the body of the standard rather than in the scope.
Response The task force believed the current placement was appropriate and consistent with other ASOPs.
Section 2.2, Financial Projection (now section 2.1)
Comment One commentator suggested inserting “covered” before “expenses.”
Response The task force believed that, if this word were added, the actuary could interpret it to mean expenses
covered, for example, by premiums. Financial projections should include all expenses, which may or
may not be covered by premiums. As such, the task force concluded not to add this word.
Comment One commentator stated that a projection of covered lives in the absence of financial quantities was
not considered a “financial projection” and that “covered lives” should be removed from the list. The
commentator also suggested changing “administrative expenses” to “expenses” since claims are
expenses too and noted that in other places in the standard “expenses” means “administrative
expenses.”
Response The task force believed that covered lives often are included in financial projections and should be
included in the projection. The task force also believed that “expenses” as a general term provided
adequate guidance, particularly since claims are mentioned as a separate item.
Section 2.3, Health Benefit Plan (now section 2.2)
Comment One commentator expressed concern that “health benefit plan” is a defined term in numerous state
insurance laws, but the ASOP defines it differently. The commentator suggested substituting a term
such as “health coverage plan.”
Response The task force believed that the definition needed to be sufficiently broad and inclusive to cover all
states’ requirements and that definition contained in the exposure draft was sufficiently clear to avoid
confusion with statutory language. The task force noted that terms in section 2 are defined only for
their use within this standard and may depart from definitions used in other actuarial literature.
Comment One commentator suggested adding “hospital” before “medical” and adding this sentence to the end
of the paragraph: “A discount-only plan is not a health benefit plan.”
Response The task force agreed and made the first suggested change. On the second suggestion, the task force
noted that, at this time, this type of product would not be subject to this ASOP since it would not
require a health filing as defined under section 2.4 and believed it was unnecessary to add this
sentence.
Section 2.4, Health Filing (now section 2.3)
Comment One commentator suggested that a definition of “manual rates” be included and that ASOP No. 8
should be expanded to cover the derivation and proper use of manual rates.
Response The task force believed the term “manual rates” was well enough understood in the context of health
filings and did not need to be defined in this ASOP. The task force did not believe that a discussion
of the derivation or use of manual rates was an appropriate subject for this ASOP.
11
Comment One commentator was concerned that the definition was too restrictive and questioned whether the
phrase “certification of benefit values” includes filings where an actuary certifies that two sets of
benefits are equivalent, which would not always require a projection into the future and may be
strictly based on the current experience.
Response The task force intends that, for a filing to be subject to this ASOP, the filing be required by a
regulatory authority and that at least one element of the filing requires projection of future contingent
events. If the filing does not have both of these requirements, the filing is not subject to this ASOP. In
the example given by the commentator, if the benefit equivalence calculation requires a projection of
future contingent events, and the actuary chooses to use current experience with zero trend, and the
filing is required by a regulatory authority, the filing would be subject to this ASOP.
Comment One commentator suggested striking the phrase “as may be defined by the regulatory body” because
it does not help to strengthen the section and may in fact do harm, as applicable law can define
anything as “actuarial soundness” or “rate adequacy.” The power of the “regulatory body” should not
be defined to dictate unsound practice.
Response The task force noted that it had previously considered this issue and had intentionally concluded to
add this language. The task force had discussed including a definition of “actuarial soundness” in this
ASOP but concluded that “actuarial soundness” is a broader industry issue and decided to limit its
inclusion to cover those situations in which states have specific requirements, for example, that the
actuary opine that the rates are reasonable in relation to the benefits provided or that the rates meet
mandated minimum loss ratio requirements.
Comment One commentator recommended replacing the last paragraph of the section with the following: “A
financial projection or business plan filing includes, but is not limited to, any filings in which the
financial projections are a stand-alone requirement, such as those for licensure requirements, or are a
requirement of a broader filing, such as a rate filing or projections of future capital and surplus or
other regulatory benchmark requirements.”
Response The task force noted that the suggested wording was basically the same as that contained in the
exposure draft except adding the wording about business plan. The task force did not believe the
reference to business plan in this paragraph was necessary.
Comment One commentator stated that the term “health filing” is based on the undefined term “required
regulatory filing.” As a result, the scope of the definition is left unclear. No distinction is made
between a legal requirement and an administrative request that is unsupported by statute or
regulation. The commentator suggested adding the following definition of a required regulatory
filing: “A required regulatory filing is a filing required by statute or regulation.”
Response The task force believed the definition of “health filing” in the exposure draft provided adequate
guidance and that the proposed definition was circular.
Section 2.7, Time Value of Money (now section 2.6)
Comment One commentator suggested dropping the phrase “usefulness and” and leaving the term defined in
terms of value only, perhaps by adding the word “monetary” before “value.” Another commentator
believed the definition and references to “earlier” and “later” in particular were not clear.
Response The task force considered the wording in light of the comments but concluded that the definition,
which is used in other ASOPs, was sufficiently clear.
12

Section 3.2.1, Purpose of Filing
Comment One commentator noted that the example in the second paragraph appeared to provide more precision
than appeared to be implied by the requirement in the first sentence of this paragraph, which required
the actuary only to “describe” the interpretation of the regulatory requirements. The commentator
questioned what level of precision is appropriate for the description and believed that “describe” does
not provide any notion of the degree of completeness needed.
Response The task force believed the wording was appropriate and did not believe the standard should be too
prescriptive.
Section 3.2.2, Consistency With Business Plan (now section 3.2.2, Assumptions, and section 3.2.3, Use of
Business Plans to Project Future Results)
Comment One commentator suggested alternative language that would require assumptions to be consistent
with contemporaneous health filings relating to the health benefit plan subject to the current filing;
one commentator suggested strengthening the requirement that “the actuary should use assumptions
and methodologies that are consistent with the business plan….”
Response Section 3.2.2 from the exposure draft was reorganized into new sections 3.2.2, Assumptions, and
3.2.3, Use of Business Plans to Project Future Results, to better address these different but connected
issues.
Comment One commentator noted that the term “persistency” appears without definition. While the term has an
unambiguous meaning in an individual life insurance setting, it could have multiple applications in
the health insurance arena.
Response The task force considered this and believed that the meaning should be clear within the context of
each filing. The task force did not believe a definition was necessary.
Comment One commentator stated that, in any given filing, certain assumptions may not be material and that
this should be so noted in the ASOP.
Response The task force did not believe such a statement was necessary. As noted in the task force’s response
to the last comment under General Comments, the task force chose not to make a distinction between
levels of materiality of assumptions and did not want to include a formal definition of materiality in
this standard, as materiality is a subjective concept and often depends on professional judgment.
Comment Several commentators expressed concerns and raised important issues and questions on the opening
paragraph of this section, including the following:
One commentator found that certain terms such as “business plan,” “sales results,” and “overall” in
“overall business results” were undefined.
One commentator questioned whether the relevant sections of the business plan should be disclosed
in the actuarial communication.
One commentator believed the phrase “as known to the actuary” was too lenient and that the actuary
should review the components of the business plan that are relevant to the determination of
reasonable assumptions.
One commentator noted that business plans developed by health plans to support the internal plan
management serve a different purpose than the projections used to support pricing and regulatory
filings. For example, they are often intended to set challenging performance goals rather than most
likely outcome. The commentator stated that it would be inappropriate to base pricing assumptions on
such projections, as there is no guarantee that they represent a reasonable expectation of future
experience. Further, the commentator suggested that business plans subject to regulatory filing and
review should be included in the definition of a health filing.
13
Response The task force agreed with many of the comments and renamed the title and rewrote the section to
address these issues. It is recognized there are many types of business plans, ranging from formal
written documents to informal verbal discussions. To avoid being prescriptive, the language was
changed to require the consideration of relevant information from whatever business plan exists and
included wording about requesting such plan, although obvious. The task force removed references to
consistent assumptions. The task force believed that the issue regarding documentation is adequately
covered in sections 3.4 and section 4.1.
Comment One commentator found that sections 3.2.2 and 3.2.3 of the exposure draft when read together were
troublesome. Section 3.2.2 would have required consistency with the business plan. Section 3.2.3.
would have described a review for reasonableness versus, among other factors, the business plan. The
commentator proposed several changes to both sections, including a proposed redraft of section 3.2.2.
Response The task force substantially rewrote sections 3.2.2 and 3.2.3, (now sections 3.2.2, 3.2.3, and 3.2.9,
Reasonableness of Assumptions) and believes that these revisions adequately address the concerns
mentioned.
Section 3.2.3, Reasonableness of Assumptions (now section 3.2.9)
Comment One commentator questioned whether the actuary should state the extent to which the assumptions
are the actuary’s own or that he or she is reviewing those of some other technician (who may or may
not be an actuary) and perhaps assessing them to meet only the lower standard of “not unreasonable”
or “in a reasonable range.” The commentator stated that two aspects should be reported: (a) the
applicable standard of reasonableness; and (b) who the author is. The commentator noted that, in
assessing anything prepared by an actuary, the actuary’s assessment is going to be strongly affected
by whether the assumptions were devised by the signing actuary or by someone else and, for that
matter, whether the actuary was independent or employed by the organization from which the
assumptions came and questioned whether that should be the case.
Response The task force rewrote this section and believes that this revision addresses many of the
commentator’s concerns.
Comment One commentator stated that two ideas seem important here. First, the model chosen can be important
because some models make assumptions explicit while other models make the same assumptions
implicit. Second, it seems inappropriate to exempt implicit assumptions from the same scrutiny as the
explicit assumptions. The commentator suggested renaming the section “Reasonableness of
Projection Model and Assumptions.”
Response The task force believed that no change was necessary since this section applies to all assumptions,
both implicit and explicit.
Comment Two commentators raised the issue regarding materiality of assumptions and suggested wording
changes to the effect that “each material assumption should be reasonable.”
Response The task force believed that it was important that all assumptions be identified and that the support
for reasonableness of the assumptions be based on the actuary’s professional judgment. As noted in
the task force’s response to the last comment under General Comments, the task force chose not to
make a distinction between levels of materiality of assumptions and did not want to include a formal
definition of materiality in this standard, as materiality is a subjective concept and often depends on
professional judgment.
Comment One commentator recommended retaining the old language in this section requiring assumptions to
be reasonable based on all information available to the actuary and suggested replacing the last two
sentences with the following: “The support for reasonableness should be determined based on the
actuary’s professional judgment, using relevant information available to the actuary. This information
may include, but is not limited to, past experience of the health plan entity or the health benefit plan,
and any relevant industry and government studies.”
Response The task force substantially agreed with most of the commentator’s comments and made appropriate
changes to this section while adding another sentence outlining the actuary’s duty to make a
reasonable effort to become familiar with relevant studies.
14
Section 3.2.4, Use of Past Experience to Project Future Results

Comment One commentator suggested striking “in the actuary’s professional judgment,” citing it extraneous.
Response The task force believed that decisions about materiality often depend on the actuary’s professional
judgment and, as such, concluded not to strike those words.
Comment One commentator suggested that, in 3.2.4(d) the comma between “benefit” and “expense” be
replaced with the word “and.”
Response The task force clarified this section (now section 3.2.4 (e)) with revised wording.
Comment One commentator recommended including the concept of “known” changes in the first paragraph and
noted that there may be changes that have taken place between the end of the experience period and
the date of the filing that are known and will materially affect expected future results.
Response The task force agreed and made the change.

Comment One commentator noted the wording of item 3.2.4(e) is potentially confusing and recommended using
either “trends in mortality and morbidity” or “trends in mortality and in the utilization and cost of
services.”
Response The task force agreed and revised the section (now section 3.2.4(f)) for clarity.
Comment One commentator stated that the discussion in the second paragraph refers to paid and incurred
“claims” and to “earned premiums,” etc., and yet the principles are more general and extend beyond
premiums and claims to any financial flows with similar characteristics, for example, capitation
income and payments, government subsidy or “reinsurance” payments, risk adjustments, state risk
pool assessments, etc. The commentator asked whether more general language should be used.
Response The task force believed that more general language was not necessary. The items mentioned are, for
the most part, an element of premiums or incurred claims, for example, capitation income would be
part of earned premiums and capitation payments are a part of incurred claims.
Section 3.2.5, Recognition of Plan Provisions
Comment One commentator stated that the phrase “as described to the actuary” in this context should be
acceptable only if such descriptions are carefully documented with sufficient specificity to designate
the contract provisions precisely.
Response The task force believed that this is adequately covered with the requirements in sections 3.4 and
section 4.1.
Comment One commentator found the meaning “plan documents” unclear and questioned whether it could
include employer contracts, employee certificates, group administration manuals, provider contracts,
etc.
Response The task force believed that plan documents and unwritten procedures, such as those mentioned by
the commentator, can provide useful information about the plan. The task force believed that further
clarification was not necessary.
15
Section 3.2.6, New Plans or Benefits

Comment One commentator suggested that the first sentence could be shortened to say, “The actuary should
consider available relevant data,” because the wording as it stands almost limits the paragraph to an
actuary on the filing end and excludes the actuary on the reviewing end.
Response The task force agreed and rewrote this sentence to clarify the language.
Comment One commentator recommended rewording the second sentence of this section as follows: “In the
absence of such data, the actuary should use a reasonable model that is consistent with similar
benefits or plans of coverage offered by the health plan entity and that, if appropriate for the plan or
benefit, takes into account the general characteristics of the health care delivery system.”
Another commentator believed that the second sentence was incomplete in that the model, by itself,
does nothing and that the standard should state what to do with the model. The commentator believed
that the standard meant that the actuary should consider the elements of the new benefits, find other
existing coverages that have matching benefits to the new plan, see if the experience would apply to
the new plan, and, if it does not, keep looking until a match is found.
Response This section was rewritten. Although the wording is very similar, the phrasing has been rearranged
somewhat for clarification. With regards to the second comment, the task force means that the
actuary is to select a model that is intended to develop data that can be used for estimating the value
of new plans or benefits from data on existing plans, when directly relevant data on the new plan are
not available. The language does not require that the benefits and the experience match exactly. As
with all other items under section 3.2, the results of such a model would be considered for the health
filing.
Section 3.2.7, Projection of Future Capital and Surplus
Comment One commentator stated that the phrase “as described to the actuary” should not be used without a
requirement to document what was described to the actuary.
Response The task force believes that this is adequately covered with the requirements in sections 3.4 and
section 4.1.
Section 3.2.8, Investment Income
Comment One commentator recommended revising section 3.2.8 of the exposure draft by substituting
“reasonable earnings rates” for “a reasonable earnings rate.” This would (a) allow for earnings rates
varying by the average duration of liabilities; and (b) leave room for stochastic interest rate studies
(admittedly rare at present, but a concern for very long-term products such as LTC). The present
wording seems to require use of a single rate.
Response This section was deleted but the term “investment earnings” has been included without further
description in the list of assumption in new section 3.2.2, Assumptions.
Section 3.2.9, Regulatory Benchmark (now section 3.2.8)
Comment One commentator believed that the second sentence was a general statement that applied to any filing
and, thus, belonged in section 3.2.4. The commentator suggested that, if it is desirable to mention
regulatory benchmark in the standard, it should be done in section 3.2.1.
Response The task force believed that sections 3.2.4 and 3.2.6 already provide for the use of appropriate
relevant information in their respective descriptions. The task force considered the commentator’s
second suggestion regarding having regulatory benchmark be a part of section 3.2.1. The task force
concluded to keep it as a separate subsection under section 3.2 because of the importance and relative
uniqueness of these types of projections.
16
Section 3.3, Reliance On Others (now Reliance on Data or Other Information Supplied by Others)
Comment One commentator recommended that the word “descriptions” be included so that it would read,
“…on information, including data and descriptions….”
Another commentator expressed concern about the reliance on information supplied by others and
any due diligence the actuary should perform on that information.
Response The task force revised this section to be consistent with language used in other current ASOPs and
notes that ASOP No. 23, Data Quality, provides expanded guidance on these issues.
Section 4.1, Communication and Disclosures
Comment One commentator expressed concern with item 4.1(b), stating actuaries will adopt blanket boilerplate
statements that absolve them of the responsibility to inform the employer or client who may rely on
their judgments and what they relied on.

Comment One commentator expressed a concern about whether the actuary has been required to estimate the
extent that adopting an assumption dictated by laws or regulations has changed the results of the
calculations. The commentator suggested that one way to do this would be to make section 4.1(e)
more explicit, for example, by stating, “any conflicts arising from applicable law or regulations and
their effects on the calculations.”
Response The task force decided not to change the language from that contained in the exposure draft. The task
force believed that this suggested requirement would put a greater burden on the actuary and does not
necessarily reflect generally accepted practice. It may be a good thing to know but would not be part
of a required regulatory filing.
17
Actuarial Standard
of Practice
No. 9
Documentation and Disclosure

in Property and Casualty Insurance
Ratemaking, Loss Reserving, and Valuations
Revised Edition
Developed by the
Casualty Committee of the
Adopted by the
January 1991
(Doc. No. 027)

TABLE OF CONTENTS
PREAMBLE
Section 1. Purpose, Scope, and Effective Date 1

1.1 Purpose 1
1.2 Scope 1
2.2 Actuarial Work Product 1
2.3 Required Actuarial Document 1
2.4 Statement of Actuarial Opinion 2
2.5 Statement of Actuarial Review 2
Section 3. Background and Historical Issues 2
Section 4. Current Practices and Alternatives 2

5.1 Introduction 3
5.2 Extent of Documentation 3
5.3 Prevention of Misuse 3
5.4 Disclosure of Conflict with Professional Judgment, and of Advocacy 3
5.5 Availability of Documentation 4
5.6 Conflicting Interests 4
5.7 Signature on Work Product 4
5.8 Reliance on Another 4
5.9 Waiver of Fee 4

APPENDIXES
Appendix 1—Statement of Principles Regarding Property and Casualty Insurance

Ratemaking 5
Appendix 2—Statement of Principles Regarding Property and Casualty Loss and Loss
Adjustment Expense Reserves 10
Appendix 3—Statement of Principles Regarding Property and Casualty Valuations 19
ii
January 1991
TO: Members of the American Academy of Actuaries (AAA) and Other Persons
Interested in Property and Casualty Insurance Ratemaking, Loss Reserving, and
Valuations
SUBJ: Actuarial Standard of Practice No. 9
This booklet contains the final version of Actuarial Standard of Practice (ASOP) No. 9,
Documentation and Disclosure in Property and Casualty Insurance Ratemaking, Loss Reserving,
and Valuations.
Background
This booklet contains an actuarial standard of practice concerning documentation and disclosure
in property and casualty insurance ratemaking, loss reserving, and valuations. This standard has
been prepared jointly by the Subcommittee on Ratemaking, the Subcommittee on Loss
Reserving, and the Subcommittee on Valuation of the Casualty Committee of the ASB, and it
has been reviewed by the full Casualty Committee. The standard relies heavily on Interpretative
Opinion 3 of the Guides and Interpretative Opinions as to Professional Conduct of the AAA.
The Casualty Committee is one of six operating committees of the ASB; it is charged with
drafting actuarial standards of practice relating to property and casualty insurance.
The Casualty Committee acknowledges that the professional practice of actuaries varies widely.
In some property and casualty areas, there may be significant differences of opinion as to what is
generally accepted actuarial practice. The enclosed standard sets forth recommended practices
for documentation and disclosure that actuaries must consider in property and casualty
ratemaking, reserving, and valuations. They are intended to guide actuaries in performing their
professional responsibilities.
The standard was originally drafted to apply only to ratemaking and loss reserving. This draft
was exposed to the members of the AAA and to other interested persons in August 1988;
comments were received into October 1988. In addition, the standard was discussed at a session
on this subject at the Casualty Actuarial Society (CAS) meeting in November 1988. The
Casualty Committee considered these comments in preparing a revised standard for adoption by
the ASB. A detailed report of comments received and the committee’s disposition of them
appears below.
iii
Change in Format
After the exposure draft was distributed, the ASB adopted, at its October 1988 meeting, a new,
uniform format for standards of practice. At the ASB’s direction, this standard was reformatted
to conform to the new format. In addition, the standard was given a number (9) in the standards
of practice series, and was reprinted (Document No. 011).
Extension to Cover Valuations
In 1990, the standard was amended to apply to property and casualty insurance company
valuation as well as to ratemaking and loss reserving. The amended version (Document No. 027)
was approved by the Casualty Committee and by the ASB, effective May 1, 1991.
Responses to Comments on 1988 Exposure Draft
The Casualty Committee is grateful to the respondents who submitted comments in 1988 on the
exposure draft. A total of nine individuals responded, and additional comments were made at a
special session on this topic at the November CAS meeting. All comments were carefully
considered by the Casualty Committee, and a number of changes were made to the exposure
draft as a result.
Four respondents commented on the fact that this standard limited its application to ratemaking
and loss reserving, rather than to all facets of actuarial work. The committee agreed in principle
that disclosure and documentation are equally appropriate for other work products. However, the
standard was designed to be in support of established statements of principles of the CAS. At the
time of its original drafting, two such statements had been promulgated, in ratemaking and in
loss reserving. The standard was, therefore, appropriate as written. In 1989, the CAS
promulgated a Statement of Principles Regarding Property and Casualty Valuations, and the
standard was subsequently amended to be in support of that statement as well.
One respondent to the exposure draft commented that the loss reserving principles do not
specifically refer to documentation and disclosure. The committee believed that this standard of
practice is equally applicable to those principles and that the principles need not be revised. Also,
the last sentence of the first paragraph under section 3 (Background and Historical Issues) was
revised to make clear that this standard, not the statements of principles, states the criteria for
documentation and disclosure.
Several other respondents raised a question as to whether this standard requires actuaries to take
positive action if they believe their work is being relied upon inappropriately. This question was
raised in response to appendix 1 in the exposure draft containing “Casualty Committee
Comments,” which specifically stated that this responsibility exists. The standard requires that
actuaries take reasonable steps to ensure that actuarial work products are presented fairly in order
iv
to minimize the risk of misquotation, misinterpretation, or other misuse of the product’s actuarial
aspects. The standard does not in and of itself require positive action on the actuary’s part if the
actuary is aware of any such misuse. Such an intent is beyond the purpose of this standard.
Rather, it is more an issue related to the guides to professional conduct, or normal work ethics.
The appendix containing the comments was not included with the final standard of practice. The
committee also added wording at the end of section 5.3 (Prevention of Misuse) to clarify what
was intended by the phrase, presented fairly.
In section 4 (Current Practices and Alternatives), last sentence, the clause, “as there have been no
formal standards of practice,” was deleted, since it would be inappropriate to imply causality in
this statement.
In section 5.2 (Extent of Documentation), the standard was revised to incorporate a “minimal”
criterion. This was done by moving the word appropriate to modify records, worksheets, and
other documentation, and by specifying that documentation should be sufficient for another
actuary practicing in the same field to evaluate the work. Documentation is required—whether or
not there is a legal or regulatory requirement for documentation—and the standard defines what
that documentation should entail.
One respondent questioned whether the word must should have been used instead of should in
several instances. The committee did not make this change because it believed that the word
should expresses obligation and propriety, but also allows for deviation, in some cases. (See
section 6.)
One respondent commented on the roles of standards of practice, relative to the Guides and
Interpretative Opinions as to Professional Conduct, which are standards of professional conduct.
He commented that this standard could raise questions and perhaps cause confusion unless
guidance is provided as to whether the standard of practice or the standard of professional
conduct applies. The committee has written this standard to be complete and sufficient, so that
the standard will provide specific guidance on documentation and disclosure in ratemaking, loss
reserving, and valuations, within the general framework provided by Interpretative Opinion 3.
Other changes of a grammatical or editorial nature were adopted, many in response to comments
received.
v
Casualty Committee of the ASB
Charles A. Bryan, Chairperson 1988

Michael J. Miller, Chairperson 1989–
Subcommittee on Ratemaking
LeRoy A. Boison Jr., Chairperson
Subcommittee on Reserving
James A. Faber, Chairperson
Subcommittee on Valuation
Douglas J. Collins, Chairperson
Members of the Casualty Committee, Past and Present
Martin Adler Gary Grant

James R. Berquist James A. Hall III
Richard Beverage Bertram A. Horowitz
Richard S. Biondi Eldon J. Klaassen
Randall E. Brubaker Michael R. Lamb
Douglas J. Collins Stephen P. Lowe
Robert V. Deutsch Robert A. Miller III
Daniel J. Flaherty Gary K. Ransom
David P. Flynn Alfred O. Weller
Spencer M. Gluck Paul E. Wulterkens
David J. Grady
Walter N. Miller, Chairperson

Edward E. Burrows Frederick W. Kilbourne
Gary Corbett Harry L. Sutton Jr.
Willard A. Hartman Jack M. Turnquist
James C. Hickman P. Adger Williams
vi
DOCUMENTATION AND DISCLOSURE

IN PROPERTY AND CASUALTY INSURANCE
RATEMAKING, LOSS RESERVING, AND VALUATIONS
PREAMBLE
Section 1. Purpose, Scope, and Effective Date
1.1 Purpose—The purpose of this standard of practice is to define the documentation and
disclosure required of an actuary in property and casualty insurance ratemaking, loss
reserving, and valuations.
1.2 Scope—This standard of practice is limited to the practices that relate to the Statement of
Principles Regarding Property and Casualty Insurance Ratemaking, the Statement of
Principles Regarding Property and Casualty Loss and Loss Adjustment Expense
Reserves, and the Statement of Principles Regarding Property and Casualty Valuations
as adopted by the Casualty Actuarial Society (CAS).
1.3 Effective Date—This standard became effective July 14, 1989, for documentation and
disclosure in ratemaking and loss reserving. Its effective date for valuations was May 1,
1991.
2.1 Actuarial Report—A document, or other presentation, prepared as a formal means of

conveying the actuary’s professional conclusions and recommendations, of recording and
communicating the methods and procedures, and of ensuring that the parties addressed
are aware of the significance of the actuary’s opinion or findings.
2.2 Actuarial Work Product—The result of an actuary’s work. The term applies to the
following actuarial communications, whether written or oral: statements of actuarial
opinion, actuarial reports, statements of actuarial review, and required actuarial
documents.
2.3 Required Actuarial Document—An actuarial communication of which the formal content
is prescribed by law or regulation.
1
2.4 Statement of Actuarial Opinion—A formal statement of the actuary’s professional
opinion on a defined subject. It outlines the scope of the work but normally does not
include descriptive details.
2.5 Statement of Actuarial Review—A formally communicated appraisal of actuarial work

done by another person.
Section 3. Background and Historical Issues
Professional documentation and communication are essential components of actuarial practice.

In the absence of specific standards of practice, the amount of documentation and disclosure has
varied. As the nature of casualty actuarial work has become more complex and more open to and
available for public review, the need to formalize standards has increased. The CAS has adopted
a Statement of Principles Regarding Property and Casualty Insurance Ratemaking, a Statement
of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves, and
a Statement of Principles Regarding Property and Casualty Valuations. Those statements serve
as guides to this standard. This standard states that the methodology and material assumptions
utilized in ratemaking, reserving, and valuations should be documented and, in some cases,
available for disclosure.
This standard addresses the following issues:
1. the extent to which an actuarial work product should be documented,
2. the persons to whom that documentation should be available,
3. the extent to which deviations from standards of practice should be documented,
4. the requirement that actuaries sign work products within their responsibility, and
5. the requirement that actuaries disclose the names of others upon whose work they have
relied.
Section 4. Current Practices and Alternatives
Current practices have been governed by the Guides and Interpretative Opinions as to
Professional Conduct promulgated by the American Academy of Actuaries, the CAS, the
Conference of Actuaries in Public Practice, and the Society of Actuaries. Current practices have
varied with individual interpretations of those Guides and Opinions.
2
5.1 Introduction—Ratemaking, loss reserving, and valuations take place in a variety of

settings depending upon the legal and regulatory environment involved. The form and
content of any actuarial communication should meet the needs of the particular
circumstances, taking into account the knowledge and understanding of the users and the
actuary’s relationship to the users. Users may be either direct or indirect. A client or
employer is the direct user of the actuary’s service, as distinguished from an indirect user.
The direct user selects the actuary and communicates directly with the actuary about
qualifications, work, and recommendations.
5.2 Extent of Documentation—This standard requires documentation of an actuarial work

product whether or not there is a legal or regulatory requirement for the documentation.
Appropriate records, worksheets, and other documentation of the actuary’s work should
be maintained by the actuary and retained for a reasonable period of time. Documentation
should be sufficient for another actuary practicing in the same field to evaluate the work.
The documentation should describe clearly the sources of data, material assumptions, and
methods. Any material changes in sources of data, assumptions, or methods from the last
analysis should be documented. The actuary should explain the reason(s) for and describe
the impact of the changes.
5.3 Prevention of Misuse—Information prepared by an actuary may be used by another

person in a way that may influence the actions of a third party. If someone other than an
actuary might convey such information to any such indirect users, the actuary should
recognize the risk of misquotation, misinterpretation, or other misuse of its actuarial
aspects. The actuary should take reasonable steps to ensure that an actuarial work product
is presented fairly, that the presentation as a whole is clear in its actuarial aspects, and
that the actuary is identified as the source of the actuarial aspects and as the individual
who is available to answer questions. An actuarial report is customarily considered to be
presented fairly if it describes the data, material assumptions, methods, and material
changes in these with sufficient clarity that another actuary practicing in the same field
could make an appraisal of the reasonableness and validity of the report.
5.4 Disclosure of Conflict with Professional Judgment, and of Advocacy—If the service
requested by a client or employer produces a result that conflicts materially with the
actuary’s professional judgment, the actuary should advise the client or employer of the
conflict and should include appropriate qualifications or disclosures in any related
actuarial communication. When an actuary acts, or may seem to be acting, as advocate
for a client or employer, the nature of that relationship should be disclosed to directly
interested parties.
3
5.5 Availability of Documentation—Documentation should be available to the actuary’s
client or employer, and it should be made available to other persons when the client or
employer so requests, assuming appropriate compensation, and provided such availability
is not otherwise improper. Ownership of documentation is normally established by the
actuary and the client or employer, in accordance with law.
5.6 Conflicting Interests—The actuary does not normally have an obligation to communicate
with any person other than the client or employer. If aware of any significant conflict
between the interests of indirect users and the interests of the client or employer, the
actuary should advise the client or employer of the conflict and should include
appropriate qualifications or disclosures in any related actuarial communication.
5.7 Signature on Work Product—When required by law or regulation or when called upon by
the client or employer to provide documentation of work, the actuary should provide such
disclosure in writing. Any such disclosure must be signed with the name of the actuary
responsible for the work. The name of an organization with which the actuary is affiliated
may be incorporated into the signature. The actuary’s responsibilities to comply with this
standard are not affected by the form of the signature.
5.8 Reliance on Another—An actuary who makes an actuarial communication assumes

responsibility for it, except to the extent the actuary disclaims responsibility by stating
reliance on another person. Reliance on another person means using that person’s work
without assuming responsibility therefor. A communication should define the extent of
any such reliance.
5.9 Waiver of Fee—The waiving of a fee for professional services, either partially or totally,
does not relieve the actuary of the need to observe professional standards.
6.1 Deviation from Standard—An actuary who uses a procedure which differs from this
standard must include, in the actuarial communication disclosing the result of the
procedure, an appropriate and explicit statement with respect to the nature, rationale, and
effect of such use.
4
Appendix 1
Statement of Principles Regarding

Property and Casualty Insurance Ratemaking
(Adopted by the Board of Directors of the CAS May 1988)
The purpose of this Statement is to identify and describe principles applicable to the
determination and review of property and casualty insurance rates. The principles in this
Statement are limited to that portion of the ratemaking process involving the estimation of costs
associated with the transfer of risk. This Statement consists of four parts:
I. DEFINITIONS
II. PRINCIPLES
III. CONSIDERATIONS
IV. CONCLUSION
The principles contained in this Statement provide the foundation for the development of
actuarial procedures and standards of practice. It is important that proper actuarial procedures be
employed to derive rates that protect the insurance system’s financial soundness and promote
equity and availability for insurance consumers.
Although this Statement addresses property and casualty insurance ratemaking, the principles
contained in this Statement apply to other risk transfer mechanisms.
I. DEFINITIONS
Ratemaking is the process of establishing rates used in insurance or other risk transfer
mechanisms. This process involves a number of considerations including marketing goals,
competition and legal restrictions to the extent they affect the estimation of future costs
associated with the transfer of risk. This Statement is limited to principles applicable to the
estimation of these costs. Such costs include claims, claim settlement expenses, operational and
administrative expenses, and the cost of capital. Summary descriptions of these costs are as
follows:
—Incurred losses are the cost of claims insured.
—Allocated loss adjustment expenses are claims settlement costs directly assignable to specific
claims.
—Unallocated loss adjustment expenses are all costs associated with the claim settlement
function not directly assignable to specific claims.
5
—Commission and brokerage expenses are compensation to agents and brokers.
—Other acquisition expenses are all costs, except commission and brokerage, associated with
the acquisition of business.
—Taxes, licenses and fees are all taxes and miscellaneous fees except federal income taxes.
—Policyholder dividends are a non-guaranteed return of premium charged to operations as an

expense.
—General administrative expenses are all other operational and administrative costs.
—The underwriting profit and contingency provisions are the amounts that, when considered
with net investment and other income, provide an appropriate total after-tax return.
II. PRINCIPLES
Ratemaking is prospective because the property and casualty insurance rate must be developed
prior to the transfer of risk.
Principle 1: A rate is an estimate of the expected value of future costs.
Ratemaking should provide for all costs so that the insurance system is financially sound.
Principle 2: A rate provides for all costs associated with the transfer of risk.
Ratemaking should provide for the costs of an individual risk transfer so that equity among
insureds is maintained. When the experience of an individual risk does not provide a credible
basis for estimating these costs, it is appropriate to consider the aggregate experience of similar
risks. A rate estimated from such experience is an estimate of the costs of the risk transfer for
each individual in the class.
Principle 3: A rate provides for the costs associated with an individual risk transfer.
Ratemaking produces cost estimates that are actuarially sound if the estimation is based on
Principles 1, 2, and 3. Such rates comply with four criteria commonly used by actuaries:
reasonable, not excessive, not inadequate, and not unfairly discriminatory.
Principle 4: A rate is reasonable and not excessive, inadequate, or unfairly

discriminatory if it is an actuarially sound estimate of the expected value of all future
costs associated with an individual risk transfer.
6
III. CONSIDERATIONS
A number of ratemaking methodologies have been established by precedent or common usage

within the actuarial profession. Since it is desirable to encourage experimentation and innovation
in ratemaking, the actuary need not be completely bound by these precedents. Regardless of the
ratemaking methodology utilized, the material assumptions should be documented and available
for disclosure. While no ratemaking methodology is appropriate in all cases, a number of
considerations commonly apply. Some of these considerations are listed below with summary
descriptions. These considerations are intended to provide a foundation for the development of
actuarial procedures and standards of practice.
Exposure Unit—The determination of an appropriate exposure unit or premium basis is

essential. It is desirable that the exposure unit vary with the hazard and be practical and
verifiable.
Data—Historical premium, exposure, loss and expense experience is usually the starting
point of ratemaking. This experience is relevant if it provides a basis for developing a reasonable
indication of the future. Other relevant data may supplement historical experience. These other
data may be external to the company or to the insurance industry and may indicate the general
direction of trends in insurance claim costs, claim frequencies, expenses and premiums.
Organization of Data—There are several acceptable methods of organizing data including

calendar year, accident year, report year and policy year. Each presents certain advantages and
disadvantages; but, if handled properly, each may be used to produce rates. Data availability,
clarity, simplicity, and the nature of the insurance coverage affect the choice.
Homogeneity—Ratemaking accuracy often is improved by subdividing experience into

groups exhibiting similar characteristics. For a heterogeneous product, consideration should be
given to segregating the experience into more homogeneous groupings. Additionally,
subdividing or combining the data so as to minimize the distorting effects of operational or
procedural changes should be fully explored.
Credibility—Credibility is a measure of the predictive value that the actuary attaches to a

particular body of data. Credibility is increased by making groupings more homogeneous or by
increasing the size of the group analyzed. A group should be large enough to be statistically
reliable. Obtaining homogeneous groupings requires refinement and partitioning of the data.
There is a point at which partitioning divides data into groups too small to provide credible
patterns. Each situation requires balancing homogeneity and the volume of data.
Loss Development—When incurred losses and loss adjustment expenses are estimated,
the development of each should be considered. The determination of the expected loss
development is subject to the principles set forth in the Casualty Actuarial Society’s Statement of
Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves.
7
Trends—Consideration should be given to past and prospective changes in claim costs,
claim frequencies, exposures, expenses and premiums.
Catastrophes—Consideration should be given to the impact of catastrophes on the

experience and procedures should be developed to include an allowance for the catastrophe
exposure in the rate.
Policy Provisions—Consideration should be given to the effect of salvage and

subrogation, coinsurance, coverage limits, deductibles, coordination of benefits, second injury
fund recoveries and other policy provisions.
Mix of Business—Consideration should be given to distributional changes in deductibles,

coverage limitations or type of risks that may affect the frequency or severity of claims.
Reinsurance—Consideration should be given to the effect of reinsurance arrangements.
Operational Changes—Consideration should be given to operational changes such as

changes in the underwriting process, claim handling, case reserving and marketing practices that
affect the continuity of the experience.
Other Influences—The impact of external influences on the expected future experience

should be considered. Considerations include the judicial environment, regulatory and legislative
changes, guaranty funds, economic variable, and residual market mechanisms including
subsidies of residual market rate deficiencies.
Classification Plans—A properly defined classification plan enables the development of

actuarially sound rates.
Individual Risk Rating—When an individual risk’s experience is sufficiently credible, the

premium for that risk should be modified to reflect the individual experience. Consideration
should be given to the impact of individual risk rating plans on the overall experience.
Risk—The rate should include a charge for the risk of random variation from the
expected costs. This risk charge should be reflected in the determination of the appropriate total
return consistent with the cost of capital and, therefore, influences the underwriting profit
provision. The rate should also include a charge for any systematic variation of the estimated
costs from the expected costs. This charge should be reflected in the determination of the
contingency provision.
Investment and Other Income—The contribution of net investment and other income
should be considered.
Actuarial Judgment—Informed actuarial judgments can be used effectively in

ratemaking. Such judgments may be applied throughout the ratemaking process and should be
documented and available for disclosure.
8
IV. CONCLUSION
The actuary, by applying the ratemaking principles in this Statement, will derive an estimation of
the future costs associated with the transfer of risk. Other business considerations are also a part
of ratemaking. By interacting with professionals from various fields including underwriting,
marketing, law, claims, and finance, the actuary has a key role in the ratemaking process.
9
Appendix 2

Property and Casualty
Loss and Loss Adjustment Expense Reserves
(Adopted by the Board of Directors of the CAS, May 1988)
The purpose of this Statement is to identify and describe principles applicable to the evaluation
and review of loss and loss adjustment expense reserves. Because of their size and the
uncertainties in the estimation process, the evaluation of these reserves requires the use of proper
actuarial and statistical procedures. The financial condition of a property and casualty insurer
cannot be assessed accurately without sound reserve estimates.
This Statement consists of three parts:
I. DEFINITIONS
II. PRINCIPLES
III. CONSIDERATIONS
The definitions in the next section apply to both loss reserves and loss adjustment expense
reserves. For the purpose of this statement the terms loss and claim are used interchangeably, and
the term insurer is meant to represent any risk bearer for property and casualty exposures,
whether an insurance company, self-insured entity, or other.
I. DEFINITIONS
A loss reserve is a provision for its related liability. A total loss reserve is composed of five
elements, although the five elements may not necessarily be individually quantified:
—case reserve
—provision for future development on known claims
—reopened claims reserve
—provision for claims incurred but not reported
10
—provision for claims in transit (incurred and reported but not recorded)
Before these five elements are discussed, certain key dates and terms need to be defined.
—The accounting date is the date that defines the group of claims for which liability may exist,
namely all insured claims incurred on or before the accounting date. The accounting date may be
any date selected for a statistical or financial reporting purpose.
—The valuation date is the date through which transactions are included in the data base used in
the evaluation of the liability, regardless of when the analysis is performed. For a defined group
of claims as of a given accounting date, reevaluation of the same liability may be made as of
successive valuation dates. A valuation date may be prior to, coincident with or subsequent to the
accounting date.
—The carried loss reserve is the amount shown in a published statement or in an internal
statement of financial condition.
—An indicated loss reserve is the result of the application of a particular loss reserving
evaluation procedure. An indicated loss reserve for a given accounting date likely will change
from one valuation date to another.
—A division is often required between reserves for known claims and reserves for claims which
have been incurred but not reported (IBNR). The reserve for known claims represents the
amount, estimated as of the valuation date, that will be required for future payments on claims
that already have been reported to the insurer. (The reserve for known claims is also sometimes
referred to by other labels such as the reported reserve, the reserve for claims adjusted or in the
process of adjustment, or the reserve for unpaid losses excluding IBNR.) The IBNR reserve
represents the amount that must be provided for future payments on insured losses that have oc-
curred but that have not been reported.
—The case reserve is defined as the sum of the values assigned to specific known claims
whether determined by claims adjusters or set by formula. (The term case reserve is sometimes
used in place of the reserve for known claims. However, as defined, the case reserve does not
include the provision for future development on known claims.) Adjusters’ estimates are the
aggregate of the estimates made by claims personnel for individual claims, based on the facts of
the particular claims. Formula reserves are reserves established for groups of claims for which
certain classifying information is provided. Formula reserving may be applied to individual
claims or to aggregations of claims with similar characteristics through use of average claim
values or factors applied to representative statistics (for example, premiums in force or earned
premiums).
—Development is defined as the change between valuation dates in the observed values of
certain fundamental quantities that may be used in the loss reserve estimation process. For
example, the observed number of reported claims associated with losses occurring within a
particular calendar period often will be seen to increase from one valuation date to the next until
11
all claims have been reported. The pattern of accumulating claims represents the development of
the number of claims.
In a similar fashion, the amount of claim payments for losses occurring within a specific calendar
period also will be seen to increase at succeeding valuation dates. In this case the pattern of
accumulating payments represents the development of claim costs and is usually referred to by
the term paid development. The concept of development also applies to incurred losses. Incurred
development is defined as the difference between estimates of incurred costs at two valuation
dates for a defined group of claims.
—The provision for future development on known claims relates to incurred development on
those claims reported to an insurer on or before a specific accounting date that are still open on
that accounting date. Incurred development on such claims can be either increasing or
decreasing.
—The reopened claims reserve is a provision for future payments on claims closed as of the
accounting date that may be reopened due to circumstances not foreseen at the time the claims
were closed. In some instances, post-closing payments or recoveries for claims not actually
reopened may be included with the development on known claims.
For many insurers a claim is considered to be reported when it is first recorded in the accounting
records of the insurer. Conceptually, two elements form the IBNR reserve. The first of these
elements is the provision for claims incurred but not reported, referred to as the “pure” IBNR.
This provision results from the normal delay that occurs in reporting losses. The second element
is the provision for claims in transit, which are incurred and reported but not recorded. This
provision represents the additional time consumed by the insurer’s recording procedures. As a
practical matter it is not always feasible to measure these two elements separately, but it is
important to understand the effect reporting procedures can have on the amount of IBNR reserve.
For some insurers claims in transit are considered known claims. The IBNR reserve must
provide for the ultimate value of IBNR claims including the development which is expected to
occur on these claims after reporting.
—Loss adjustment expenses include allocated loss adjustment expenses and unallocated loss
adjustment expenses. Allocated loss adjustment expenses are those expenses, such as attorneys’
fees and other legal costs, that are incurred in connection with and are assigned to specific
claims. Unallocated loss adjustment expenses are all other claim adjustment expenses and
include salaries, utilities and rent apportioned to the claim adjustment function but not readily
assignable to specific claims. The definition of allocated and unallocated loss adjustment
expenses for reserving purposes varies among insurers, and an individual insurer’s practice for
reserving may not always conform to its definition for statistical reporting or ratemaking
purposes.
Since allocated expenses are assigned to specific claims, all of the analyses performed on loss
data can also be performed on allocated loss expense data. Thus, the allocated loss adjustment
expense reserve can be divided into known and IBNR components. All of the concepts discussed
12
in the preceding paragraphs, as well as each of the five elements of the loss reserve, have similar
meanings with regard to the allocated loss adjustment expense reserve.
Although the same statistical procedures normally do not apply to unallocated expenses, the
unallocated loss adjustment expense reserve can still be divided into known reserve and IBNR
components, and the concept of a particular valuation date is meaningful.
II. PRINCIPLES
1. An actuarially sound loss reserve for a defined group of claims as of a given valuation date is
a provision, based on estimates derived from reasonable assumptions and appropriate
actuarial methods for the unpaid amount required to settle all claims, whether reported or not,
for which liability exists on a particular accounting date.
2. An actuarially sound loss adjustment expense reserve for a defined group of claims as of a
given valuation date is a provision, based on estimates derived from reasonable assumptions
and appropriate actuarial methods, for the unpaid amount required to investigate, defend, and
effect the settlement of all claims, whether reported or not, for which loss adjustment expense
liability exists on a particular accounting date.
3. The uncertainty inherent in the estimation of required provisions for unpaid losses or loss
adjustment expenses implies that a range of reserves can be actuarially sound. The true value
of the liability for losses or loss adjustment expenses at any accounting date can be known
only when all attendant claims have been settled.
4. The most appropriate reserve within a range of actuarially sound estimates depends on both
the relative likelihood of estimates within the range and the financial reporting context in
which the reserve will be presented.
Although specific reserve requirements may vary, the same basic principles apply in each
context in which the reserves are stated, including statutory balance sheets, statements of opinion
on loss reserves, and reports to shareholders or securities regulators. Guidance in the application
of these principles is provided in the Considerations section of this statement.
III. CONSIDERATIONS
Understanding the trends and changes affecting the data base is a prerequisite to the application
of actuarially sound reserving methods. A knowledge of changes in underwriting, claims
handling, data processing and accounting, as well as changes in the legal and social environment,
affecting the experience is essential to the accurate interpretation and evaluation of observed data
and the choice of reserving methods.
A knowledge of the general characteristics of the insurance portfolio for which reserves are to be
established also is important. Such knowledge would include familiarity with policy provisions
13
that may have a bearing on reserving, as well as deductibles, salvage and subrogation, policy
limits, and reinsurance.
Data Organization—The categorization of claims by time unit is extremely important. The

successful organization of a data base for reserving revolves around five key dates:
—accident date, which is the date on which the loss occurred, or for those losses that cannot be
identified with a single isolated event, the date on which the loss is deemed to have occurred
—report date, which is the date on which the loss is first reported to the insurer (in practice it is
often taken to be the recorded date)
—recorded date, which is the date on which the loss is first entered in the statistical records of
the insurer
—accounting date
—valuation date
Commonly, insurers compile claim data by accident periods (accident year, accident quarter,
accident month, etc.), which group together all claims with accident dates falling within
particular fiscal periods; or by policy periods, which group all claims relating to policies written
during particular fiscal periods. Claim information by accident year is required for various
financial reporting schedules. Many insurers also compile claim data by report periods, which
group together all claims with report dates falling within specified fiscal periods.
Claims with report dates equal to or prior to a particular accounting date would be classified as
known or reported claims with respect to the accounting date, but claims with report dates later
than a particular accounting date and with accident dates equal to or earlier than the accounting
date would be classified as IBNR with respect to the accounting date.
The preceding paragraph gives the precise definition of IBNR claims. In practice a broader
definition is sometimes used in which the IBNR reserve denotes the provision for late reported
claims, development on known claims, and a provision for reopened claims.
The ambiguity regarding the definition of IBNR can result from the differing strategies insurers
may employ in approaching loss reserving. The two common strategies are the report period
approach and the accident period approach. In the report period approach the adequacy of
existing reserves on reported claims is estimated on the basis of the historical results. Further
analysis is required in order to measure the emergence of IBNR claim. In a pure accident period
approach, the ultimate cost of all claims, both reported and unreported, arising from each
accident period is estimated. This approach results in an estimate of the loss reserve without
segregation of claims incurred but not reported. The estimated loss reserve is then apportioned
between reserves for IBNR and known claims on a suitable basis. Because accident period
14
techniques do not necessarily require separate treatment of reported and unreported claims, their
use can lead to a broader definition IBNR as mentioned above.
The method of assigning report dates to reopened claims can also affect the IBNR reserve.
Because reopened claims are generated from claims previously reported and closed, there is
general agreement that the provision for this liability should be included in the reserve for known
claims. Some insurers, however, establish new report dates for reopened claims and thereby
consider the provision for these claims as a component of the IBNR reserve.
Homogeneity—Loss reserving accuracy often is improved by subdividing experience into

groups exhibiting similar characteristics, such as comparable claim experience patterns,
settlement patterns or size of loss distributions. For a heterogeneous product, such as commercial
multi-peril or miscellaneous liability insurance, consideration should be given to segregating the
experience into more homogeneous groupings. Other example applications concern the
distinctions between personal and commercial risks and between primary and excess coverage.
Additionally, subdividing or combining the data so as to minimize the distorting effects of
operational or procedural changes should be fully explored.
Credibility—Credibility is a measure of the predictive value that the actuary attaches to a

body of data. The degree to which consideration is given to homogeneity is related to the
consideration of credibility. Credibility is increased by making groupings more homogeneous or
by increasing the number of claims analyzed within each group. A group of claims should be
large enough to statistically reliable. Obtaining homogeneous groupings requires refinement and
partitioning of the total data base. There is a point at which partitioning divides data into cells too
small to provide credible development patterns. Each situation requires a balancing of the
homogeneity and amount of data in each grouping. Thus, line and coverage definitions suitable
for the establishment of reserves for large insurers can be in much finer detail than in the case of
small insurers. Where a very small group of claims is involved, use of external information such
as industry aggregates may be necessary.
Data Availability—Data should meet requirements for the proper evaluation of reserves.
Existing information systems may impose constraints while more suitable data are being
developed. Whatever data are used in analysis of reserves, they must reconcile to the insurer’s
financial records. If reserves are established in less detail than necessary for reporting
requirements, procedures for properly assigning the reserves to required categories must be
developed.
Emergence Patterns—The delay between the occurrence of claims and the recording of
claims depends upon both the line of business and the insurer’s practices. In general, property
claims are reported quickly, whereas the reporting of liability claims may be substantially
delayed.
A review of the insurer’s claims practices should be made to assure that assumptions regarding
the claims process are appropriate. If a change in claims procedures is identified, its impact on
emergence patterns should be evaluated.
15
Settlement Patterns—The length of time that it normally takes for reported claims to be
settled will affect the choice of the loss reserving methods. Lines of business for which claims
settle quickly generally are less subject to reserve uncertainty. A claim arising under collision
coverage, for example, tends to be settled quickly, and the amount of settlement is usually close
to the original estimate. Conversely, a bodily injury liability claim often requires a long time to
settle. Moreover, the amount of settlement often varies considerably from the original estimate,
since it depends on the interaction of complex variables such as the type and severity of the
injury and the intricacies of the judicial process.
Development Patterns—The pattern of development on known claims should be carefully

reviewed. An insurer’s claims procedures will affect the manner in which the case reserves
develop for any group of claims, and changes in claims practices may affect the consistency of
historical developments. Further, the length of time to settlement may affect the observed
development.
If reserves have been established at present values, the payments of claims, by themselves, cause
an appearance of upward development apart from development due to other factors. To interpret
development patterns correctly, the development history should be restated to remove the effect
of discounting.
Frequency and Severity—The same total dollars of losses may arise from a few very large
claims or from many small claims. Reserve estimates will tend to be more accurate for losses
resulting from a high frequency/low severity group of claims than from a low frequency/high
severity group of claims. Therefore, the evaluation of reserves for low frequency/high severity
groups of claims will ordinarily require more extensive analysis. If the exposure for the group of
claims being considered includes the potential for claims of a magnitude not present in historical
data, adjustments should be made to reflect the expectation of such claims.
Reopened Claims Potential—The tendency for closed claims to reopen varies substantially
among lines of business. Judicial opinions and legislation can affect the reopening of claims, as
can changes in an insurer’s procedures.
Claims-Made—Some coverages may be provided on a policy form covering claims reported

during a certain period rather than claims arising out of occurrences during that period. Claims-
made data should be segregated from experience on occurrence policies. It may be necessary to
augment claims-made statistics with appropriate report period statistics generated under
occurrence programs.
Certain provisions may modify the claims-made policy upon fulfillment of conditions stipulated
in the contract. Review of the contract wording is necessary to determine the appropriate reserve,
if any, for occurrences prior to the policy effective date or claims reported after the policy
expiration.
16
Aggregate Limits—For certain insurance coverages, such as products and professional
liability, aggregate policy limits may act to restrict total potential incurred losses and therefore
reserve requirements. In the review of groups of claims where aggregate limits apply, modeling
techniques or audit tests of the data will reveal to what extent limit ceilings have been reached
and assist in determining how reserve projections may have to be modified.
Salvage, Subrogation, and Collateral Sources—For a proper evaluation of an insurer’s total

reserve position, the potential impact of salvage and subrogation on the group of claims under
consideration should be evaluated even though statutory accounting may prohibit a deduction
from loss reserves. In addition, the impact of coinsurance, deductibles, coordination of benefits,
second injury fund recoveries, as well as any other collateral sources, should be considered.
Generally Accepted Accounting Principles—Reports to shareholders and to securities

regulators are governed by generally accepted accounting principles (GAAP). GAAP reserves
may be defined differently from statutory reserves. For example, GAAP reserves are ordinarily
reduced by anticipated salvage and subrogation. The same principles of analysis used for
statutory estimates can be applied to GAAP reserve estimates.
Reinsurance—Reserves are affected by the types of reinsurance plans and retentions that
were and are in force, and the impact of changes in net retentions should be evaluated. To
determine the effect of reinsurance it may be appropriate to analyze direct and ceded experience
separately. The recoverability of ceded reinsurance is a further consideration; generally, it is
addressed separately from the reserve evaluation process.
Portfolio Transfers, Commutations, and Structured Settlements—Portfolio transfers,

commutations, and structured settlements generally recognize the time value of money. Such
transactions should be evaluated for their impact on the loss reserves and the development
patterns.
Pools and Associations—The loss liabilities of an insurer depend to some degree on forces
beyond its control, such as business obtained through participation in voluntary and non-
voluntary underwriting pools and associations. The operating and reserving policies of these
organizations vary, and adjustments to reserves reported by the pools and associations may be
warranted.
Operational Changes—The installation of a new computer system, an accounting change, a

reorganization of claims responsibility or changes in claims handling practices or underwriting
programs are examples or operational changes that can affect the continuity of the loss
experience. The computation of the reserves should reflect the impact of such changes.
Changes in Contracts—Changes in contract provisions, such as policy limits, deductibles, or

coverage attachment points, may alter the amounts of claims against an insurer. Such contractual
changes may affect both the frequency and severity of claims.
17
External Influences—Due regard should be given to the impact of external influences.
External influences include the judicial environment, regulatory and legislative changes, residual
or involuntary market mechanisms, and economic variables such as inflation.
Discounting—There are circumstances where loss reserves are stated on a present value
basis. To calculate or evaluate such reserves, it is generally appropriate to perform an analysis on
an undiscounted basis and then apply the effect of discounting.
Provision for Uncertainty—A reserve estimate should take into account the degree of
uncertainty inherent in its projections. A reserve stated at its ultimate value may include an
implicit provision for uncertainty due to the time value of money. If a reserve is to be stated at a
present value, it may be appropriate to include an explicit provision for uncertainty in its
undiscounted amount. Further, an explicit provision for uncertainty may be warranted when the
indicated ultimate reserve value is subject to a high degree of variability.
Reasonableness—The incurred losses implied by the reserves should be measured for

reasonableness against relevant indicators, such as premiums, exposures, or numbers of policies,
and expressed wherever possible in terms of frequencies, severities, and loss ratios. No material
departure from expected results should be accepted without attempting to find an explanation for
the variation.
Loss-Related Balance Sheet Items—The loss reserve analysis may have implications for
other loss-related balance sheet items. These include contingent commissions, retrospective
premium adjustments, policyholder dividends, premium deficiency reserves, minimum statutory
reserves and the deduction for unauthorized reinsurance.
Loss Reserving Methods—Detailed discussion of the technology and applicability of current

loss reserving practices is beyond the scope of this statement. Selection of the most appropriate
method of reserve estimation is the responsibility of the actuary. Ordinarily the actuary will
examine the indications of more than one method when estimating the loss and loss adjustment
expense liability for a specific group of claims.
Standards of Practice—This statement provides the principles of loss reserving. The actuary
should also be familiar with standards of practice, which address the application of these
principles.
18
Appendix 3

Property and Casualty Valuations
(Adopted by the Board of Directors of the CAS September 22, 1989)
The purpose of this Statement is to identify and describe principles applicable to property and
casualty valuations. The Statement establishes fundamental concepts for research and education
regarding valuation techniques. The principles in this Statement provide the foundation for
actuarial procedures and standards of practice regarding valuations. These principles apply to
valuations regarding any risk bearer of property and casualty contingencies.
This Statement consists of three parts:
I. DEFINITIONS
II. PRINCIPLES
III. DISCUSSION
I. DEFINITIONS
—Valuation is the process of determining and comparing, for the purpose of assessing a risk
bearer’s financial condition as of a given date, called the valuation date, the values of part or all
of a risk bearer’s obligations and the assets and considerations designated as supporting those
obligations.
A valuation is carried out in accordance with specified rules or assumptions selected or

prescribed in accordance with the purpose of the valuation.
—A risk bearer is a person or other entity that is exposed to the risk of financial losses that may
arise out of specified contingent events during a specified period of exposure.
—Cash flows are receipts or disbursements of cash.
—An asset is cash held or any other resource that can generate receipts or reduce disbursements.
—An obligation is a commitment by or requirement of a risk bearer to make disbursements with

respect to financial losses arising out of specified contingent events or with respect to any type of
other expense or investment commitment.
19
—A consideration is a receipt or a reduction in disbursements in exchange for accepting the risk
of financial losses that may arise out of specified contingent events during a specified period of
exposure.
II. PRINCIPLES
1. Every obligation, consideration or asset, with the exception of cash held, is associated with
one or more items of cash flow.
2. The value of every item of cash flow depends upon the following valuation variables, each of
which may involve uncertainty:
a. the occurrence of the item of cash flow,
b. the amount of the item of cash flow,
c. the interval of time between the valuation date and the date of occurrence of the item of
cash flow, and
d. a rate of interest related to the interval of time between the valuation date and the date of
occurrence of the cash flow.
3. The degree of uncertainty affecting each valuation variable for any item of cash flow
associated with a given asset, obligation or consideration depends upon:
a. the nature of the asset, obligation or consideration,
b. the various environments (e.g. regulatory, judicial, social, financial and economic
environments) within which the valuation is being performed, and
c. the predictive value of the data used to estimate the valuation variables associated with
each item of cash flow.
4. In general, the values of items of cash flow associated with a given asset, obligation or
consideration, and the values of assets, obligations and considerations themselves are not
only uncertain, they are also not independent of each other. Consequently, the degree of
uncertainty relative to the combined value of items of cash flow or of assets, obligations and
considerations reflects the uncertainties affecting the underlying valuation variables and
arising out of the interaction of those variables in the process of combination.
5. The value of an asset, obligation or consideration is equal to the combined values of its
constituent items of cash flow.
20
6. The result of a valuation is the combined value of the assets, obligations and considerations
involved in the valuation with due recognition of the offsetting characteristics of receipts and
disbursements.
7. These valuation principles apply to any valuation whether it involves a risk bearer’s total
assets, obligations and considerations as of a given valuation date or only identified segments
of the risk bearer’s assets, obligations and considerations including:
a. commitments made on or before the valuation date, or
b. the commitments in (a) and commitments projected to be made after the valuation date,
or
c. only those commitments projected to be made after the valuation date.
III. DISCUSSION
Although no valuation methodology is appropriate in all situations, a number of considerations

commonly apply. Some of these considerations are discussed in this section. These discussions
are intended to provide a foundation for the development of actuarial procedures and standards
of practice.
Data—Data to be used in valuation include descriptions of the characteristics of the risk

bearer’s assets, obligations and considerations. The descriptions should be sufficiently detailed to
permit reasonable projections of cash flows from these assets, obligations and considerations.
The actuary may use a risk bearer’s own experience relative to its assets, obligations and
considerations if this provides a basis for developing a reasonable indication of the future.
Moreover, the actuary may use external data drawn from relevant experience of the insurance
industry, other financial institutions or surrounding environments.
Organization of Data—Organization of data for valuation is affected by the characteristics of

the assets, obligations and considerations involved and the characteristics of the valuation
variables connected with them.
Much of the data organizational work relative to obligations and considerations begins with data
used in connection with the reserving and ratemaking processes. However, it may be necessary
to adjust the results of those processes so as to take into account differences between cash flow
dates and the various dates used in those processes. It may also be necessary to identify any
relevant expenses that fall outside the data used in the reserving and ratemaking processes and
reflect them in the valuation process. It is important, too, to identify potential adjustments to
considerations like retrospective premiums or audit premiums that may be received or paid in the
future.
21
If a valuation deals with detailed analyses of cash flows, data organization relative to assets
involves principally the work of classifying the assets and developing projections of contractual
or anticipated cash flows from them. It is also often necessary to divide assets into classes of
investment by such things as time to maturity or quality and to project flows of anticipated
receipts into particular classes of investment in accordance with an assumed investment strategy.
Homogeneity—Valuation accuracy is often improved by dividing the data on assets,

obligations and considerations into groups exhibiting similar characteristics. Homogeneous
groupings recognize, when appropriate, the interrelationships between those assets, obligations
and considerations.
Credibility—Credibility is a measure of the predictive value attached to a body of data.

Credibility is increased by defining groups of assets, obligations or considerations so as to
increase their homogeneity or to increase the volume of data relative to the groups. Increasing
homogeneity may fragment the groups to such an extent that their predictive value is reduced to
an unacceptable level. Each situation requires balancing homogeneity and the volume of data.
Operating Conditions—Operating conditions should be reflected in valuation. Operating con-

ditions include mix of business, underwriting, claims handling, marketing, accounting, premium
processing, portfolio of investments, investment strategy, and reinsurance programs.
Environmental Conditions—Environmental conditions should be reflected in valuation. The

regulatory, judicial, social, financial, and economic environments are some of the major ones to
be considered.
Losses and Loss Adjustment Expenses—The major obligations of a risk bearer are usually
those relating to the future payment of losses and loss adjustment expenses. When these
obligations are estimated for purposes of a valuation, their future development may be a factor
for consideration. Development of losses and loss adjustment expenses is defined in the Casualty
Actuarial Society’s Statement of Principles Regarding Property and Casualty Loss and Loss
Adjustment Expense Reserves.
Rules and Assumptions—The objective of a valuation is to produce an assessment of a risk

bearer’s financial condition that will be useful for the purpose for which the valuation is
performed. The purpose of the valuation affects the rules and assumptions used.
Cash flow analyses produce projections of receipts and disbursements. These analyses are
conceptually the most fundamental of the forms of valuation. The other forms of valuation can
be derived from cash flow analysis by suitable selection of rules and assumptions relative to the
valuation variables.
Balance sheets and income statements are often produced internally by a risk bearer using rules
and assumptions established by its management to assess financial strength and earning
performance.
22
Appraisals are intended to help determine the value of all or a part of a risk bearer’s assets,
obligations and considerations related to property and casualty contingencies, taking into account
not only financial statement items but also off-balance-sheet items such as investment in staff,
leases and so on. Appraisals are usually made in connection with mergers and acquisitions and
the sale of parts of a risk bearer’s business.
GAAP accounting rules or assumptions are intended to produce financial statements that the
financial community believes are useful for assessing a risk bearer’s earning capacity.
Statutory accounting rules or assumptions are intended to produce financial statements that
regulators believe are useful for assessing whether an insurer’s financial condition warrants its
being allowed to write insurance.
The value of any of the valuation variables with respect to a given set of items of cash flow may
be determined on the basis of any set of rules and assumptions that is appropriate to the purpose
of the valuation. Rules and assumptions relative to different classes of assets, obligations or
considerations need not necessarily be consistent with each other as long as the differences are
consistent with the purpose of the valuation, or the effect of the inconsistencies is not great
enough to invalidate the valuation.
23
Assumptions are based on a reasonable review of whatever appropriate facts are available
supplemented by the actuary’s experience and judgement as necessary. Rules are helpful to the
assurance of appropriately consistent treatment of facts and assumptions in valuation. Both rules
and assumptions can be helpful to achieving a result with a degree of refinement consistent with
the purpose of the valuation. Anticipated changes in operating and environmental conditions
should be reflected in the rules and assumptions applied to a valuation.
Valuation Variables—The valuation variables of occurrence, amount, interval of time and

rate of interest describe the quantitative characteristics of all cash flows for purposes of financial
analysis. All of the valuation variables are conceptually involved in the determination of the
values of all assets, obligations and considerations. The roles of the valuation variables in the
determination of values may be limited by the selection of rules or assumptions.
The value of any item of cash flow changes with the passage of time. This implies that valuations
of the same sets of items of cash flow performed at different valuation dates will in general
produce different results. It further implies that a valuation of one set of items of cash flow
performed as of a given valuation date will produce a result that is not directly comparable with
that of a second valuation of the same or a different set of items of cash flow performed as of a
different date.
Uncertainty—The result of a valuation involves uncertainty because of the uncertainty

connected with the valuation variables themselves and because the result of combining valuation
variables is affected by whatever relationships may exist among them.
Valuation Risks—The risks associated with valuation can be summarized into the following
three broad classes:
1. Asset Risk—The risk that the occurrence, amount or timing of items of cash flow
connected with assets will differ from that anticipated as of the valuation date for reasons
other than a change in the interest environment.
There are several factors that affect asset risk:
a. Type—This factor relates to whether the asset is, for example, a bond, a mortgage, a
preferred or common stock, an agent’s balance, a recoverable reinsurance item or
interest accrued but not paid. It also relates to such things as whether a bond is callable
and, if so, at what premiums; whether a bond has a sinking fund provision; or whether
prepayments can be made on a mortgage and, if so, what penalty may apply.
b. Quality—This factor relates to the financial strength of the entity from which the cash
flow is to be received and the relative standing of the type of asset in the hierarchy of
financial instruments.
24
c. Deferred Acquisition Expenses, Goodwill and Similar Assets—This factor relates to
the valuation question of whether any asset of these or similar types involves cash
flows that are not explicitly or implicitly recognized elsewhere in the valuation.
d. Investment Strategy—This factor relates to plans for investment of receipts in various

types of security, taking into account such things as the insurer’s needs for funds to
meet obligations as they mature, market conditions at the time the investments are
made, and the overall condition of the insurer’s investment portfolio at the time the
investments are made.
e. Trends—This factor relates to changes over time in the valuation variables other than
interest, insofar as they affect assets, and in the degree of uncertainty affecting them.
2. Obligation and Consideration Risk—The risk that the occurrence, amount or timing of
items of cash flow connected with obligations and considerations will differ from that
anticipated as of the valuation date for reasons other than a change in the interest
environment.
There are several factors that affect obligation and consideration risk:
a. Coverage—This factor relates to the riskiness of the coverage involved.
b. Type—This factor relates to whether the obligation is, for example, a loss or loss
adjustment reserve, an unearned premium reserve, a contingent commission reserve, a
retrospective premium adjustment reserve, a policyholder or shareholder dividend
reserve, a premium deficiency reserve, an income tax liability, an investment
commitment or an account payable for something such as expenses, taxes, licenses,
fees and assessments.
c. Commitment Provisions—This factor relates to the extent to which the range of the
valuation variables may be effectively limited by terms of the commitments out of
which the obligations arise. Examples of such commitment provisions are basic limits,
increased limits, aggregate limits, claims made, salvage and subrogation, coinsurance,
deductibles, coordination of benefits and second injury fund recoveries.
d. Reinsurance Programs—This factor relates to the extent to which the range of the
valuation variables may be effectively limited by the terms of reinsurance programs
applicable to the commitments out of which the obligations arise. Examples of such
programs are those involving surplus, excess of loss and catastrophe reinsurance.
Frequency and severity of losses, attachment points and upper limits of reinsurance are
features of the programs relating to their limiting effect. On the other hand, reinsurance
programs also involve uncertainty as to whether reinsurance will be collectible.
e. Exposure—This factor relates to the uncertainty involved in measuring or projecting

levels of exposure, and for periods beginning after the valuation date, the
25
considerations for those periods and the obligations to arise out of them. Obligations
and considerations related to these periods of exposure may be offset against each
other in recognition of the fact that the obligations would not arise if the considerations
were not received. Determination of whether obligations and considerations relative to
such periods should be recognized in a valuation depends upon the timing relative to
the valuation date of the commitments to accept risks for those periods.
f. Loss Development—This factor relates to the uncertainty arising out of changes over
time in patterns of emergence, development, reopening, settlement and payment of
claims.
g. Trends—This factor relates to changes over time in the valuation variables other than
interest, insofar as they affect obligations and considerations, and in the degree of
uncertainty affecting them.
h. Large Latent Losses—This factor relates to the treatment of identifiable classes of very
serious potential losses for which probable frequency and severity can not be
reasonably estimated for a considerable period of time.
i. Off-Balance-Sheet Items Such as Long-Term Leases and Commitments to Buy

Securities—This factor relates to the valuation question of whether any obligation of
these or similar types involve cash flows that are not explicitly or implicitly recognized
elsewhere in the valuation.
3. Interest Risk—The risk that different amounts of change in the anticipated values, and the
degree of uncertainty therein, of obligations and of the assets and considerations with
which the obligations are being compared will occur:
i. simply because of a change in the interest environment, or
ii. because a change in the interest environment brings about a change from expected
experience as to the occurrence, amount or timing of items of cash flow connected
with assets, obligations or considerations.
There are several factors that affect interest risk:
a. Mismatch of Asset and Obligation Cash Flows—This factor relates to the

development of an excess of a risk bearer’s receipts over its required disbursements
or vice versa.
If an excess of receipts over required disbursements develops, the risk bearer may
not be able to invest the excess cash at yields that will produce future cash flows
large enough to meet its obligations as they mature. This is “reinvestment” risk.
26
If an excess of required disbursements over receipts develops, the risk bearer may
have to borrow or liquidate assets with yields below then current market rates to
make up the difference. Borrowing at a relatively high interest rate, or inability to
invest the difference at then current market rates produces a reduction in the risk
bearer’s future profits. This is “market” risk.
b. Changes in the Timing of Receipts and Disbursements—This factor relates to the

preference of borrowers to prepay debt carrying high rates of interest when rates go
down and to defer repayments of debt carrying low rates of interest when rates go
up. For risk bearers of property and casualty contingencies, this risk affects mainly
their assets.
c. General Economy—This factor relates to the way in which things such as liquidity,
inflation, demand for cash to fund expansion, government debt, trade imbalances
and distortions in the yield curve affect the general level of interest rates.
d. Trends—This factor relates to changes over time in the interest valuation variable
and in the degree of uncertainty affecting it and how those changes affect the other
asset and obligation valuation variables.
Interaction with Other Professionals—The uncertainties that affect other actuarial fields, such
as ratemaking and reserving, also affect valuation. In addition, valuation is affected by
uncertainties met in other fields, such as marketing, underwriting, finance, regulation, risk
management and so on. This implies that professionals working in other fields can be helpful in
gathering information and developing rules and assumptions to be used in valuation.
Actuarial Judgment—It is important to apply actuarial judgment based on education and

experience in selecting and organizing data and making rules and assumptions to be used in the
valuation process and in assessing the reasonableness of the results.
27
Actuarial Standard
of Practice
No. 10
Methods and Assumptions for Use in Life Insurance Company

Financial Statements Prepared in Accordance with GAAP
Revised Edition
Developed by a Task Force of the

Adopted by the
March 2000
(Doc. No. 068)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Costs 2
2.2 Deferred Policy Acquisition Cost 2
2.3 GAAP Net Premium 2
2.4 Gross Premium 2
2.5 Indeterminate Premium Policies 2
2.6 Investment Contracts, Limited-Payment Contracts, and Universal Life-Type
(UL-Type) Contracts 2
2.7 Lock-In 2
2.8 Net GAAP Liability 2
2.9 Participating Policy 2
2.10 Policy Benefit Liability 2
2.11 Risk of Adverse Deviation 3

3.1 The Role of the Actuary 3
3.2 Preparation of Financial Statements 3
3.3 Categories of Assumptions 3
3.4 Best-Estimate Assumptions 3
3.4.1 Items to Be Considered 3
3.4.2 Internal Consistency 3
3.4.3 Sources of Data 4
3.5 Provision for Risk of Adverse Deviation 4
3.5.1 Degree of Risk 4
3.5.2 Relationship to Best-Estimates 4
3.6 Methods 4
3.6.1 Lock-In/Adjustment 5
3.6.2 Recognition of Loss 5
3.6.3 Recognition of Premiums 5
3.7 Special Situations 5
3.7.1 Participating Policies That Are Subject to SFAS No. 60 6
3.7.2 Indeterminate Premium Policies 6
3.8 Materiality 6
ii
4.1 Documentation 7
4.2 Prescribed Statement of Actuarial Opinion (PSAO) 7
APPENDIXES
Appendix 1Background and Current Practices 8

Background 8
Current Practices 9
Appendix 2Comments on the Exposure Draft and Committee Responses 10
iii
March 2000

Actuarial Standards Board and Other Persons Interested in Life Insurance
Company Financial Reporting According to Generally Accepted Accounting
Principles (GAAP)
SUBJ: Revision of Actuarial Standard of Practice (ASOP) No. 10
This booklet contains the revision of Actuarial Standard of Practice No. 10, Methods and
Assumptions for Use in Life Insurance Company Financial Statements Prepared in Accordance
with GAAP (formerly titled Methods and Assumptions for Use in Stock Life Insurance Company
Financial Statements Prepared in Accordance with GAAP).
Development of the Standard
This booklet contains an updated and expanded version of ASOP No. 10, originally adopted by
the ASB in 1989. The 1989 standard was developed by the American Academy of Actuaries
(AAA) Committee on Life Insurance Financial Reporting for the Life Committee of the ASB.
In 1992, ASOP No. 10 was expanded. The purpose of the expansion was to incorporate portions
of the AAA’s Financial Reporting Recommendation (FRR) 1, Actuarial Methods and
Assumptions for Use in Financial Statements of Stock Life Insurance Companies Prepared in
Accordance with Generally Accepted Accounting Principles; FRR 5, Recognition of Premiums;
FRR 6, Participating Policies Sold by Stock Life Insurance Companies; and AAA Interpretation
1-I, Nonparticipating Guaranteed Renewable Life and Accident and Health Insurance Policies.
The standard was also reformatted. On adoption of the revised ASOP No. 10 in 1992,
Recommendations 1, 5, and 6 and their accompanying interpretations were eliminated.
In 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts,
which extended the requirements of SFAS No. 60, Accounting and Reporting by Insurance
Enterprises, and SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, to
mutual life insurers. SFAS No. 120 also established accounting for certain participating life
insurance contracts of mutual life insurance enterprises (and stock life insurance subsidiaries of
mutual life insurance enterprises). In the same year, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) No. 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises.
iv
This revision of ASOP No. 10 provides guidance in light of these pronouncements, and includes
other minor revisions in the text, as well.
Exposure Draft
An exposure draft of this revision was issued in June 1999 with a comment deadline of
December 1, 1999. Nine comment letters were received. For a detailed summary of the
substantive issues contained in the comment letters and the committee’s responses to such,
please see appendix 2.
The key change from the exposure draft was the modification of sections 1.2, 3.1, and 3.2 to
clarify that the standard applies to actuaries reviewing historical life insurance company GAAP
financial statements, as well as to actuaries preparing such statements.
The Task Force on Revision of ASOP No. 10 and the Life Committee would like to thank
everyone who contributed comments and suggestions on the exposure draft.
The ASB adopted this revision at its March 2000 meeting.
Task Force on Revision of ASOP No. 10
Mark Freedman, Chairperson

John W. Brumbach Godfrey Perrott
Lew H. Nathan, Chairperson

Marc A. Cagen Thomas A. Phillips
Mark J. Freedman Barry L. Shemin
Stephen G. Hildenbrand Timothy J. Tongson

Phillip N. Ben-Zvi Roland E. King
Heidi R. Dexter William C. Koenig
David G. Hartman James R. Swenson
Ken W. Hartwell Robert E. Wilcox
v
METHODS AND ASSUMPTIONS FOR USE IN

LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS
PREPARED IN ACCORDANCE WITH GAAP
1.1 Purpose—The purpose of this actuarial standard of practice (ASOP) is to provide

guidance to the actuary in establishing appropriate actuarial methods and assumptions for
life insurance companies’ financial statements prepared in accordance with generally
accepted accounting principles (GAAP).
1.2 Scope—This standard applies to actuaries selecting or reviewing methods or assumptions

used in the preparation of historical life insurance company GAAP financial statements.
The standard does not apply in purchase accounting situations. For investment contracts
(as defined in Statement of Financial Accounting Standards (SFAS) No. 97, Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments, promulgated by the Financial
Accounting Standards Board (FASB)) that are issued by insurance companies, GAAP
requires accounting as for other interest-bearing obligations. To the extent that the ac-
counting treatment for these contracts does not involve actuarial methods or assumptions,
such contracts are specifically excluded from the scope of this standard.
reference includes the referenced document as it may be amended or restated in the
future, and any successor to it, by whatever name called. If the amended or restated
1.4 Effective Date—This revision of ASOP No. 10 will be effective for work on life
insurance company financial statements for fiscal periods ending on or after October 15,
2000.
1
The terms below are defined for use in this actuarial standard of practice:
2.1 Costs—All benefit payments and expenses associated with issuing and maintaining a
company’s policies, with no explicit provision for profit.
2.2 Deferred Policy Acquisition Cost (DPAC)—The unamortized portion of those policy
acquisition expenses that vary with, and are primarily related to, the acquisition of new
and renewal insurance contracts and coverages.
2.3 GAAP Net Premium—The portion of gross premium that provides for costs.
2.4 Gross Premium—Amounts contractually required to be paid or anticipated to be

contributed by the policyholder.
2.5 Indeterminate Premium Policies—Life and health insurance policies under which the
insurer is obligated to provide coverage for an extended period of time, and under which
premiums may vary at the discretion of the insurer.
2.6 Investment Contracts, Limited-Payment Contracts, and Universal Life-Type (UL-Type)

Contracts—As each is defined in SFAS No. 97, ¶ 6–14.
2.7 Lock-In—A GAAP concept that requires the continuing use of original basis assumptions
(issue, acquisition, or prior redetermination). This concept is further discussed in SFAS
No. 60, Accounting and Reporting by Insurance Enterprises, SFAS No. 97, and in the
American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
No. 95-1, Accounting for Certain Insurance Activities of Mutual Life Insurance
Enterprises.
2.8 Net GAAP Liability—The GAAP policy benefit liability for a book of business less any
associated DPAC.
2.9 Participating Policy—An insurance or annuity policy under which the policyholder is
entitled to participate in the distributable surplus of the company.
2.10 Policy Benefit Liability—An accrued obligation to policyholders that relates to insured
events, such as death or disability. This financial statement liability includes amounts
accrued for deferred revenues under SFAS No. 97 and maintenance expenses under
SFAS No. 60. The amount accrued for deferred revenue, known as the deferred revenue
reserve, may or may not be shown separately in the company’s financial statements, but
is, in any case, included in the policy benefit liability for purposes of this standard.
2
2.11 Risk of Adverse Deviation—The risk that actual experience may differ from best-
estimate assumptions in a manner that produces costs higher than assumed or revenues
less than assumed.
3.1 The Role of the Actuary—Applicable accounting literature suggests, but does not require,
that the actuary select the methods and assumptions used to establish net GAAP
liabilities. To the extent the actuary selects or reviews such methods or assumptions, the
actuary should be guided by this standard.
3.2 Preparation of Financial Statements—An actuary who selects or reviews methods or

assumptions used in a life insurance company GAAP financial statement should be
familiar with relevant accounting and actuarial literature, including, but not limited to,
SFAS No. 60, SFAS No. 97, SFAS No. 120, Accounting and Reporting by Mutual Life
Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts; and the AICPA’s Audits of Stock Life Insurance Companies
(Audit Guide), Practice Bulletin 8, and SOP No. 95-1.
3.3 Categories of Assumptions—Two general types of actuarial assumptions are used in the
preparation of GAAP financial statements. Best-estimate assumptions as of the financial
statement date are required in certain instances. In others, assumptions that provide for
the risk of adverse deviation are required. Relevant accounting standards call for best-
estimate assumptions to be periodically reviewed and updated to reflect emerging
experience, whereas assumptions with provision for risk of adverse deviation are subject
to lock-in until a loss recognition situation arises. The actuary should exercise care to
ensure that the proper category of assumptions is used.
3.4 Best-Estimate Assumptions—In instances where GAAP requires best-estimate

assumptions, the actuary should choose assumptions that, in his or her judgment, reflect
the most likely outcome of events. Best-estimate assumptions selected by the actuary
should be reasonable. Except in a loss recognition situation, accounting practice usually
follows the convention that, given two choices that are deemed equally likely, the one
that should be selected is the one that produces the larger liability or smaller asset.
3.4.1 Items to Be Considered—In selecting best-estimate assumptions, the actuary

should consider the characteristics and magnitude of the company’s business; the
maturity of the company and its rate of growth; the prior experience of the
company, to the extent considered relevant, and the trends in that experience; and
medical, economic, social, and technological developments that might affect
future experience.
3.4.2 Internal Consistency—The actuary should select best-estimate assumptions that,

when taken together, reflect all pertinent areas of expected future experience and
3
are specific to the particular product, line of business, or block of business being
valued. These assumptions should be comprehensive and internally consistent.
3.4.3 Sources of Data—In forming a judgment as to the appropriate assumptions, the

actuary should consider available pertinent data. To the extent possible and
appropriate, the actuary should consider data specific to the company for which
the assumptions are being made. Where such data are not available or are not
credible, the actuary should consider industry data or data from other similarly
situated companies, modified as appropriate. ASOP No. 23, Data Quality, gives
further guidance to the actuary on issues related to the selection of data, use of
imperfect data, and reliance on data supplied by others.
3.5 Provision for Risk of Adverse Deviation—In certain instances GAAP requires a
provision for the risk of adverse deviation in actuarial assumptions.
3.5.1 Degree of Risk—In selecting assumptions that include provision for the risk of
adverse deviation, the actuary should consider the degree to which the assumption
is subject to such risk in total and at each future duration. Provision for the risk of
adverse deviation should be reasonable in the actuary’s judgment.
3.5.2 Relationship to Best-Estimates—In selecting assumptions that include provision

for the risk of adverse deviation, the actuary should consider whether such
assumptions bear a reasonable relationship to the best-estimate assumptions.
Under GAAP, the provision for the risk of adverse deviation should not increase
the resulting GAAP net premium above the gross premium. The resulting GAAP
net premium may be less than the gross premium, provided that due provision has
been made for the risks of adverse deviation. Note that the GAAP net premium
prior to provision for the risk of adverse deviation may be greater than the gross
premium.
The actuary should establish that the aggregate net GAAP liability determined
using assumptions that include provision for the risk of adverse deviation equals
or exceeds a similarly determined net liability determined using best-estimate
assumptions without provision for the risk of adverse deviation.
3.6 Methods—One purpose of GAAP is to achieve matching of revenue and expenses. This
matching is accomplished primarily through establishing policy benefit liabilities and
DPAC assets. Methods used to determine policy benefit liabilities and DPAC assets will
vary according to whether SFAS No. 60, SFAS No. 97, or SOP No. 95-1 applies. The
actuary should use the methods that are appropriate to the type of contract.
For contracts subject to the requirements of SFAS No. 60, premiums are included in
revenues, while benefits and other expenses are included in expenses. Matching is
achieved by accruing costs against premiums.
4
For UL-type contracts subject to SFAS No. 97, amounts assessed against the policyholder
are included in revenue; benefits in excess of the policy value and other expenses are
included in expenses. Matching is achieved by amortizing deferrable acquisition
expenses and unearned revenue against margins.
For contracts subject to SOP No. 95-1, premium and benefit recognition is identical to the
requirements of SFAS No. 60, but amortization revenue is analogous to that used for UL-
type contracts subject to SFAS No. 97.
3.6.1 Lock-In/Adjustment—Unless loss recognition or a significant difference between

actual and expected persistency exists, policy benefit liabilities and DPAC for
insurance contracts subject to SFAS No. 60 are subject to lock-in. Where lock-in
is applicable under SFAS No. 60, the actuary should base the amortization on the
same assumptions as those underlying the calculation of the GAAP policy benefit
liability.
The actuary should adjust DPAC and the amortization thereof for UL-type
contracts, investment contracts, and participating contracts subject to SOP
No. 95-1 as conditions warrant.
3.6.2 Recognition of Loss—GAAP requires the recognition of a loss when it is

probable and can be reasonably estimated (SFAS No. 5, Accounting for
Contingencies). This is further discussed in SFAS No. 60, SFAS No. 97, and SOP
No. 95-1. When asked to perform a loss recognition analysis, the actuary should
use best-estimate assumptions.
3.6.3 Recognition of Premiums—The actuary should use appropriate methods to rec-

ognize premiums in income. These are determined by the applicable accounting
standards and vary by the type of contract. The recognition of GAAP net
premiums in the GAAP benefit liability and DPAC computations should be
consistent with the treatment of gross premiums in the income statement.
When deferred premiums are appropriate, any excess of gross premium over net
premium should not be recognized in net GAAP income until the related gross
premium is due. This applies to life and health contracts (except credit) under
SFAS No. 60 and SOP No. 95-1 if it is expected that the policy may be renewed
for more than one year with reasonably predictable persistency. For credit
insurance, or where persistency is such that a term of one year or less is expected,
gross premiums should be recognized as revenue over the premium period by
means of an unearned gross premium liability.
3.7 Special Situations—In preparing GAAP financial statements, the actuary will encounter
circumstances that require significant interpretation of the general considerations already
5
addressed in this standard. Two of these situations are sufficiently common to be
addressed in this standard.
3.7.1 Participating Policies That Are Subject to SFAS No. 60—GAAP requires that
only the portion of profits that inures to the benefit of stockholders is reflected in
reported results. Profits that are derived from participating policies and inure to
the benefit of stockholders may be restricted (by law, regulation, company
practice, or otherwise) or may be unrestricted. The actuary should use the
appropriate methods and assumptions for each of the following two
circumstances.
a. Restricted Stockholder Profits—Profits in excess of the amount inuring to

the benefit of stockholders should be accumulated in a participating
policyholder account. Assumptions, including provision for the risk of
adverse deviation, may be established at a level consistent with those
underlying gross premiums or may be comparable to those used for the
company’s nonparticipating business. Policyholder dividends would
generally be treated as disbursements of predividend profits, not as
disbursements in the liability calculation.
b. Unrestricted Profits—Policyholder dividends should be treated as

disbursements in the liability calculation. Assumptions may include a
somewhat smaller provision for the risk of adverse deviation, given the
flexibility provided by the dividend scale.
3.7.2 Indeterminate Premium Policies—Provided the policy is not, in substance, a UL-

type contract, SFAS No. 60 is applicable to indeterminate premium policies. The
premium flexibility associated with these policies may affect the application of
SFAS No. 60, such as the use of a smaller provision for the risk of adverse
deviation. The ability and willingness of the insurer to change premiums may be
anticipated in performing loss recognition. Assumptions may be “unlocked” at
gross premium change dates. If assumptions are adjusted, it should be done
prospectively, without a change in the liability as of the valuation date.
3.8 Materiality—It may be appropriate to use assumptions and techniques (for example,
models) that simplify the calculation of policy benefit liabilities and DPAC amortization.
For example, it may be appropriate to assume that policy anniversaries occur on July 1 of
each calendar year. Another example is that statutory reserves might be deemed a proxy
for net GAAP reserves on small or old blocks of business. Simplification and
approximations are acceptable only if the results can reasonably be expected not to differ
materially from the results of detailed calculations. The actuary may seek guidance from
accounting professionals on the issue of materiality.
6
4.1 Documentation—The actuary should maintain adequate documentation of the

assumptions selected and methods used, such that another actuary qualified in the same
practice area could assess the reasonableness of the work.
4.2 Prescribed Statement of Actuarial Opinion (PSAO)—This ASOP does not require a
prescribed statement of actuarial opinion (PSAO) as described in the Qualification
Standards for Prescribed Statements of Actuarial Opinion promulgated by the American
Academy of Actuaries (AAA). However, law, regulation, or accounting requirements
may also apply to an actuarial communication prepared under this standard, and as a
result, such actuarial communication may be a PSAO.
7
Appendix 1
practice.
Background
Determination of generally accepted accounting principles (GAAP) is the responsibility of the

accounting profession. The American Institute of Certified Public Accountants (AICPA)
developed Audits of Stock Life Insurance Companies (Audit Guide) in 1972 with the cooperation
of life insurance company accountants and actuaries. The Audit Guide represented the first effort
by the accounting profession to establish GAAP for the life insurance industry. The Financial
Accounting Standards Board (FASB) is now responsible for the determination of GAAP for
companies whose financial statements are audited. It does so through the promulgation of
Statements of Financial Accounting Standards (SFAS).
GAAP standards for stock life insurance companies are primarily established by SFAS No. 60,
Accounting and Reporting by Insurance Enterprises, and SFAS No. 97, Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments. The FASB issued SFAS No. 60, which generally
codified the concepts in the Audit Guide, in 1972. In 1987, the FASB issued SFAS No. 97, which
(1) established GAAP for certain forms of insurance contracts not specifically addressed by
SFAS No. 60, primarily UL-type contracts; (2) established GAAP for investment contracts not
involving a significant insurance component; and (3) revised GAAP for limited-payment
contracts. In November 1990, the AICPA issued Practice Bulletin 8, providing guidance for
certain questions related to SFAS No. 97. In 1995, the FASB issued SFAS No. 120, Accounting
and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts, which extended the requirements of SFAS No. 60 and
SFAS No. 97 to mutual life insurers; and established accounting for certain participating life
insurance contracts of mutual life insurance enterprises (and stock life insurance subsidiaries of
mutual life insurance enterprises) in its Statement of Position (SOP) No. 95-1, Accounting for
Certain Insurance Activities of Mutual Life Insurance Enterprises. This statement permits other
stock life insurers to apply its provisions to participating life insurance contracts that meet the
SOP’s conditions. Other standards are also relevant, as is prevailing accounting practice in areas
not specifically addressed by an SFAS. Prior to the issuance of SFAS No. 120, mutual life
insurers’ statutory financial statements were, in practice, described as being in accordance with
GAAP.
8
Current Practices
The AAA had promulgated Financial Reporting Recommendations and Interpretations

applicable to GAAP for insurance companies, thus establishing guidance to actuaries in this area
before the formal appearance of ASOP No. 10 in 1989. Because of changes in GAAP resulting
from SFAS No. 97, SFAS No. 120, and evolution in actuarial practice, it is appropriate once
again to replace certain existing guidance and to promulgate a more generally applicable
standard of actuarial practice with respect to life insurance company GAAP financial statements.
9
Appendix 2
Comments on the Exposure Draft and Committee Responses
The exposure draft of this actuarial standard of practice (ASOP) was issued in June 1999, with a
comment deadline of December 1, 1999. (Copies of the exposure draft are available from the
ASB office.) Nine comment letters were received, which the Life Committee carefully
considered. Summarized below are the significant issues and questions contained in the comment
letters, printed in standard type. The Life Committee’s responses to these issues and questions
appear in boldface.
Section 1.2, Scope—One commentator suggested that actuaries are not only involved in the
preparation of financial statements, but that some review historical GAAP financial statements.
The committee agreed and modified the wording to reflect the role of some actuaries to
review historical GAAP financials. In addition, the committee modified wording in section
3.1, The Role of the Actuary, and section 3.2, Preparation of Financial Statements, to
reflect this role.
The same commentator also suggested the inclusion of Purchase GAAP in the scope. The
committee believes that Purchase GAAP should be excluded from the standard. Many
changes in the ASOP would have to be made to accommodate Purchase GAAP. In
addition, industry practice varies considerably. Nonetheless, in many cases, Purchase
GAAP requires either best-estimate assumptions or provisions for the risk of adverse
deviation. In these instances, even though Purchase GAAP is excluded from this ASOP, it
might still be reasonable for an actuary to apply the spirit of this ASOP.
Section 2.1, Costs, and section 2.3, GAAP Net Premium—One commentator suggested that it
would be more logical to exclude profits from the definition of costs instead of from the
definition of GAAP Net Premium. The committee agreed and modified the wording.
Section 3.1, The Role of the Actuary—See the comments under section 1.2, Scope.
Section 3.2, Preparation of Financial Statements—See the comments under section 1.2, Scope.
Two commentators suggested the inclusion of additional accounting guidance. The committee
believes that the accounting guidance listed is the most relevant to this standard, and feels
10
comfortable that the phrase “including, but not limited to” encompasses the other guidance
as necessary.
Section 3.3, Categories of Assumptions—One commentator believed that loss recognition should
be defined. The committee believes that this subject is sufficiently defined in the accounting
literature.
Section 3.4, Best-Estimate Assumptions—Three commentators were uncomfortable with the

phrase most likely outcome and suggested using more defined statistical measures such as mean,
median, or mode. One of the commentators strongly suggested that mean expected value is a
much more appropriate measure, although this commentator acknowledged that accounting
literature uses the phrase most likely.
Although the committee believes that mean expected value has theoretical merit for some
assumptions, the committee does not want to change current practice by requiring its use.
The standard calls for the actuary to use judgment and pick reasonable assumptions.
Therefore, the committee did not modify the wording.
Two commentators suggested that the guidance for assumptions in loss recognition situations
should be clearer. The committee believes that the current language is sufficiently clear.
Therefore, the committee did not modify the wording.
Section 3.6, Methods—One commentator suggested some clarification was necessary in the
phrases describing matching of revenue and expenses. The committee agreed and changed the
phrase in the second paragraph from “amortizing costs against premiums” to “accruing
costs against premiums.”
Section 3.6.3, Recognition of Premiums—One commentator suggested that the guidance for
credit insurance should be slightly different depending upon exactly the type of coverage. For
example, the pro rata method is not commonly used for single premium credit insurance with
decreasing benefits. The committee agreed and made the language more general by deleting
the reference to the pro rata method.
The committee thanks everyone who took the time and made the effort to comment on the
exposure draft. The input was helpful in developing the standard.
11
Actuarial Standard
of Practice
No. 11
Financial Statement Treatment of Reinsurance

Transactions Involving Life or Health Insurance
Revised Edition
Developed by the
Adopted by the
June 2005
(Doc. No. 098)

ASOP No. 11—June 2005
TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Health Insurance 2
2.2 Net Statement Liabilities 2
2.3 Nonproportional Feature 2
2.4 Reinsurance Agreement 2
2.5 Reinsurance Assumed 2
2.6 Reinsurance Ceded 2
2.7 Reinsurance Transaction 2

3.1 Financial Features 2
3.2 Cash Flows 2
3.3 Treatment of Reinsurance Ceded 3
3.4 Termination of Reinsurance 3
3.5 Additional Liabilities 3
3.7 Accounting Guidance 4
3.9 Documentation 4

4.1 Actuarial Communications 4
APPENDIXES

Background 5
Current Practices 5
Appendix 2—Comments on the Second Exposure Draft and Task Force Responses 7
ii
June 2005
TO: Members of the American Academy of Actuaries and Other Persons Interested in
the Financial Statement Treatment of Reinsurance Transactions Involving Life or
Health Insurance
This booklet contains the final version of a revision of ASOP No. 11, Financial Statement
Treatment of Reinsurance Transactions Involving Life or Health Insurance.
Background
The Actuarial Standards Board adopted the original ASOP No. 11, then titled The Treatment of
Reinsurance Transactions in Life and Health Insurance Company Financial Statements, in 1989.
Prior to adoption of the standard, Recommendation No. 4 and Interpretation No. 4-A of the
Financial Reporting Recommendations and Interpretations of the American Academy of
Actuaries covered certain aspects of generally accepted accounting principles (GAAP) financial
reporting on reinsurance ceded by life and health insurance companies. The original standard
superseded Recommendation No. 4 and Interpretation No. 4-A.
Since the original actuarial standard was issued, reinsurance practice and related accounting
guidance have evolved significantly. Such accounting guidance includes, for GAAP financial
statements, Statement of Financial Accounting Standard (SFAS) No. 113, Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, issued in 1992;
American Institute of Certified Public Accounts (AICPA) Statement of Position (SOP) 98-7,
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk; and, for statutory accounting, Statutory Statement of Accounting
Principles (SSAP) No. 61 and other statutory guidance, including Appendix A-785 (credit for
reinsurance) and Appendix A-791 (risk transfer/in-force accounting) of statutory codification.
The Task Force to Revise ASOP No. 11 included a member of the Casualty Actuarial Society.
However, the task force, the Life Committee, and the ASB agreed that the scope of this standard
would not be expanded to include reinsurance of purely property/casualty insurance at this time.
In the first exposure draft, the scope was changed to apply to reinsurance transactions involving
life (including annuities) and health insurance, rather than to life and health insurance company
financial statements. In the second exposure draft, the scope was further clarified to state that this
standard will apply when life and health insurance is reinsured by property/casualty companies.
Furthermore, should a company enter into a transaction that involves reinsurance of
iii
both life/health insurance and property/casualty insurance, it is incumbent on the actuary to

determine whether this standard, ASOP No. 36, Statements of Actuarial Opinion Regarding
Property/Casualty Loss and Loss Adjustment Expense Reserves, or aspects of both are most
appropriate to determine the proper treatment of the transaction.
The first exposure draft of this ASOP was issued in June 2003, with a comment deadline of
December 15, 2003. Eleven comment letters were received. The Task Force to Revise ASOP
No. 11 carefully considered all comments received and made clarifying changes to the language
in several sections. The most significant change from the first exposure draft was the revision of
section 1.2, Scope, to clarify that the standard will apply to the extent that life/health insurance is
reinsured by property/casualty companies. Should a reinsurance transaction involve both
life/health and property/casualty insurance, the actuary should use professional judgment to
determine whether this standard, ASOP No. 36, or aspects of both are most appropriate to
determine the proper treatment of the transaction.
The second exposure draft of this ASOP was issued in November 2004, with a comment
deadline of March 31, 2005. Nine comment letters were received. The Task Force to Revise
ASOP No. 11 carefully considered all comments received and made clarifying changes to the
language in several sections. For a summary of the substantive issues contained in the second
exposure draft comment letters and the task force’s responses, please see appendix 2. There were
no significant changes from the second exposure draft.
The task force thanks everyone who took the time to contribute comments on the exposure
drafts.
iv
Allan W. Ryan, Chairperson

Franklin C. Clapper, Jr. Jeremy Starr
Paul J. Kneuer Stephen A. Zonca


v
FINANCIAL STATEMENT TREATMENT OF REINSURANCE TRANSACTIONS

INVOLVING LIFE OR HEALTH INSURANCE

when performing professional services relating to financial statements that contain
material reinsurance transactions involving life insurance (including annuities) or health
insurance.

connection with preparing, reviewing, or analyzing financial statement items that reflect
reinsurance ceded or reinsurance assumed on life insurance (including annuities) or
health insurance.
To the extent that life/health insurance is reinsured by property/casualty companies, this

standard will apply. If a reinsurance transaction involves both life/health and
property/casualty insurance, the actuary should use professional judgment to determine
whether this standard, ASOP No. 36, Statements of Actuarial Opinion Regarding
Property/Casualty Loss and Loss Adjustment Expense Reserves, or aspects of both are
most appropriate to determine the proper treatment of the reinsurance transaction.
The actuary should satisfy the requirements of applicable law (including regulation and
other binding authority) and this standard. However, to the extent applicable law conflicts
with this standard, compliance with such applicable law shall not be deemed a deviation
from this standard, provided the actuary discloses that the actuarial assignment was
1.4 Effective Date—This standard is effective for actuarial services performed in connection
with financial statements for periods beginning on or after January 1, 2006.
1
2.1 Health Insurance⎯Coverage associated with contract provisions for medical, dental,
vision care, disability income, accidental death and dismemberment, long-term care, and
similar benefits, on either a reimbursement or service-benefit basis, sold by insurance
companies, health maintenance organizations, hospital and medical service organizations,
and other entities subject to insurance regulatory authorities.
2.2 Net Statement Liabilities⎯Reserves (net of reinsurance reserve credits), plus any other
liabilities (such as amounts due reinsurers), less any other assets arising from reinsurance
transactions (such as amounts receivable from reinsurers or deferred acquisition costs),
for the reinsured block of business.
2.3 Nonproportional Feature—A feature of a reinsurance agreement that makes the

reinsurer’s financial experience nonproportional to that of the ceding entity. Examples of
such nonproportional features include aggregate claim limits, deductibles, limited
coverage periods, experience refunds, profit-sharing provisions, separate but related
agreements, i.e., where the results of one agreement affect the operation of the other, and
termination provisions.
2.4 Reinsurance Agreement—An agreement whereby one or more elements of risk contained
in insurance contracts are transferred from a ceding insurance entity to a reinsuring (or
assuming) insurance entity in return for some consideration.
2.5 Reinsurance Assumed—Reinsurance as it affects the entity assuming the risk under a
reinsurance agreement.
2.6 Reinsurance Ceded—Reinsurance as it affects the entity ceding the risk under a
reinsurance agreement.
2.7 Reinsurance Transaction—A transaction made pursuant to a reinsurance agreement.
3.1 Financial Features—When preparing, reviewing, or analyzing financial statement items,

the actuary should consider the material financial features of relevant reinsurance
agreements. In particular, the actuary should appropriately and consistently recognize the
risks transferred.
3.2 Cash Flows—When preparing, reviewing, or analyzing financial statement items that
reflect reinsurance ceded or reinsurance assumed, the actuary should consider potential
2
cash flows that may, in the actuary’s professional judgment, have a material impact under
the reinsurance agreement (for example, premiums, allowances, investment income,
expenses, modified coinsurance reserve adjustments, benefits, experience refunds, risk
fees, and volume or other bonuses, including any contingent payments). The actuary
should consider the likely impact of nonproportional features and termination provisions
of the reinsurance agreement.
3.3 Treatment of Reinsurance Ceded—The actuary should determine adjustments for

reinsurance ceded financial statement items using assumptions that are consistent with
those underlying the calculation of the direct items, except as otherwise indicated by the
terms and conditions of the reinsurance agreement, even though the values of the direct
financial statement items (before reinsurance) and adjustments for reinsurance ceded are
generally determined separately.
The actuary should calculate adjustments for reinsurance ceded directly without relying
upon the values of financial statement items held by the reinsurer. Because the ceding
entity and the assuming entity each establish and test statement liabilities and assets
independently, it is possible for the value of the net statement liabilities held by the
ceding entity, plus those held by the reinsurer on a reinsured contract, to be more or less
than the amount that would have been held if the ceding entity had not reinsured the
contract. For example, the two entities may have different investment strategies, resulting
in the use of different interest rate assumptions.
3.4 Termination of Reinsurance—When preparing, reviewing, or analyzing financial

statement items, the actuary should take into account conditions of the reinsurance
agreement whereby the indemnification responsibility of the reinsurer expires prior to the
expiration of the benefits underlying the policy. The actuary should consider relevant and
material provisions that provide for the termination of the reinsurance at the option of
either party.
3.5 Additional Liabilities—For reinsurance ceded, the actuary should consider whether
additional liabilities should be established as a result of the reinsurance agreement. The
assumptions used in making this consideration should be consistent with the purpose
(such as GAAP or statutory accounting). For example, if the reinsurer has the right to
raise reinsurance premiums on in-force business without a corresponding right by the
ceding entity to raise policyholder premiums or terminate the reinsurance, an additional
liability may be indicated.
3.6 Applicable Law—When preparing, reviewing, or analyzing financial statement items that
reflect reinsurance ceded or reinsurance assumed, the actuary should consider relevant
applicable law, regulation, or other binding authority affecting reserve credit or
accounting for reinsurance.
3
3.7 Accounting Guidance—When preparing, reviewing, or analyzing financial statement

items that reflect reinsurance ceded or reinsurance assumed, the actuary should consider
the accounting guidance applicable to entries made for material reinsurance transactions.
The actuary should consider whether a particular reinsurance agreement qualifies as
reinsurance for statutory, GAAP, or other purposes, and how this may affect the
accounting treatment.

3.9 Documentation—The actuary should document, as appropriate, the methods,

assumptions, procedures, and sources of the data supporting the actuary’s work. The
documentation should be in a form such that another actuary qualified in the same
practice area could assess the reasonableness of the actuary’s work.
4.1 Actuarial Communications—When issuing actuarial communications relating to work

subject to this standard, the actuary should refer to ASOP No. 23 and ASOP No. 41,
Actuarial Communications. In addition, such actuarial communications should disclose
the following:
a. any unresolved concerns the actuary has about reinsurance information (for
example, reinsurance settlement data, in-force information, and legal agreements)
that, in the actuary’s professional judgment, could have a material effect on the
actuarial work product; and
b. the source and extent of reliance on data or other information supplied by others.
However, law, regulation, accounting requirements, or other actuarial standards of
practice may also apply to an actuarial communication prepared under this standard, and
as a result, such actuarial communication may be a prescribed statement of actuarial
opinion.
4
Appendix 1
Note: The following material is provided for informational purposes, but is not part of the
Background
Actuarial practice with respect to reinsurance, as well as the complexity of reinsurance

agreements, has evolved significantly since the original standard was issued in 1989. Much of
the increased attention to reinsurance has resulted from more recent accounting guidance in both
generally accepted accounting principles (GAAP), and statutory financial reporting.
Current Practices
In analyses such as asset adequacy testing or GAAP premium deficiency testing, reinsurance
agreements may have a material impact. Under GAAP accounting, reinsurance cash flows may
affect the amortization of deferred acquisition costs (DAC) and related financial statement items.
The presentation of the components of the net statement liabilities may vary under different
accounting principles. For example, the reserves are shown net of reinsurance ceded in statutory
financial statements and generally presented on a gross basis before reinsurance in GAAP
financial statements with an offsetting asset.
Statement of Financial Accounting Standard (SFAS) No. 113, issued since the date of the
original actuarial standard of practice, provides guidance (with respect to ceded reinsurance) on
accounting for reinsurance and requirements for a reinsurance agreement to qualify as
reinsurance for purposes of GAAP accounting. SFAS No. 113 defines reinsurance (i.e., a
transaction that receives reinsurance accounting) in a restrictive manner. For example,
reinsurance of deferred annuities would generally not be considered reinsurance from a GAAP
accounting perspective, although it could be reinsurance for statutory accounting.
There are also requirements relating to risk transfer that must be met in order to receive
reinsurance accounting treatment under the requirements of Statutory Statement of Accounting
Principles (SSAP) No. 61, which incorporates related guidance in Appendices A-785 and A-791
of the NAIC Accounting Practices and Procedures Manual.
Statutory accounting now requires that the after tax initial impact from the reinsurance of an
existing block of business be reflected directly through surplus at the inception of the agreement.
The resulting increase to surplus is then amortized into income over the life of the reinsured
business.
5
Statutory or other regulatory financial reporting may include “mirror” requirements, that is, a
requirement that the ceding entity’s reserve credit may not exceed the reserve established by the
assuming entity.
The presentation in financial statements differs for assumption reinsurance agreements and
indemnity reinsurance agreements. Under indemnity reinsurance agreements, the ceding entity
remains legally responsible for all policyholder obligations of the reinsured policies. The
assuming entity indemnifies, or protects, the ceding entity against one or more of the risks in the
reinsured policies. Under an assumption reinsurance agreement, the ceding entity is relieved of
responsibility for the policies reinsured, and the contracts are accounted for by the assuming
entity in the same manner as direct business. The reinsurer assumes all of the obligations
formerly assumed by the ceding entity. Typically, regulatory and policyholder approval is
required. When a company intends to enter into an assumption reinsurance transaction, an
indemnity reinsurance agreement may be used for those policies not yet covered by the
assumption agreement.
The ceding entity is responsible for assessing the collectibility of reinsurance recoverables,
including determining whether the portion that is non-collectable should be written down.
Accounting literature and state laws and regulations provide guidance on security for
reinsurance. Considerations include financial strength and liquidity of the reinsurer, court or
arbitration findings, and other market forces.
6
Appendix 2
Comments on the Second Exposure Draft and Task Force Responses
The second exposure draft of this actuarial standard of practice (ASOP) was issued in November
2004, with a comment deadline of March 31, 2005. Nine 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 Task Force to Revise ASOP No. 11 carefully considered
all comments received. Summarized below are the significant issues and questions contained in
the comment letters and the task force’s responses. Unless otherwise noted, the section numbers
and titles used below refer to those in the second exposure draft.
GENERAL COMMENTS
In the transmittal memorandum of the second exposure draft, the task force asked readers whether the revised
language in section 1.2, Scope, was clear and appropriate in regards to its application to reinsurance assumed by
property/casualty insurers, which involves only life/health insurance. There was consensus among commentators that
the revised language appropriately clarified the scope of the standard.
In addition, the task force asked readers whether revising the scope to clarify that when reinsurance involves both
life/health and property/casualty insurance, the actuary should use professional judgment to determine whether this
standard, ASOP No. 36, or aspects of both would apply, was clear and appropriate. There was consensus among
commentators that this was also the correct approach.
The task force implemented editorial changes in addition to those addressed specifically below if they enhanced
clarity and did not alter the intent of the section.
Comment One commentator believed that the language of the standard could be clearer in describing situations
in which the actuary needed to use judgment to determine which standard applied, noting that such
situations should be limited to those in which life/health and property/casualty insurance are covered
under the same reinsurance agreement.
Response The task force agreed and clarified the language in the scope by adding the word “transaction” to
section 1.2.
Comment One commentator was concerned that language in paragraph 5.2 of the original standard had been
removed. The language stated that net statement liabilities should “make appropriate provision for all
of the company’s unmatured obligations according to the actuary’s best estimate of future experience,
considering the reinsurance.” The commentator suggested restoring the language in a manner to make
clear that the net liability test is an aggregate test covering the entire company.
Response The task force carefully addressed this concern but believed that the original decision to delete this
language was the appropriate one. The task force did, however, revise section 2.2, Net Statement
Liabilities, to make clear that in the context of this standard, the term refers only to reserves and
related items affected by the reinsurance agreement.
7
Comment One commentator believed the issues of liquidity and collectibility of reinsurance should be
highlighted and specifically mentioned in the standard.
Response The task force carefully addressed these issues and concluded that they should not be addressed in the
body of the standard, recognizing that the actuary may or may not be involved with their assessment.
The task force did, however, revise the language in appendix 1 to include reference to liquidity as well
as collectibility.
Section 2.2, Net Statement Liabilities
Comment One commentator believed that the language should be clarified to distinguish more clearly between
“reinsurance reserve credits” and “amounts receivable from reinsurers,” so that the relationship is
delineated explicitly.
Response The task force disagreed and made no change because any more specificity could result in
unintentionally omitting situations that need to be considered by the actuary.
Section 2.4, Reinsurance Agreement
Comment One commentator believed that the word “primary” raised the possibility that the scope does not cover
retrocessions of reinsurance and suggested revising the wording to say “ceding” rather than “ primary
(or ceding)” insurance entity.
Response The task force agreed and replaced the phrase “primary (or ceding)” with “ceding” in this section.
Comment One commentator believed that the definition of “health insurance” in section 2.1, combined with the
definition of “reinsurance agreement” in section 2.4, leaves the scope rather unclear for both employer
stop-loss programs and the wide variety of managed care arrangements and recommended that this
standard be clarified to state that health insurance does not include self-insured benefits or providers
who enter into risk-sharing arrangements with HMOs or health insurers.
Response The task force agrees that, for example, a stop-loss arrangement written by an insurance company on a
self-insured health plan, or agreements under Medicare Part D with the federal government as stop-
loss and catastrophic claims payor, are outside the scope of this standard. The task force believes that
sections 2.4, 2.5, and 2.6 make it clear that, for purposes of this standard, reinsurance requires both a
ceding and assuming insurance entity. Therefore, the task force made no change in response to this
comment. However, the task force notes that the guidance in this standard may still be useful in
situations that are outside the scope of this standard.
Section 3.3, Treatment of Reinsurance Ceded
Comment One commentator suggested that the first paragraph be deleted, stating that its language tries to
influence the independent judgment approach espoused in the second paragraph.
Response The task force believes that the commentator has misinterpreted the first paragraph, which is intended
to achieve internal consistency of treatment between reinsurance ceded and the direct or assumed
business from which it arises, within the scope of a particular company’s financial statements. This
paragraph is not intended to refer to consistency between different companies.
Comment One commentator suggested that the language be revised to clarify that “adjustments for reinsurance
ceded” include adjustments to the financial statement items.
Response The task force agreed, noting that adjustments for reinsurance ceded typically relate to the values of
financial statement items. Section 3.3 was revised to clarify this issue.
8
Comment One commentator believed that, although section 3.3 states that calculation of the adjustments for
reinsurance ceded should be consistent with those underlying the calculation of the direct values,
language should be inserted to highlight the impact of the long-term nature of the reinsurance
transaction, particularly as it relates to nonproportional features.
Response The task force disagreed, believing this is already adequately addressed in the standard.
Section 3.8, Reliance on Others (now Reliance on Data or Other Information Supplied by Others)
Comment One commentator believed that the language in this section was inconsistent with ASOP No. 23, Data
Quality, since there is no reference to the actuary’s responsibility when reviewing data for
reasonableness and consistency. The commentator suggested that such a sentence be added.
Response The task force agreed with the spirit of the comment and revised the title and language of section 3.8
to make a direct reference to ASOP No. 23.
Comment One commentator stated that the first sentence in this section covers documentation for items “used”
but should elaborate further to state what the items are used for.
Response The task force agreed and rewrote the sentence to clarify its meaning.
Section 4.1, Communications (now Actuarial Communications)
Comment One commentator believed the phrase “unresolved, material concerns” needed further clarification and
suggested defining the term “resolved.”
Response The task force disagreed, believing the current language is appropriate. However, the task force did
delete the word “material” form the phrase to make the language consistent with other ASOPs.
Comment One commentator believed that this section should better clarify what “reinsurance information”
should include.
Response The task force agreed and added examples to this section to clarify what items may be included in
reinsurance information.
9
Actuarial Standard
of Practice
No. 12
Risk Classification (for All Practice Areas)
Revised Edition
Developed by the
General Committee of the
Adopted by the
December 2005
Doc. No. 101

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Advice 2
2.2 Adverse Selection 2
2.3 Credibility 2
2.4 Financial or Personal Security System 2
2.5 Homogeneity 2
2.6 Practical 2
2.7 Risk(s) 2
2.8 Risk Characteristics 2
2.9 Risk Class 3
2.10 Risk Classification System 3

3.1 Introduction 3
3.2 Considerations in the Selection of Risk Characteristics 3
3.2.1 Relationship of Risk Characteristics and Expected Outcomes 3
3.2.2 Causality 4
3.2.3 Objectivity 4
3.2.4 Practicality 4
3.2.5 Applicable Law 4
3.2.6 Industry Practices 4
3.2.7 Business Practices 4
3.3 Considerations in Establishing Risk Classes 4
3.3.1 Intended Use 4
3.3.2 Actuarial Considerations 5
3.3.3 Other Considerations 5
3.3.4 Reasonableness of Results 5
3.4 Testing the Risk Classification System 5
3.4.1 Effect of Adverse Selection 5
3.4.2 Risk Classes Used for Testing 6
3.4.3 Effect of Changes 6
3.4.4 Quantitative Analyses 6
ii

3.6 Documentation 6

APPENDIXES
Appendix 1⎯Background and Current Practices 8

Background 8
Current Practices 9
Appendix 2⎯Comments on the Exposure Draft and Responses 10
iii
December 2005
Risk Classification (for All Practice Areas)
This booklet contains the final version of a revision of ASOP No. 12, now titled Risk
Classification (for All Practice Areas).
Background
In 1989, the Actuarial Standards Board adopted the original ASOP No. 12, then titled
Concerning Risk Classification. The original ASOP No. 12 was developed as the need for more
formal guidance on risk classification increased as the selection process became more complex
and more subject to public scrutiny. In light of the evolution in practice since then, as well as the
adoption of a new format for standards, the ASB believed it was appropriate to revise this
standard in order to reflect current generally accepted actuarial practice.
Exposure Draft
The exposure draft of this ASOP was approved for exposure in September 2004 with a comment
deadline of March 15, 2005. Twenty-two comment letters were received and considered in
developing the final standard. A summary of the substantive issues contained in the exposure
draft comment letters and the responses are provided in appendix 2.
1. The task force clarified language relating to the interaction of applicable law and this
standard.
2. The task force revised the definition of “adverse selection.”
3. The task force reworded the definition of “financial or personal security system” and
included examples.
4. The words “equitable” and “fair” were added in section 3.2.1 but defined in a very
limited context that is applicable only to rates.
iv
5. With respect to the operation of the standard, the task force added language that clarifies
that this standard in all respects applies only to professional services with respect to
designing, reviewing, or changing risk classification systems.
6. Sections 4.1 and 4.2 were combined into a new section 4.1, Communications and
Disclosures, which was revised for clarity. The placement of communication
requirements throughout the proposed standard was examined, and a sentence regarding
disclosure was removed from section 3.3.3 and incorporated into section 4.1. A similar
change was made by adding a new sentence in section 4.1 to correspond to the guidance
in section 3.4.1.
In addition, the disclosure requirement in section 4 for the actuary to consider providing
quantitative analyses was removed and replaced by a new section 3.4.4, which guides the
actuary to consider performing such analyses, depending on the purpose, nature, and
scope of the assignment.
The task force thanks everyone who took the time to contribute comments on the exposure draft.
Mark E. Litow, Chairperson

David J. Christianson Charles L. McClenahan
Arnold A. Dicke Donna C. Novak
Paul R. Fleischacker Ronnie Susan Thierman
Joan E. Herman Kevin B. Thompson
Barbara J. Lautzenheiser
General Committee of the ASB
W.H. Odell, Chairperson

Charles A. Bryan Mark E. Litow
Thomas K. Custis Chester J. Szczepanski
Burton D. Jay Ronnie Susan Thierman
v

vi
RISK CLASSIFICATION (FOR ALL PRACTICE AREAS)

when performing professional services with respect to designing, reviewing, or changing
risk classification systems.
1.2 Scope⎯This standard applies to all actuaries when performing professional services with
respect to designing, reviewing, or changing risk classification systems used in
connection with financial or personal security systems, as defined in section 2.4,
regarding the classification of individuals or entities into groups intended to reflect the
relative likelihood of expected outcomes. Such professional services may include expert
testimony, regulatory activities, legislative activities, or statements concerning public
policy, to the extent these activities involve designing, reviewing, or changing a risk
classification system used in connection with a specific financial or personal security
system.
Throughout this standard, any reference to performing professional services with respect
to designing, reviewing, or changing a risk classification system also includes giving
advice with respect to that risk classification system.
Risk classification can affect and be affected by many actuarial activities, such as the
setting of rates, contributions, reserves, benefits, dividends, or experience refunds; the
analysis or projection of quantitative or qualitative experience or results; underwriting
actions; and developing assumptions, for example, for pension valuations or optional
forms of benefits. This standard applies to actuaries when performing such activities to
the extent such activities directly or indirectly involve designing, reviewing, or changing
a risk classification system. This standard also applies to actuaries when performing such
activities to the extent that such activities directly or indirectly are likely to have a
material effect, in the actuary’s professional judgment, on the intended purpose or
expected outcome of the risk classification system.
1
1.4 Effective Date—This standard will be effective for any professional service commenced
on or after May 1, 2006.
2.1 Advice—An actuary’s communication or other work product in oral, written, or

electronic form setting forth the actuary’s professional opinion or recommendations
concerning work that falls within the scope of this standard.
2.2 Adverse Selection—Actions taken by one party using risk characteristics or other
information known to or suspected by that party that cause a financial disadvantage to the
financial or personal security system (sometimes referred to as antiselection).
2.3 Credibility⎯A measure of the predictive value in a given application that the actuary
attaches to a particular body of data (predictive is used here in the statistical sense and not
in the sense of predicting the future).
2.4 Financial or Personal Security System⎯A private or governmental entity or program that
is intended to mitigate the impact of unfavorable outcomes of contingent events.
Examples of financial or personal security systems include auto insurance, homeowners
insurance, life insurance, and pension plans, where the mitigation primarily takes the
form of financial payments; prepaid health plans and continuing care retirement
communities, where the mitigation primarily takes the form of direct service to the
individual; and other systems, where the mitigation may be a combination of financial
payments and direct services.
2.5 Homogeneity⎯The degree to which the expected outcomes within a risk class have
comparable value.
2.6 Practical⎯Realistic in approach, given the purpose, nature, and scope of the assignment
and any constraints, including cost and time considerations.
2.7 Risk(s)—Individuals or entities covered by financial or personal security systems.
2.8 Risk Characteristics⎯Measurable or observable factors or characteristics that are used to

assign each risk to one of the risk classes of a risk classification system.
2
2.9 Risk Class⎯A set of risks grouped together under a risk classification system.
2.10 Risk Classification System—A system used to assign risks to groups based upon the
expected cost or benefit of the coverage or services provided.
3.1 Introduction⎯This section provides guidance for actuaries when performing professional
services with respect to designing, reviewing, or changing a risk classification system.
Approaches to risk classification can vary significantly and it is appropriate for the
actuary to exercise considerable professional judgment when providing such services,
including making appropriate use of statistical tools. Sections 3 and 4 are intended to
provide guidance to assist the actuary in exercising professional judgment when applying
various acceptable approaches.
3.2 Considerations in the Selection of Risk Characteristics⎯Risk characteristics are

important structural components of a risk classification system. When selecting which
risk characteristics to use in a risk classification system, the actuary should consider the
following:
3.2.1 Relationship of Risk Characteristics and Expected Outcomes⎯The actuary

should select risk characteristics that are related to expected outcomes. A
relationship between a risk characteristic and an expected outcome, such as cost,
is demonstrated if it can be shown that the variation in actual or reasonably
anticipated experience correlates to the risk characteristic. In demonstrating a
relationship, the actuary may use relevant information from any reliable source,
including statistical or other mathematical analysis of available data. The actuary
may also use clinical experience and expert opinion.
Rates within a risk classification system would be considered equitable if

differences in rates reflect material differences in expected cost for risk
characteristics. In the context of rates, the word fair is often used in place of the
word equitable.
The actuary should consider the interdependence of risk characteristics. To the

extent the actuary expects the interdependence to have a material impact on the
operation of the risk classification system, the actuary should make appropriate
adjustments.
Sometimes it is appropriate for the actuary to make inferences without specific

demonstration. For example, it might not be necessary to demonstrate that persons
with seriously impaired, uncorrected vision would represent higher risks as
operators of motor vehicles.
3
3.2.2 Causality—While the actuary should select risk characteristics that are related to
expected outcomes, it is not necessary for the actuary to establish a cause and
effect relationship between the risk characteristic and expected outcome in order
to use a specific risk characteristic.
3.2.3 Objectivity—The actuary should select risk characteristics that are capable of
being objectively determined. A risk characteristic is objectively determinable if it
is based on readily verifiable observable facts that cannot be easily manipulated.
For example, a risk classification of “blindness” is not objective, whereas a risk
classification of “vision corrected to no better than 20/100” is objective.
3.2.4 Practicality—The actuary’s selection of a risk characteristic should reflect the

tradeoffs between practical and other relevant considerations. Practical
considerations that may be relevant include, but are not limited to, the cost, time,
and effort needed to evaluate the risk characteristic, the ongoing cost of
administration, the acceptability of the usage of the characteristic, and the
potential usage of different characteristics that would produce equivalent results.
3.2.5 Applicable Law—The actuary should consider whether compliance with

applicable law creates significant limitations on the choice of risk characteristics.
3.2.6 Industry Practices—When selecting risk characteristics, the actuary should

consider usual and customary risk classification practices for the type of financial
or personal security system under consideration.
3.2.7 Business Practices⎯When selecting risk characteristics, the actuary should

consider limitations created by business practices related to the financial or
personal security system as known to the actuary and consider whether such
limitations are likely to have a significant impact on the risk classification system.
3.3 Considerations in Establishing Risk Classes⎯A risk classification system assigns each
risk to a risk class based on the results of measuring or observing its risk characteristics.
When establishing risk classes for a financial or personal security system, the actuary
should consider and document any known significant choices or judgments made,
whether by the actuary or by others, with respect to the following:
3.3.1 Intended Use—The actuary should select a risk classification system that is
appropriate for the intended use. Different sets of risk classes may be appropriate
for different purposes. For example, when setting reserves for an insurance
coverage, the actuary may choose to subdivide or combine some of the risk
classes used as a basis for rates.
4
3.3.2 Actuarial Considerations⎯When establishing risk classes, the actuary should

consider the following, which are often interrelated:
a. Adverse Selection⎯If the variation in expected outcomes within a risk

class is too great, adverse selection is likely to occur. To the extent
practical, the actuary should establish risk classes such that each has
sufficient homogeneity with respect to expected outcomes to satisfy the
purpose for which the risk classification system is intended.
b. Credibility⎯It is desirable that risk classes in a risk classification system

be large enough to allow credible statistical inferences regarding expected
outcomes. When the available data are not sufficient for this purpose, the
actuary should balance considerations of predictability with considerations
of homogeneity. The actuary should use professional judgment in
achieving this balance.
c. Practicality⎯The actuary should use professional judgment in balancing

the potentially conflicting objectives of accuracy and efficiency, as well as
in minimizing the potential effects of adverse selection. The cost, time,
and effort needed to assign risks to appropriate risk classes will increase
with the number of risk classes.
3.3.3 Other Considerations⎯When establishing risk classes, the actuary should (a)
comply with applicable law; (b) consider industry practices for that type of
financial or personal security system as known to the actuary; and (c) consider
limitations created by business practices of the financial or personal security
system as known to the actuary.
3.3.4 Reasonableness of Results⎯When establishing risk classes, the actuary should

consider the reasonableness of the results that proceed from the intended use of
the risk classes (for example, the consistency of the patterns of rates, values, or
factors among risk classes).
3.4 Testing the Risk Classification System⎯Upon the establishment of the risk classification
system and upon subsequent review, the actuary should, if appropriate, test the long-term
viability of the financial or personal security system. When performing such tests
subsequent to the establishment of the risk classification system, the actuary should
evaluate emerging experience and determine whether there is any significant need for
change.
3.4.1 Effect of Adverse Selection—Adverse selection can potentially threaten the

long-term viability of a financial or personal security system. The actuary should
assess the potential effects of adverse selection that may result or have resulted
from the design or implementation of the risk classification system. Whenever the
effects of adverse selection are expected to be material, the actuary should, when
5
practical, estimate the potential impact and recommend appropriate measures to

mitigate the impact.
3.4.2 Risk Classes Used for Testing—The actuary should consider using a different set
of risk classes for testing long-term viability than was used as the basis for
determining the assigned values if this is likely to improve the meaningfulness of
the tests. For example, if a risk classification system is gender-neutral, the actuary
might separate the classes based on gender when performing a test of long-term
viability.
3.4.3 Effect of Changes⎯If the risk classification system has changed, or if business or
industry practices have changed, the actuary should consider testing the effects of
such changes in accordance with the guidance of this standard.
3.4.4 Quantitative Analyses—Depending on the purpose, nature, and scope of the

assignment, the actuary should consider performing quantitative analyses of the
impact of the following to the extent they are generally known and reasonably
available to the actuary:
a. significant limitations due to compliance with applicable law;
b. significant departures from industry practices;
c. significant limitations created by business practices of the financial or

personal security system;
d. any changes in the risk classes or the assigned values based upon the
actuary’s determination that experience indicates a significant need for a
change; and
e. any expected material effects of adverse selection.

3.6 Documentation⎯The actuary should document the assumptions and methodologies used
in designing, reviewing, or changing a risk classification system in compliance with the
requirements of ASOP No. 41, Actuarial Communications. The actuary should also
prepare and retain documentation to demonstrate compliance with the disclosure
6
4.1 Communications and Disclosures⎯When issuing actuarial communications under this

standard, the actuary should refer to ASOP Nos. 23 and 41. In addition, the actuarial
communications should disclose any known significant impact resulting from the
following to the extent they are generally known and reasonably available to the actuary:
a. significant limitations due to compliance with applicable law;
b. significant departures from industry practices;
c. significant limitations created by business practices related to the financial or

personal security system;
d. a determination by the actuary that experience indicates a significant need for

change, such as changes in the risk classes or the assigned values; and
e. expected material effects of adverse selection.
The actuarial communications should also disclose any recommendations developed by

the actuary to mitigate the potential impact of adverse selection.
7
Appendix 1
Note: The following appendix is provided for informational purposes but is not part of the
Background
Risk classification has been a fundamental part of actuarial practice since the beginning of the
profession. The financial distress and inequity that can result from ignoring the impact of
differences in risk characteristics was dramatically illustrated by the failure of the nineteenth-
century assessment societies, where life insurance was provided at rates that disregarded age.
Failure to adhere to actuarial principles regarding risk classification for voluntary coverages can
result in underutilization of the financial or personal security system by, and thus lack of
coverage for, lower risk individuals, and can result in coverage at insufficient rates for higher
risk individuals, which threatens the viability of the entire system.
Adverse selection may result from the design of the classification system, or may be the result of
externally mandated constraints on risk classification. Classes that are overly broad may produce
unexpected changes in the distribution of risk characteristics. For example, if an insurer chooses
not to screen for a specific risk characteristic, or a jurisdiction precludes screening for that
characteristic, this may result in individuals with the characteristic applying for coverage in
greater numbers and/or amounts, leading to increased overall costs.
Risk classification is generally used to treat participants with similar risk characteristics in a
consistent manner, to permit economic incentives to operate and thereby encourage widespread
availability of coverage, and to protect the soundness of the system.
The following actuarial literature provides additional background and context with respect to risk
classification:
1. In 1957, the Society of Actuaries published Selection of Risks by Pearce Shepherd and
Andrew Webster, which educated several generations of actuaries and is still a useful
reference.
2. In 1980, the American Academy of Actuaries published the Risk Classification Statement
of Principles, which has enjoyed widespread acceptance in the actuarial profession. At
the time of this revision of ASOP No. 12, the American Academy of Actuaries was
developing a white paper regarding risk classification principles.
3. In 1992, the Committee on Actuarial Principles of the Society of Actuaries published

“Principles of Actuarial Science,” which discusses risk classification in the context of the
principles on which actuarial science is based.
8
Current Practices
Over the years, a multitude of risk classification systems have been designed, put into use, and
modified as a result of experience. Advances in medical science, economics, and other
disciplines, as well as in actuarial science itself, are likely to result in continued evolution of
these systems. While future developments cannot be foreseen with accuracy, practicing actuaries
can take reasonable steps to keep abreast of emerging and current practices. These practices may
vary significantly by area of practice. For example, the risk classes for voluntary life insurance
may be subdivided to reflect the applicant’s state of health, smoking habits, and occupation,
while these factors are usually not considered in pension systems.
Innovations in risk classification systems may engender considerable controversy. The potential
use of genetic tests to classify risks for life and health insurance is a current example. In some
cases, such controversy results in legislation or regulation. The use of postal codes, for example,
has been outlawed for some types of coverage. For the most part, however, the legal test for risk
classification has remained unchanged for several decades; risk classification is allowed so long
as it is “based on sound actuarial principles” and “related to actual or reasonably anticipated
experience.”
Risk classification issues in some instances may pose a dilemma for an actuary working in the
public policy arena when political considerations support a system that contradicts to some
degree practices called for in this ASOP. Also, when designing, reviewing, or changing a risk
classification system, actuaries may perform professional services related to a designated set of
specific assumptions that place certain restraints on the risk classification system.
In such situations, it is important for those requesting such professional services to have the
benefit of professional actuarial advice.
This ASOP is not intended to prevent the actuary from performing professional services in the
situations described above. In such situations, the communication and disclosure guidance in
section 4.1 will be particularly pertinent, and current section 4.1(e), which requires disclosure of
any known significant impact resulting from expected material effects of adverse deviation, may
well apply. Section 4.1(a), which relates to applicable law, and section 4.1(b), which relates to
industry practices, may also be pertinent.
9
Appendix 2
The exposure draft of this revision of ASOP No. 12, Risk Classification for All Practice Areas,
was issued in September 2004 with a comment deadline of March 15, 2005. Twenty-two
comment letters were received, some of which were submitted on behalf of multiple comment-
ators, 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 task force
questions contained in the comment letters and the responses, which may have resulted from
ASB, General Committee, or task force discussion. Unless otherwise noted, the section numbers
and titles used below refer to those in the exposure draft.
GENERAL COMMENTS
below.
Response The task force implemented such suggestions if they enhanced clarity and did not alter the intent of the
section.
Comment One commentator noted that the ASOP should deal with the ability of an insured to misrepresent or
manipulate its classification.
Response The task force believed that the considerations raised by the commentator are adequately addressed by
sections 3.2.3 and 3.2.4.
Comment One commentator thought that a section on public and social policy considerations should be added to
the standard.
Response The task force believed that social and public policy considerations, while essential aspects of the way
the public views the profession, did not belong in an ASOP dealing with the actuarial aspects of risk
classification.
Comment One commentator questioned whether the ASOP would apply to company selection criteria (tiering
criteria) and schedule-rating criteria that may be part of a rating scheme.
Response The task force believes that the ASOP applies to the extent the selection or schedule rating criteria, used
by a company as part of the risk classification system, creates the potential for adverse selection.
Comment One commentator believed that the ASOP could conflict with proposed state legislation to ban credit as
a rating variable and suggested adding an additional consideration in section 3 that the actuary should
select risk characteristics in order to avoid controversy or lawsuits.
Response The task force believes it has addressed issues regarding applicable law, industry practices, business
practices, and testing the risk classification system under various scenarios.
Comment In the transmittal memorandum of the exposure draft, the task force asked whether the key changes from
the previous standard were appropriate.
Response Several commentators responded that the changes were appropriate and some suggested additional
changes that are discussed in this appendix.
10
Comment One commentator expressed concern regarding the expansion of scope and the implications in actuarial
work that would be otherwise unrelated to risk classification and the expansion of scope to the public
policy arena in general.
Response The task force has added modified wording in the standard to clarify that in all cases the standard applies
only in respect to design, reviewing, or changing risk classification systems related to financial or
personal security systems.
Comment Two commentators believed that the revised standard should discuss the purposes of risk classification
similar to the discussion in the previous standard. One commentator noted the discussion about
encouraging “widespread availability of coverage” in particular.
Response The task force retained a brief discussion of the purposes of risk classification in appendix 1 but did not
believe it was appropriate for the ASOP to provide additional education about the purposes of risk
classification. The task force noted that a white paper on risk classification that could contain such
material is being developed.
Comment Several commentators noted that the previous ASOP No. 12 had been very useful in court proceedings
and recommended that the task force retain some of the wording in section 5 of the previous ASOP. One
commentator suggested strengthening the revised standard so that actuarial testimony would be given
greater weight by the courts in interpreting rate standards. Another commentator suggested
strengthening the ASOP by adding an explicit statement that one objective during the development and
use of risk classification systems is to minimize adverse selection.
Response The task force reviewed the revised standard with these concerns in mind but concluded that the revised
standard represents current generally accepted practice and provides an appropriate level of guidance.
The task force considered the specific suggestions with respect to additional wording and incorporated
some of the wording regarding adverse selection from the old section 5.5 into appendix 1.
Comment In the transmittal memorandum of the exposure draft, the task force asked whether it was appropriate for
the ASOP not to use the terms “equitable” and “fair.” Two commentators believed that the ASOP should
use or define these concepts because they have been used in court proceedings, but the majority of
commentators believed that it was appropriate not to define them and that the standard adequately
addressed these concepts.
Response The task force agreed that the ASOP should not define subjective qualities such as “equitable” and
“fair.” As the result of ASB deliberation on this issue, language was added to section 3.2.1 to discuss
what was meant by the terms “equitable” and “fair.” These terms are intended to apply to a risk
classification system only to the extent the risk classification system applies to rates. As such, a formal
definition was not added. Court decisions notwithstanding, there is no general agreement as to what
characterizes “equitable” classification systems or “fair” discrimination. The task force also considered
the possibility that further discussions about such issues might become part of the proposed white paper
on risk classification that the American Academy of Actuaries is developing.
Comment One commentator questioned why the standard offered separate guidance for “risk characteristics”
(section 3.2) and “risk classes” (section 3.3). Another commentator believed there should be greater
differentiation between the concepts of “risk characteristic” and “risk classification.”
Response The task force believed that the ASOP uses these terms appropriately and made no change.
Comment One commentator thought that section 3.3.2 should include guidance on appropriately matching the risk
with the outcome when establishing a risk class.
Response The task force believed that section 3.2.1 addressed this comment and noted that section 3.3.2(a)
requires sufficient homogeneity with respect to outcomes.
11
Section 1.2, Scope

Comment In the transmittal memorandum of the exposure draft, the task force asked whether it was appropriate to
include the actuary’s advice within the scope of the standard. Several commentators agreed that
including guidance on actuarial advice was appropriate. One commentator believed that the disclosure
requirements in section 4 could be burdensome to an actuary who has provided brief oral advice.
Response The task force kept actuarial advice within the scope of the standard and intended that the disclosure
requirements in section 4 should apply to any actuarial advice that falls within the scope of the standard.
Comment One commentator questioned what was meant by “legislative activities” as an example of a professional
service.
Response The task force intended that “legislative activities” could include drafting legislation, for example.
Comment Several commentators questioned the meaning of “personal security system.” One commentator
questioned whether the definition of “financial or personal security system” would exclude share-based
payment systems from the scope of the standard. The commentator recommended that the standard be
revised to include such systems.
Response The task force intended that the ASOP should apply if share-based payment systems or stock options
were part of a financial or personal security system, as defined in the section 2.5. If such plans were not
part of a financial or personal security system, the ASOP would not apply. The task force chose not to
expand the scope to include such plans in all situations but did clarify the definition of “financial or
personal security system.”
Comment One commentator suggested that a definition of experience be included, citing the definition of
“experience” in the previous ASOP (old section 2.5), which includes the wording, “Experience may
include estimates where data are incomplete or insufficient.”
Response The task force agreed that experience may include estimates where data are incomplete or insufficient
but did not believe that the old definition was necessary in the revised ASOP.
Comment One commentator suggested that a definition of “reasonable” be included.
Response The task force disagreed and did not add a definition of “reasonable.”
Section 2.1, Advice
Comment One commentator suggested that “other work product” was not needed, since the standard already listed
“an actuary’s oral, written, or electronic communication.”
Response The task force revised the language to clarify that “communication or other work product” was intended.
Comment One commentator believed that a definition for “advice” is not needed.
Response The task force disagreed and retained the definition of advice.
Section 2.2, Adverse Selection
Comment In the transmittal memorandum of the exposure draft, the task force asked if the definition of “adverse
selection” was appropriate or whether an alternative definition (included in the transmittal letter) would
be preferable. Many commentators responded, some agreeing with the original, some with the
alternative, and some suggested other wording. The other wording was most often to change the phrase,
“take financial advantage of.”
Response The task force believed that some of the reasoning on the part of the commentators who preferred the
current version did not accurately describe adverse selection. The task force ultimately decided to use
the alternative definition in the standard and believed that it better addressed some commentators’
concerns that the other definition could have a negative connotation with respect to motivation.
12
Comment One commentator suggested that “antiselection” is synonymous with adverse selection and that should
be made clear in the definition.
Response The task force agreed and added that reference.

Section 2.4, Credibility (now 2.3)
Comment Two commentators believed that within the definition of “credibility” the language concerning
“predictive” was confusing.
Response The task force retained the definition as it is used in several other ASOPs.
Section 2.5, Financial or Personal Security System (now 2.4)
Comment Several commentators questioned the meaning of “personal security system.”
Response The task force clarified the definition.

Comment One commentator suggested that “impact” be modified to read “financial impact.”
Response The task force disagreed and revised the definition of “financial and security systems” to delineate the
impacts.
Section 2.6, Homogeneity (now 2.5)
Comment One commentator believed the definition of “homogeneity” needed revisions to include the concept of
grouping similar risks. Another commentator found the definition unclear.
Response The task force believes that the current definition is appropriate for this ASOP.
Section 2.7, Practical (now 2.6)
Comment One commentator believed the definition of “practical” was much too broad and needed to be more
actuarial in nature. Alternatively, the commentator suggested dropping it and relying on section 3.2.4.
Response The task force believed the definition was appropriate and made no change. Section 3.2.4 addresses
actuarial practice with respect to practicality. While “practical” is used there and in other places, it is
always modified by its context.
Section 2.8, Risk(s) (now 2.7)
Comment One commentator suggested that the definition of risks as individuals or entities seemed too limiting and
noted that covered risks can also include pieces of property or events.
Response The task force disagreed, believing that “entity” could encompass property and events.
Comment One commentator suggested that a unit of risk be defined at the basic unit of risk.
Response The task force disagreed and made no change.

Section 2.9, Risk Characteristics (now 2.8)
Comment One commentator suggested defining risk characteristics as “measurable or observable factors or
characteristics, each of which is measured by grouping similar risks into risk classes.”

Section 2.11, Risk Classification System (now 2.10)
Comment One commentator believes the definition of “risk classification system” is circular since “classify” is
used in the definition.
Response The task force agreed and revised the wording.

Comment One commentator recommended that the term “risks” be changed to “similar risks” in this definition
just as in the old definition of risk classification that used the phrase “grouping risks with similar risk
characteristics.”

Comment One commentator suggested replacing “groups” with “classes.”
13
Section 3.2.1, Relationship of Risk Characteristics and Expected Outcomes

Comment One commentator expressed concern with the standard’s differentiation between the section’s
quantitative and subjective factors.
Response The task force did not intend to be prescriptive as to how to quantify the ratings scheme and believed
that the ASOP was sufficiently specific. The ASOP does not address rate adequacy. Selection is the
focus, not quantification.
Comment One commentator believed that “clinical” was not an appropriate adjective to describe the experience an
actuary is allowed to use.
Response The task force intentionally used the term “clinical.”

Comment One commentator believed that if the classification cannot be measured by actual insurance data, then it
is not really a risk classification system.

Comment One commentator suggested that the three points addressing why risk classification is generally used be
moved to background information.
Response The task force agreed that such educational language was more appropriate in an appendix than in the
body of the ASOP and has moved it.
Comment One commentator believed that it may be difficult to deal with the process and procedures involved with
considering the interdependence of risk characteristics and their potential impact on the operation of the
risk classification system.
Response The task force did not change the language to address this comment but notes that section 3.2.4
addresses considerations regarding practicality.
Section 3.2.2, Causality
Comment A number of commentators expressed concern with establishing a cause-and-effect relationship while
others thought the standard did not go far enough in this regard.
Response The task force agreed that, where there is a demonstrable cause-and-effect relationship between a risk
characteristic and the expected outcome, it is appropriate for the actuary to include such a
demonstration. However, the task force recognized that there can be significant relationships between
risk characteristics and expected outcomes where a cause-and-effect relationship cannot be
demonstrated.
Section 3.2.4, Practicality
Comment Two commentators suggested the use of examples of practical considerations.
Response The task force revised the section to indicate that the language shows examples of practical
considerations.
Comment One commentator suggested that “theoretical,” as used in section 3.2.4, be defined.
Response The task force replaced “theoretical” with “other relevant.”

Section 3.2.5, Applicable Law
Comment One commentator thought that the proposed language in this section was much too broad.
Response The task force disagreed with the comment and made no change.
14
Section 3.3, Considerations in Establishing Risk Classes

Comment One commentator expressed concern that the documentation requirements for these considerations
represented an increase from the previous version.
Response The task force thought the documentation requirements were appropriate and necessary and made no
change.
Section 3.3.1, Intended Use
Comment One commentator noted that stratifying data sets in loss reserving is different from risk classification,
which is done to price risks, and believed that loss reserving permits more flexibility. The commentator
stated that the definition of a risk classification system does not apply to loss reserving.
Response
The task force agreed with the first concepts but disagreed with the final sentence and therefore made no
change.
Section 3.3.2, Actuarial Considerations
Comment With respect to section 3.3.2(a), one commentator suggested replacing the word “for” in the first line
with “within” for clarification.
Response The task force agreed and made the suggested change.
Comment With respect to section 3.3.2(b), two commentators questioned what was intended by the use of the term
“large enough.”
Response The task force believed the language was sufficiently clear and made no change.
Comment One commentator pointed out that there are often classes that, individually, have associated experience
with low statistical credibility and believed that alternatives to credibility should be included in section
3.3.2(b).
Response While the task force agreed that there are situations in which actuarially sound classification plans will
have individual classes where the experience has low statistical credibility, the task force believed that
credibility is a desirable characteristic of risk classes within a risk classification system and that no
expansion to include alternatives was necessary.
Comment One commentator suggested replacing “statistical predictions” with “predictions” in section 3.3.2(b) to
avoid the implication that underlying statistics were required. Another commentator suggested that the
term “predictions” needed explanation.
Response The task force agreed with these comments and replaced “predictions” with “inferences” and edited the
language to improve its clarity.
Comment One commentator suggested that the last sentence of section 3.3.2(b), while accurate, was irrelevant.
Response The task force agreed and eliminated the sentence.

Comment With respect to section 3.3.2(c), one commentator suggested the need for definitions of “accuracy” and
“efficiency.”
Response The task force believed that the existing language regarding the actuary’s professional judgment was
sufficient in determining the meaning of “accuracy” and “efficiency” and did not add a definition of
either word.
15
Comment Several commentators suggested that section 3.3.2(d) be eliminated. A number of those commentators
also pointed out that the language was both inconsistent with current actuarial practice and inappropriate
as an implied requirement.
Response The task force agreed and deleted the section.

Section 3.3.3, Other Considerations
Comment Several commentators pointed out that the last sentence of the section was unclear and might
inadvertently require a degree of testing and determination that was not intended.
Response The task force deleted the last sentence of the section. In addition, section 4.1, Communications and
Disclosures, was clarified as to what disclosures are appropriate.
Section 3.3.4, Reasonableness of Results
Comment One commentator found the parenthetical wording confusing.
Response The task force believed the examples were appropriate and made no change.
Comment One commentator found this section ambiguous in the context of establishing risk classes. Another
commentator suggested that a cost-based definition of reasonable be added or that the section be deleted
entirely.
Response The task force retained the section but clarified the wording by mentioning the intended use of the risk
classes. The task force did not believe additional clarification of “reasonableness” was necessary
because reasonableness is a subjective concept that may depend on the actuary’s professional judgment.
The task force also notes that the Introduction to the Actuarial Standards of Practice discusses this
concept in further detail.
Section 3.4, Testing the Risk Classification System
Comment One commentator indicated that it may be preferable to substitute the word “or” for “and” on the second
line so that the sentence reads, “Upon establishment of the risk classification system or upon subsequent
review. … ”
Response The task force did not agree and believed the word “and” was appropriate because testing should be
carried out both upon establishment and upon subsequent review.
Comment One commentator wanted to substitute “continuing” for “long-term” viability in the second line. The
commentator believed that the usual issue is the current and near-future viability of a system, not its
long-term prognosis. Also, another commentator said that the requirement to “test long-term viability” is
new and questioned its meaning.
Response The task force considered alternative wording but ultimately decided that the existing wording best
reflected that the actuary should check the risk classification system for viability both in the short-term
and in the long-term.
16
Comment One commentator believed that testing the system is set out as something the actuary should do, if
appropriate, rather than as something the actuary should consider. The commentator believed that the
paragraph implied a duty to test in some situations, without describing explicitly what those situations
would be (i.e., when testing would be “appropriate”). The commentator suspected that the situations
described in sections 3.4.1–3.4.3 were the kind of situations that the task force had in mind as situations
where long-term testing would be “appropriate.” However, as currently written, the commentator
thought that a stronger duty could be implied. The commentator suggested that section 3.4 itself should
read, “…the actuary should consider testing the long-term viability of the risk classification system. …”
Response The task force believed that the existing wording conveyed the concept that the actuary considers
whether testing is appropriate and made no change.
Section 3.5, Reliance on Data Supplied by Others (now Reliance on Data or Other Information Supplied by
Others)
Comment One commentator believed that the provision for reliance on data supplied by others was not needed in
this ASOP because ASOP No. 23, Data Quality, addresses this.
Response This task force agreed and revised the section to refer to ASOP No. 23, using wording consistent with
other recently adopted ASOPs and exposure drafts.
SECTION 4. COMMUNICATIONS AND DISLOSURES
Section 4.1, Communications (now Communications and Disclosures)

Comment One commentator suggested changing the phrase “when issuing actuarial communications under this
standard” to “when issuing actuarial communications that include elements of actuarial work within the
scope of this standard.”
Response The task force retained the original language to be consistent with other ASOPs.
Section 4.2, Disclosures (now 4.1, Communications and Disclosures)
Comment One commentator stated that some of the disclosures, notably section 4.2(a) and 4.2(c) (now 4.1(a) and
4.1(c)), are impractical, since they might require the actuary to begin with the universe and then disclose
everything that is not utilized. The commentator suggested replacing these disclosure requirements with
a communication that defends the choice of risk classification system and notes in that defense how
compliance with applicable law and business practices affected the selection, rather than describing all
the alternatives that would have been available in the absence of such constraints.
Response The task force did not agree that the requirement to disclose significant limitations required a discussion
of all alternatives that would have been available in the absence of legal or business constraints. The task
force noted that the listed disclosures proceed from considerations required in section 3 and modified the
wording of the disclosure requirements to be more consistent with that section, including revising the
lead-in sentence to require disclosure of the significant impact of such considerations.
Comment One commentator stated that the disclosure issue is heightened by the expansion of scope into the public
policy arena and stated that excessive disclosure requirements may weaken the actuary’s ability to
influence the discussion of public policy.
Response The task force disagreed with the comment and noted that, while the scope of the standard now includes
regulatory activities, legislative activities, and statements regarding public policy, the scope does so only
in the context of the performance of professional services.
17
Comment One commentator suggested deleting section 4.2(a) (now 4.1(a)), which requires disclosure of
significant limitations due to compliance with applicable law, noting that other ASOPs have tended not
to include this requirement except where the limitations seriously distort the work product.
Response The task force disagreed with this comment, noting that significant limitations on the choice of risk
characteristics are likely to distort the risk classification system and therefore should be disclosed.
Comment Several commentators expressed opinions regarding the requirement that the actuary should disclose
whether quantitative analyses were performed relative to items being disclosed. One commentator
expressed strong objection to this requirement, asserting that the requirement would be counter-
productive and would reduce the number of quantitative analyses being done. Another commentator
agreed and noted that the disclosure issue was heightened by the expansion of scope to the public policy
arena, where an advocacy position may be taken. A third commentator objected to the requirement to
disclose that quantitative analyses were not done but suggested requiring that any analyses that were
done be summarized. A fourth commentator suggested exempting certain of the required disclosures
from the requirement to consider quantification. A fifth commentator pointed out that, while the actuary
was required to disclose whether quantitative analyses were performed, the actuary was only required to
consider providing the results of those analyses in the disclosure.
Response The disclosure requirement for the actuary to consider providing quantitative analyses of the impact of
the items being disclosed was removed, and instead similar wording was added as a new section 3.4.4,
Quantitative Analyses, which guides the actuary to consider performing such analyses, depending on the
purpose, nature, and scope of the assignment.
Comment In the transmittal letter for the exposure draft in request for comment #6, the task force asked whether
there were any situations in which the requirement in section 4.2(c) (now 4.1(c)) to disclose any
significant limitations created by business practices of the financial or personal security system would
not be appropriate. Two comments were received, both agreeing with the appropriateness of the
requirement.
Response The task force retained the requirement.

Comment Two commentators suggested substituting “indicates” for “creates” in section 4.2(d) (now 4.1(d)).
Response The task force agreed, changed the wording as suggested, and made other revisions for clarity.
Comment In the transmittal letter for the exposure draft in request for comment #7, the task force asked whether
the requirement in 4.2(e) (now 4.1(e)) to disclose the effects of adverse selection was appropriate. Three
commentators addressed this request for comment, and all agreed the requirement was appropriate.
However, one commentator suggested that there be no requirement to quantify the impact.
Response The task force retained the requirement in what is now 4.1(e) and also removed the requirement to
consider providing quantitative analyses. Additionally, the task force deleted section 4.2(f) after
determining that it was already covered by ASOP No. 41, Actuarial Communications, to which section
4.1 refers.
APPENDIX (now Appendix 1)
Comment One commentator expressed concern with the citing of the textbook Selection of Risks by Shepherd and
Webster.
Response The task force believed that citing the Shepherd and Webster book was appropriate but added a new
lead-in sentence to the citation to indicate that the references cited provide additional background and
context with respect to risk classification.
18
ACTUARIAL STANDARD
OF PRACTICE
NO. 13
TRENDING PROCEDURES IN
PROPERTY/CASUALTY
INSURANCE RATEMAKING
Developed by the
Subcommittee on Ratemaking of the
Adopted by the
July 1990
(Doc. No. 021)

TABLE OF CONTENTS
PREAMBLE

1.1 Purpose 1
1.2 Scope 1
2.1 Experience Period 1
2.2 Forecast Period 1
2.3 Social Inflation 1
2.4 Trending Period 1
2.5 Trending Procedure 1

3.1 Inflation 2
3.2 Alternative Procedures 2

4.1 Historical Insurance Data 2
4.2 Models 2
4.3 Actuarial Judgment 2

5.1 Estimating Future Costs 3
5.2 Selection of Models 3
5.3 Purpose of Trending Procedures 3
5.4 Analysis of Historical Insurance Data 3
5.5 Analysis of Non-Insurance Data 3
5.6 Economic and Social Influences 3
5.7 Criteria for Determining Trending Period 4
5.8 Informed Actuarial Judgment 4

6.1 Documentation and Disclosure Standard 4
6.2 Trend Selection 4
ii
July 1990
Property/Casualty Insurance Ratemaking Trending Procedures
Enclosed is the final version of Actuarial Standard of Practice (ASOP) No. 13, Trending
Procedures in Property/Casualty Insurance Ratemaking. The purpose of the standard is to set
forth generally accepted actuarial practices for estimating future expected values in ratemaking,
based on analysis of historical data and other relevant information.
The standard was developed by the Subcommittee on Ratemaking of the Casualty Committee of
the ASB. It was exposed for comment in July 1989. Twenty-two written responses to the
exposure draft were received.
The Subcommittee on Ratemaking reviewed all the suggestions and concerns expressed by both
members and nonmembers of the American Academy of Actuaries regarding the draft. As a
result, several changes were made to the draft by the subcommittee. Specifically, some
significant modifications were as follows:
1. The purpose of trending procedures was redefined in section 1.1 to emphasize the need to
estimate future expected values by analyzing historical data and other relevant
information. Also, the phrase future cost levels, which had caused some concern, was
deleted.
2. The scope of the standard was broadened by eliminating the reference to cost elements.
In addition, the scope was rewritten to make the standard explicitly applicable to all
property and casualty lines of insurance.
3. Several concerns were expressed about the context in which the terms internal data and
external data were being used. There appeared to be a potential for confusion, for
example, as to whether external data encompassed data external to an insurance company
or to the entire insurance industry. In the final version, the terms internal and external
data have been replaced by the terms insurance and non-insurance data, respectively.
4. Various respondents felt that the draft's reference to regression and econometric analysis
unduly restricted the actuary's use of modeling in trending procedures. Accordingly,
specific references to regression and econometric analysis were omitted and a more
general discussion of the selection of models was substituted.
5. It was suggested that the standard be more specific with regard to the manner in which
the actuary should evaluate potential selected models, retrospectively and prospectively.
iii
Section 5.2 was strengthened to require the actuary to be familiar with and consider
various methods for measuring trends, including steps for evaluating the tentatively
selected model and possibly revising the model.
6. One respondent suggested that an additional element in the criteria for determining the
trending period is the length of the experience period. The final version includes this
consideration, in section 5.7(a).
7. Several respondents expressed concern over the frequent use of the term trend in the
exposure draft. They evidently felt that it was being used as shorthand for the entire
trending process, or was inappropriate in some contexts. As a result, the term trending
procedure replaced trend in many places in the standard, thereby also expanding the
scope.
8. A wide range of concerns was expressed about the draft's communication and disclosure
requirements in section 6. In the final version, the reference explicitly requiring
disclosure of material changes was deleted, and so was the example of what would
generally be considered a material change. However, the revised section 6.1 specifically
notes that the provisions of Actuarial Standard of Practice No. 9, Documentation and
Disclosure in Property and Casualty Insurance Ratemaking and Loss Reserving, apply to
all aspects of ratemaking. Also, sections 6.2 and 6.3 were retained; these set forth
communication requirements regarding trend selections and deviations from this
standard.
Some respondents felt that definitions of monetary or economic inflation, as well as social
inflation, were necessary. However, the subcommittee believed that monetary and economic
inflation were terms that are commonly used and understood, whereas the impact of social
inflation is not nearly as well known.
Finally, several respondents suggested that specific references be included in the standard
relating to other important actuarial procedures such as the selection of a database, assignment of
the complement of credibility, etc. These nuances are expected to be addressed by standards of
practice relating to these other ratemaking procedures. Therefore, reference in this trending
standard to such items has been limited.
Other changes of a grammatical or editorial nature have been made, many in response to
comments received. The Casualty Committee approved the revised standard for submission to
the ASB for adoption.
The standard was adopted by the ASB on July 13, 1990.
iv
Subcommittee on Ratemaking

Richard S. Biondi Eldon J. Klaassen
Daniel J. Flaherty R. Michael Lamb
Robert W. Gossrow Robert J. Lindquist
Gary Grant Paul E. Wulterkens
Steven L. Groot
Casualty Committee
Michael J. Miller, Chairperson

Martin Adler Gary Grant
Richard Beverage Steven L. Groot
Richard S. Biondi James A. Hall III
LeRoy A. Boison Jr. E. LeRoy Heer
Douglas J. Collins Bertram A. Horowitz
Robert V. Deutsch Eldon J. Klaassen
James A. Faber R. Michael Lamb
Daniel J. Flaherty Jerry A. Miccolis
Spencer M. Gluck Robert A. Miller III
Robert W. Gossrow Gary K. Ransom
David J. Grady Paul E. Wulterkens
Walter N. Miller, Chairperson

E. Paul Barnhart Frederick W. Kilbourne
Gary Corbett George B. Swick
Willard A. Hartman Jack M. Turnquist
v
TRENDING PROCEDURES IN
PROPERTY/CASUALTY
INSURANCE RATEMAKING
PREAMBLE
1.1 Purpose—This standard of practice provides a basis for assessing procedures

appropriate for estimating future expected values by analyzing historical data and
other relevant information. The historical data to be considered for analysis are
those referred to in the Statement of Principles Regarding Property and Casualty
Insurance Ratemaking of the Casualty Actuarial Society (CAS).
1.2 Scope—This standard of practice is applicable to all property and casualty lines of
insurance.
1.3 Effective Date—This standard will be effective three months after its adoption by
the Actuarial Standards Board.
2.1 Experience Period—The period of time to which historical data used for actuarial
analysis pertain.
2.2 Forecast Period—The future time period to which the historical data are
projected.
2.3 Social Inflation—The impact on insurance costs of societal changes such as

changes in claim consciousness, court practices, and judicial attitudes, as well as
in other noneconomic factors.
2.4 Trending Period—The time between the average date of writing, earning, or costs
of the experience period and the corresponding projected date in the forecast
period.
2.5 Trending Procedure—A process by which the actuary evaluates how changes over
time affect such items as claim costs, claim frequencies, expenses, exposures, and
premiums.
1
3.1 Inflation—Economic and social inflation have led to a need for increasingly
sophisticated trending procedures.
3.2 Alternative Procedures—The Proceedings and the Syllabus of Examinations of

the CAS, and many other publications such as statistics and economics textbooks,
provide extensive information on alternative procedures. The actuary may refer
to these or develop other procedures, as appropriate for each situation.
4.1 Historical Insurance Data—Trending procedures are used in ratemaking for most
property/casualty insurance plans or policies. In such procedures, actuaries
generally place reliance on (1) data generated by the book of business being
priced, (2) other insurance data, and (3) non-insurance data, in that order of
preference.
4.2 Models—Mathematical models are often used to smooth and extrapolate from
historical data. In the absence of strong contrary indications, there is a reliance on
extrapolations of historical insurance data from the mathematical models. Models
based on non-insurance data are also used as trending procedures.
4.3 Actuarial Judgment—In trending procedures, judgmental considerations generally

include, but are not limited to, the historical data used, the success of the model in
making prior projections, the statistical goodness of fit of the model to the
historical data, and the impact of any sudden, nonrecurring changes (e.g., tort
reform) which had not yet been incorporated in the historical data.
2
5.1 Estimating Future Costs—Principle 1 of the CAS Statement of Principles

Regarding Property and Casualty Insurance Ratemaking states that “a rate is an
estimate of the expected value of future costs.” Accordingly, the application of
appropriate trending procedures in the ratemaking process is essential to estimate
those future costs.
5.2 Selection of Models—The actuary should be familiar with and consider various
methods in statistics and numerical analysis for measuring trends. This process
also involves steps for evaluating the tentatively selected model and possibly
revising the model.
5.3 Purpose of Trending Procedures—The purpose of trending procedures is to

estimate future expected values by analyzing historical data and other relevant
information. Therefore, the actuary should apply trending procedures which
appropriately reflect projected changes in such components as claim costs, claim
frequencies, expenses, exposures, and premiums over the trending period.
5.4 Analysis of Historical Insurance Data—The actuary should select trending pro-
cedures with appropriate consideration given to the analysis of historical
insurance data. This includes, but is not limited to, evaluation of:
a. trending procedures established by precedent or common usage in the

actuarial profession;
b. trending procedures used in previous analyses;
c. the choice of an appropriate data base and methodology, with particular

emphasis given to the credibility of the data relied upon; and
d. the effect of known biases or distortions on the experience relied upon

(e.g., impact of catastrophic influences, seasonality, coverage changes,
nonrecurring events, and distributional changes in deductibles, types of
risks, and policy limits).
5.5 Analysis of Non-Insurance Data—Relevant non-insurance data may supplement

insurance data. These non-insurance data may indicate general trends in such
components as claim costs, claim frequencies, expenses, exposures, and
premiums.
5.6 Economic and Social Influences—Many economic and social influences can have
an impact on trends. In selecting the appropriate trending procedure, the actuary
3
should consider those economic and social influences that may have an impact on
trends. It is inappropriate to analyze only those factors that have an impact on
trend in only one direction.
5.7 Criteria for Determining Trending Period—In determining the parameters (e.g.,
average dates of writing, earning, or costs) associated with the experience and
forecast periods, criteria such as the following should be considered:
a. the length of the experience period;
b. the expected length of the forecast period (e.g., 2 years);
c. the term of the policies (e.g., 1 year, 3 years) contributing to the

experience and forecast periods; and
d. the distribution of policies written or costs incurred throughout the

experience and forecast periods (e.g., uniform distribution).
5.8 Informed Actuarial Judgment—Any trending procedure requires the actuary to

exercise informed judgment, using information on historical insurance data and
the impact of relevant economic and social factors, as well as statistical validation
and testing procedures.
6.1 Documentation and Disclosure Standard—The actuary should be mindful that the
provisions of ASOP No. 9, Documentation and Disclosure in Property and
Casualty Insurance Ratemaking and Loss Reserving, adopted by the ASB in April
1989, apply to all aspects of ratemaking.
6.2 Trend Selection—If a trend is selected that is substantially different from one that
is suggested by the range of available relevant information, the reasons for such a
selection should be documented and disclosed.
6.3 Deviation from Standard—An actuary who uses a procedure which differs from
this standard should include, in the actuarial communication disclosing the result
of the procedure, an appropriate and explicit statement with respect to the nature,
rationale, and effect of such use.
4
REPEAL OF
ACTUARIAL STANDARD
OF PRACTICE
NO. 14
WHEN TO DO CASH FLOW TESTING

FOR LIFE AND HEALTH
INSURANCE COMPANIES
Developed by the
Repealed by the
September 2001
Doc. No. 082

September 2001
TO: Members of Actuarial Organizations Governed by the Standards of

Practice of the Actuarial Standards Board and Other Persons
Interested in Cash Flow Testing for Life and Health Insurance
Companies
SUBJ: Repeal of Actuarial Standard of Practice (ASOP) No. 14
This booklet notes the repeal of ASOP No. 14, When to Do Cash Flow Testing for
Life and Health Insurance Companies.
Background
To guide actuaries who needed to perform cash flow testing, the Actuarial Standards
Board adopted ASOP No. 7, then titled Performing Cash Flow Testing for
Insurers, in October 1988 (revised July 1991 and September 2001). In addition, in
July 1990 the ASB adopted ASOP No. 14, When to Do Cash Flow Testing for Life
and Health Insurance Companies, to provide guidance in determining whether or not
to do cash flow testing in forming a professional opinion or recommendation.
As part of the project to look at all cash flow testing standards of practice, a task force
of the ASB’s Life Committee reviewed ASOP No. 7 (titled, as of September 2001,
Analysis of Life, Health, or Property/Casualty Insurer Cash Flows), ASOP No. 14
(When to do Cash Flow Testing for Life and Health Insurance Companies), and
ASOP No. 22 (titled, as of September 2001, Statements of Opinion Based on Asset
Adequacy Analysis by Actuaries for Life or Health Insurers). Relevant portions of
ASOP No. 14 were incorporated within the 2001 revisions of ASOP No. 7 and
ASOP No. 22.
At its September 2001 meeting, the ASB voted to adopt the revised ASOP No. 7 and
ASOP No. 22 and to repeal ASOP No. 14.
ASOP No. 14 is repealed for any work performed on or after April 15, 2002.
1
Actuarial Standard
of Practice
No. 15
Dividends for Individual Participating

Life Insurance, Annuities, and Disability Insurance
Revised Edition
Developed by the
Adopted by the
March 2006
(Doc. No. 102)

ASOP No. 15—March 2006
TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Actual Experience 2
2.2 Contribution Principle 2
2.3 Dividend Determination 2
2.4 Dividend Factor 2
2.5 Dividend Factor Class 2
2.6 Dividend Framework 2
2.7 Divisible Surplus 2
2.8 Policies 2
2.9 Policy Factors 2

3.1 Contribution Principle 3
3.2 Dividend Framework 3
3.3 Dividend Factors 3
3.3.1 Projection of Experience 3
3.3.2 Dividend Factor Classes 4
3.3.3 Uniform Criteria 4
3.3.4 Dividend Factors for New Policies 4
3.4 Policy Factors 4
3.5 Mortality, Morbidity, and Policy Termination 4
3.6 Investment Income 5
3.7 Policy Loans 5
3.8 Expense 5
3.9 Reinsurance 5
3.10 Tax 5
3.11 Stockholder Retention on Policies Originally Issued by a Stock Company 5
3.12 Termination Dividends 6
3.13 Illustrated Dividends Not Subject to ASOP No. 24 6
ii

4.2 Disclosures Concerning Process of Dividend Determination 6
APPENDIXES

Background 9
Current Practicies 10
iii
March 2006

Actuarial Standards Board and Other Persons Interested in Dividends for
Individual Participating Life Insurance, Annuities, and Disability Insurance
This booklet contains the final version of the revision of ASOP No. 15, now titled Dividends for
Individual Participating Life Insurance, Annuities, and Disability Insurance.
Background
The ASB adopted the original ASOP No. 15, Dividend Determination for Participating
Individual Life Insurance Policies and Annuity Contracts, in 1990 and revised it in 1997 to
exclude dividend illustrations that are subject to or represented as being in accordance with the
National Association of Insurance Commissioners’ Life Insurance Illustrations Model
Regulation.
This current revision of ASOP No. 15, now titled Dividends for Individual Participating Life
Insurance, Annuities, and Disability Insurance, was prepared by the Task Force to Revise ASOP
No. 15 of the Life Committee of the ASB to be consistent with the current ASOP format, to
bring individual disability insurance into its scope, and to reflect current, generally accepted
actuarial practices with respect to dividends for participating individual life insurance policies
and annuity contracts.
Exposure Draft
The exposure draft of this ASOP was issued in March 2005 with a comment deadline of
September 30, 2005. Fourteen comment letters, showing thoughtful insight of the issues, were
received and considered in developing the final ASOP. For a summary of the substantive issues
contained in the exposure draft comment letter and the responses, please see appendix 2.
The most significant changes since the exposure draft were as follows:
1. References to professional services with respect to long-term care insurance were

removed from section 1.2, Scope. References to long-term care were also removed from
the title and other areas of the standard.
2. Several definitions were modified for improved clarity and consistency.
iv
3. A sentence was added to section 3.1, Contribution Principle, to clarify that the
contribution principle can be applied annually or over an extended period of time.
4. Section 3.3.4, Dividend Factors for New Policies, was changed with respect to setting a
dividend factor that differentiates between old and new policies, dropping the reference
to setting such a factor on a conservative basis.
5. Guidance with respect to reinsurance was added in new section 3.9, Reinsurance.
6. The discussion of the impact of policy loans was moved from section 3.6, Investment
Income, to new section 3.7, Policy Loans.
7. Current practice with respect to disability income insurance in appendix 1 was clarified.
The Life Committee thanks all those who commented on the exposure draft.
Thomas A. Phillips, Chairperson

Armand M. dePalo Gary N. Peterson
Phillip J. Grigg Stephen N. Steinig
Dale S. Hagstrom

Dale S. Hagstrom Barry L. Shemin

Alan D. Ford William A. Reimert
Robert S. Miccolis Lawrence J. Sher
v
DIVIDENDS FOR INDIVIDUAL PARTICIPATING

LIFE INSURANCE, ANNUITIES, AND DISABILITY INSURANCE

when performing professional services relating to the dividend framework and the
determination and illustration of dividends for individual participating life insurance,
annuities, and disability insurance, whether issued by a stock, fraternal, or mutual insurer.

connection with the establishment or modification of the dividend framework and the
determination and illustration of dividends for individual participating life insurance,
annuities, and disability insurance, including any attached participating riders and
agreements.
respect to illustrations of dividends subject to ASOP No. 24, Compliance with the NAIC
Life Insurance Illustrations Model Regulation.
This standard does not apply to the establishment of the aggregate amount available to be
distributed to policyholders as dividends (i.e., divisible surplus).
1.4 Effective Date—This standard is effective for actuarial services performed on or after
August 1, 2006.
1
2.1 Actual Experience—Historical results within a dividend factor class and trends in those
results.
2.2 Contribution Principle—The concept that aggregate divisible surplus is allocated to

policies to reflect the proportion that the policies, as part of their dividend factor classes,
are considered to have contributed to divisible surplus.
2.3 Dividend Determination—Given the dividend framework, the process by which the
divisible surplus is allocated to policies including the determination of dividend factors.
2.4 Dividend Factor—A value or set of values, other than the policy factors, used in the
determination of the dividend on a particular policy. A dividend factor reflects the
experience of the dividend factor class of policies to which the particular policy belongs.
Examples of dividend factors include those related to mortality, morbidity, expense,
investment income, policy termination, tax, and experience premiums.
2.5 Dividend Factor Class—A group of policies for which dividends are determined by using
the same value or set of values for a particular dividend factor.
2.6 Dividend Framework—The structure by which the insurer allocates divisible surplus
among participating policies. This includes the assignment of policies to dividend factor
classes, the method of allocating income and costs, and the structure of the formulas or
other methods of using dividend factors.
2.7 Divisible Surplus—The aggregate amount available to be distributed to policyholders as

dividends.
2.8 Policies—Individual participating policies and contracts for life insurance, disability
insurance and annuities, and group certificates for these same types of business that
operate in substantially the same manner as individual participating policies and
contracts.
2.9 Policy Factors—Financial components of a policy based on the guarantees or actuarial

components underlying the policy. Examples of policy factors include cash values,
reserves and their associated net premiums, gross premiums, policy loan interest rates,
and the rates of interest, mortality, and morbidity used in calculating cash values or
reserves.
2
3.1 Contribution Principle—The actuary should use the contribution principle in determining
dividends unless, in the actuary’s professional judgment, a different basis is preferable,
reasonable, and appropriate. The actuary may apply the contribution principle annually or
over an extended period of time. Limitations of the dividend determination process
require that practical considerations be reflected in applying the contribution principle,
and the actuary may recognize such considerations in applying the contribution principle.
The actuary may use approximations, simplified processes, or other adjustments
considering relevant conditions and circumstances such as the size of a particular group
of policies, the costs and practical difficulties of making a dividend scale change, and the
effect of the scale change on individual dividends.
3.2 Dividend Framework—When advising the insurer with respect to the dividend
framework, the actuary should consider the following: (a) treatment of policies within
the line of business that, in the actuary’s professional judgment, is equitable; (b) the
insurer’s marketing, financial, and other objectives; (c) materiality; (d) relevant policy
provisions; and (e) practical limitations.
3.3 Dividend Factors—The actuary should determine dividend factors that allocate the
divisible surplus within the insurer’s dividend framework. The actuary should develop
dividend factors based on an analysis of policy factors and actual experience of the
participating block for which dividends are being determined. However, when actual
experience is not determinable, available, or credible, the actuary should consider the
experience and trends in experience of similar classes of business either from the same
insurer, from industry sources, or from other non-industry sources, in that order of
preference. Dividend factors may differ from actual experience, as the actuary may adjust
the factors to reflect the insurer’s financial objectives, to reflect practical limitations, and
to result in an estimated aggregate dividend payout equal to divisible surplus.
The actuary should consider materiality and practical limitations in determining the
policy and dividend factors that are to appear in the dividend formula or other method of
using dividend factors. Thus, the analysis underlying dividend determination may involve
the use a variety of policy factors and actual experience measures, but the actuary need
not include all of these factors.
When developing new dividend factors for all policies is not practical, the actuary may
recommend the continuation of a dividend scale, continuation of certain dividend factors,
or the use of approximations or simplified processes or formulas.
3.3.1 Projection of Experience—If any projection of experience is made in determining

the dividend factor of any dividend factor class, the actuary should project
experience for all classes of that dividend factor for a line of business to the same
point in time. The actuary should limit such projections to a relatively short time
frame (for example, the period for which a dividend scale is likely to remain
3
appropriate) and should develop projections consistently for dividends on both

policies in force and new business.
3.3.2 Dividend Factor Classes—When providing advice with respect to creating,

changing, or combining dividend factor classes, the actuary should consider
characteristics such as the following:
a. the similarity of the policy types;
b. the structure of the policy factors;
c. the similarity of the actual experience;
d. the time period over which the policies were issued; and
e. the underwriting and marketing of the policies.
The actuary may use the same dividend factor class for policies with different
actual experience when this difference is charged for elsewhere. For example, the
dividend factor related to mortality used for permanent policies resulting from
term conversion may be the same as that for regularly underwritten policies, even
though the actual experience is different, provided that the appropriate charges for
material differences in mortality experience, net of expense savings, are charged
to the term policies.
3.3.3 Uniform Criteria—In placing policies in their respective dividend factor classes,
the actuary should base placement on uniformly applied criteria such as criteria
designed to group similar experience. The actual occurrence or absence of a claim
on a particular policy should not be a criterion for placement of that policy in a
particular dividend factor class.
3.3.4 Dividend Factors for New Policies—Dividend factors for new policies or
products commonly differ from those of older, otherwise similar policies. When
setting dividend factors that differ for otherwise similar old and new policies, the
actuary should consider (a) actual experience, if available, and (b) assumptions
that are reasonable and methods that are equitable, in the actuary’s professional
judgment.
3.4 Policy Factors—In the calculation of dividends for a particular policy, the actuary may
use the actual policy factors for that policy or approximations to the actual policy factors
that the actuary judges appropriate.
3.5 Mortality, Morbidity, and Policy Termination—The actuary may base the dividend
factors related to mortality, morbidity, or policy termination on a variety of
characteristics or a combination thereof. Examples of such characteristics include, but are
4
not limited to, age, gender, duration, geographic location, marketing method, plan, size of
policy, and risk class.
3.6 Investment Income—The actuary should reflect the investment experience of the line of
business for which dividends are being determined in setting a dividend factor related to
investment income. The dividend factor related to investment income may reflect
investment experience net of investment expenses or, alternatively, investment expenses
may be treated separately as expenses. The actuary should consider the treatment of
capital gains and losses and taxes in setting the factor. The actuary should use a
reasonable basis for allocating investment income to policies, whether using portfolio,
segmentation, investment generation, or any other methods.
3.7 Policy Loans—The actuary may reflect the effect of policy loans in setting a dividend
factor related to investment income. In determining the effect of policy loans, the actuary
should consider the policy loan interest rate, the treatment of policy loan expenses, and
whether policy loan interest is aggregated with other investment income recognizing the
utilization rate of loanable funds or whether policy loan interest is passed through directly
to borrowing policyholders.
3.8 Expense—The actuary should consider expense experience in setting a dividend factor
related to expenses. In considering expense experience, the actuary should allocate direct
costs (those that can be related to a specific group of policies) to the policies generating
those costs. The actuary should reasonably allocate indirect costs, such as overhead. The
actuary should develop dividend factor classes and dividend factors related to expenses
such that total expenses charged to each class are reasonable.
3.9 Reinsurance—The actuary should review the nature of any applicable reinsurance
arrangement and determine the allocation, if any, of the impact (positive or negative) of
reinsurance to specific blocks of business. If a reinsurance agreement is reflected in the
determination of dividends, the actuary may reflect its impact in the dividend factors such
as those related to expenses or mortality, or elsewhere in the dividend framework.
3.10 Tax—The actuary may determine a dividend factor related to taxes without reflecting
modest variations in taxes among jurisdictions. The actuary should consider material
variations in applicable laws in determining a dividend factor related to taxes, consistent
with the analyses underlying other experience.
3.11 Stockholder Retention on Policies Originally Issued by a Stock Company—The actuary

should consider applicable state law with respect to stockholder retention charges on
participating policies. The actuary should not ordinarily change the dividend factors for
stockholder retention from those in the scale used in the original dividend illustrations. If
the factors are to be changed from the scale used in the original dividend illustrations, the
actuary should make corresponding changes to all participating policies in force.
5
3.12 Termination Dividends—In establishing or changing termination dividends (dividends

that may be provided upon events such as death, maturity or surrender), the actuary
should consider the insurer’s intent as represented to the actuary by the insurer for the
block of business, if available, and develop termination dividends that are consistent with
that intent and supportable within the divisible surplus of the insurer. The actuary should
consider applicable state law with respect to termination dividends.
3.13 Illustrated Dividends Not Subject to ASOP No. 24—The actuary should determine
dividends to be used in illustrations not subject to ASOP No. 24 so that they reasonably
relate to actual dividends recently determined for payment on policies in force.
The actuary should consider whether illustrated dividends can be supported by recent
experience. If not, the actuary should disclose this and consider the appropriateness of
recommending a reduced scale for illustrations.


4.1 Actuarial Report—When advising an insurer on dividends subject to this standard of

practice, or on the dividend framework, the actuary should issue an actuarial report in
accordance with ASOP No. 41 to the insurer stating the actuary’s advice, unless another
actuary advising the same insurer is issuing such an actuarial report that incorporates
such advice.
4.2 Disclosures Concerning Process of Dividend Determination—The actuary should

disclose the following items in appropriate detail in the actuarial report:
a. a description of the process and dividend framework used to determine dividends,

the manner in which the policy and dividend factors were reflected in that
process, and any material change in process or dividend framework since the last
dividend scale;
b. whether the contribution principle has been followed and, if not, the basis used for
dividend allocation;
c. if the contribution principle is being applied to divisible surplus for a period other
than the current year, the procedures used for such application;
6
d. a description of the use of any significant approximations, simplified procedures,

and practical adjustments to dividends, and the rationale for that usage;
e. a description of the dividend factor classes used and any material changes in such
classes or in placement of policies within them;
f. a description of the policy factors and any material change in practice with respect
to their determination or use;
g. a description of the dividend factor values used and any material changes in such
values, including an identification of dividend factors with more than one
dividend factor class. If a projection of experience has been used in setting a
dividend factor, the type and extent of usage should be stated;
h. a description of the approach used for allocating investment income to the policies
covered by the report. If the approach for a given group of policies has changed,
or if a previously unused approach is to be introduced for a new group of policies,
the report should identify the approach and include a full description of the nature,
rationale, and effect of such approach;
i. for the dividend factors related to stockholder retention, a description of the

method, the actual factors, and any material changes in values of these factors
since the last dividend scale change;
j. if the insurer provides for termination dividends, a description of the processes

used to determine termination dividends and any material changes in practice with
respect to the determination of termination dividends since the last report;
k. for illustrations that are not included in the scope of ASOP No. 24, a description
of the methods used to determine illustrated dividends; and
l. a description of any illustrated dividends that cannot be supported by recent

experience.
7
considered to be a deviation from this standard, provided the actuary discloses that the
actuarial assignment was performed in accordance with the requirements of such
applicable law.
8
Appendix 1
practice.
Background
The determination of dividends on participating life insurance policies was a fundamental part of
actuarial practice in the United States before the founding of actuarial organizations. Principles
were defined early and have not changed. Practices have changed. Broad averaging of
experience was generally used until the early 1970s. Because of newly emerging products with
differentiated pricing, newly emerging differences in experience factors, and increased computer
speed and capacity, dividend practices shifted toward more refined reflections of cost and
income.
There have been no fundamental changes in life insurance dividend practices since the 1980s.
The general trend in practice has been to develop refinements in classes of business. This has
paralleled the development of dividend frameworks that are more refined and computer systems
that are capable of handling the additional refinements.
The determination of dividends for disability insurance policies has a shorter history than that for
life insurance, but the principles are similar.
One trend of the 1990s was the development of closed blocks of participating business, usually
as a result of the demutualization of mutual life insurance companies. These closed blocks,
according to their operating rules, are self-supporting and preserve the reasonable dividend
expectations of their policyholders. The determination of dividends for policies in closed blocks
follows the principles outlined in this ASOP. The divisible surplus for the closed block is set so
as to exhaust the assets when the last policy terminates, while avoiding the creation of a tontine.
Some insurers have sold blocks of participating individual policies to a reinsurer. In such a
situation, the guidance provided by this standard applies to any actuaries providing professional
services, as defined in this standard, to an insurer with respect to those policies.
In 1976, the Society of Actuaries appointed a Committee on Dividend Philosophy to consider

this subject. Building on the work and recommendations of that committee, the American
Academy of Actuaries’ (Academy) Committee on Dividend Principles and Practices formulated
a set of Recommendations for the participating individual life insurance business of mutual
companies that was adopted by the Board of Directors of the Academy in 1980. In 1985, the
Academy board adopted a revised set of Recommendations that covered participating individual
life insurance and participating annuity contracts of both mutual and stock companies. The
original ASOP No. 15, Dividend Determination for Participating Individual Life Insurance
Policies and Annuity Contracts, was a reformatted version of those Recommendations. This
9
revision has been updated to reflect current dividend determination practices and to add
individual disability insurance to its scope.
Current Practices
The actuary may provide professional services in two principal areas with respect to dividends.
The actuary is normally involved in the determination of dividends, using the dividend
framework of the insurer. In addition, the actuary may be involved in advising the insurer with
respect to the dividend framework. In providing such services, current practices, such as the
following, provide a background for dividend determination.
For typical insurers, management recommends an aggregate amount available to be distributed to

policyholders as dividends (i.e., divisible surplus), actuaries recommend an allocation of that
amount to individual policies, and the board approves the entire process. Divisible surplus may
be determined for the organization as a whole or may be determined for specific lines of business
within the organization, including closed blocks or participating lines of business operated by
stock life insurers. Also, some insurers have developed policies that are participating but upon
which dividends are not anticipated to be paid. For these policies, the insurer determines whether
there is any divisible surplus to be allocated to the policies in the line of business.
Dividends may be calculated for a company as a whole but it is more common that dividends are
calculated on a “line of business” basis. For this purpose, “line of business” varies by company.
Some companies may view the entire individual life block as a single line of business while
others may break that down into two or more separate lines. For dividend purposes, disability
insurance is often treated as a separate line. Annuity business is also often separated from other
lines for dividend purposes.
The use of the contribution principle in determining dividends is generally accepted practice in
the United States. Methods of applying the contribution principle in dividend determination
described in actuarial literature include the following:
1. the contribution or source of earnings method;
2. the asset share method;
3. the fund method;
4. the experience premium method;
5. the percentage of premium method; and
6. the reversionary bonus method.
Some of these methods, such as the percentage of premium method, refer primarily to the
formula used to calculate dividends. Other methods, such as the asset share method, refer
10
primarily to the process used. Much of the standard is implicitly written in terms of the
contribution method, but the standard should be understood in terms of analogous effects under
the other methods.
It is the application of a particular method, by means of the dividend factors, that determines
whether or not it follows the contribution principle, not the method itself. Also, it may be that a
particular method, which does not of itself satisfy the contribution principle, will do so when
termination dividends (see section 3.12) are taken into account.
Frequently the calculation of dividend factors takes place at two levels. At the detail level (policy
form, issue age, issue year, gender, etc.) the actuary seeks a formula that is simple to administer
while producing equitable dividends. A very common formula is the three-factor dividend
formula with a dividend factor related to investment, a dividend factor related to mortality, and a
dividend factor for all other sources (primarily expenses). After the actuary has selected a
formula that the actuary thinks is appropriate, the actuary tests it at a model level (quinquennial
issue ages, major policy forms, selected issue years, etc.), using assets share calculations with a
complete set of assumptions. The testing determines whether the selected scale is (in the
actuary’s professional judgment) reasonable and equitable. The dividend factors may reflect
experience directly in one or more of the three factors, but more often experience is reflected in
the asset share assumptions.
A simplified approach to the determination of dividends for disability policies is common for
several reasons. It is more difficult to know claim costs with certainty because of the volatility of
morbidity results. The product offerings in these areas tend to be quite complex, with many
potential dividend factor classes. An approach for these products may include a simplified
formula for paying dividends, such as a percentage of premium or an experience premium
determined from underlying experience, and a broad application of the definition of dividend
factor class.
As stated in section 3.2 of the standard, practical limitations are part of the dividend framework.
In determining dividends, actuaries commonly make adjustments to dividends for a variety of
reasons, such as the following:
1. to reflect unusual gains or losses on certain supplementary benefit riders;
2. to reflect losses from the presence of settlement option guarantees;
3. to smooth the transition from one dividend scale to another;
4. to provide consistency in quantity discounts made to varying degrees in the gross

premium structure;
5. to serve as a balancing item so that aggregate dividends equal aggregate divisible

surplus;
11
6. to distribute gains from extraneous sources such as nonparticipating benefits or lines of

business; and
7. to smooth the incidence of dividends within a dividend scale by policy duration.
Determination of dividends requires analysis of the actual experience of the participating block
for which the dividends are being determined. Maintaining distinct accounting for participating
business and for nonparticipating business and by line within each of these businesses may be
helpful for this purpose.
In allocating divisible surplus to policies, a wide variety of acceptable practice exists in the
determination of dividend factors and the treatment of dividend factors in the dividend
framework. The actual experience upon which dividend factors are based commonly varies by
several characteristics. For example, expenses may vary by plan, size of policy, marketing
method, level of policyholder service, and other items. Also, details of taxation vary widely,
depending on applicable laws in various jurisdictions. Differences in dividend frameworks are
also common among insurers. Dividends may be calculated on a pre-tax basis or the dividend
framework may include a dividend factor related to taxes. Some products of some insurers
provide for termination dividends and there is a wide variety of practices with respect to
termination dividends.
Where an insurer is operating a closed block of participating policies under operating rules
developed in a demutualization, the insurer continues to set the divisible surplus for the partici-
pating policies, while the actuary continues to use the dividend framework to determine
dividends for the policies based on the contribution principle, as defined in the standard.
However, as described in ASOP No. 33, Actuarial Responsibilities with Respect to Closed
Blocks in Mutual Life Insurance Company Conversions, aggregate dividends in a closed block
are to be managed so as to exhaust the assets when the last policy terminates, while avoiding the
creation of a tontine. In such situations, actuaries commonly include in dividend work an
evaluation of the financial position of the closed block relative to the principle of exhausting the
assets while avoiding a tontine. Also, as the operating rules for the closed block may refer to one
or more dividend factors, actuaries commonly refer to the operating rules for the closed block in
setting the dividend factors.
The actuary may have responsibilities in addition to the requirements of this ASOP. For
example, the Exhibit 5 Interrogatories of the National Association of Insurance Commissioners’
current annual statement address additional issues with respect to the determination of dividends
(see section 3.13 of this standard).
12
Appendix 2
The exposure draft of this actuarial standard of practice (ASOP), then titled Dividends for
Individual Participating Life Insurance, Annuities, Disability Insurance, and Long-Term Care
Insurance, was issued in March 2005, with a comment deadline of September 30, 2005. Fourteen
comment letters were received, some of which were submitted on behalf of multiple comment-
ators, 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 Task Force
to Revise ASOP No. 15 carefully considered all comments received, and the Life Committee and
the ASB reviewed (and modified, where appropriate) the proposed changes to the ASOP.
responses to each. The term “reviewers” includes the task force, the Life Committee, and the
ASB. Unless otherwise noted, the section numbers and titles used below refer to those in the
exposure draft.
GENERAL COMMENTS
below.
section.
Comment One commentator noted that if interest earned is less than required, there may be yearly dividend decreases
and policyholder complaints. The commentator suggested that it may be better to level scales, build
surplus, and develop dividends with an increasing pattern.
Response The reviewers noted that the development of such scales is a determination of divisible surplus, which is a
decision by the insurer and not within the scope of the standard.
Comment Two commentators suggested that the cost of reinsurance might be taken into account in the distribution of
costs among policyholders.
Response The reviewers agreed and created new section 3.9, Reinsurance.
Comment Some disability income policies have been issued as participating but where no dividend is anticipated to
be paid. One commentator suggested the standard address (a) whether it is appropriate to offer such
policies under the contribution principle, and (b) how the actuary is to determine dividends.
Response The reviewers believed determining the appropriateness of policy offerings was beyond the scope of this
standard. The reviewers disagreed with the commentator’s request that the standard discuss how to
determine dividends.
Comment One commentator noted that some blocks of individual participating insurance have been sold to a
reinsurer and asked about the scope of the standard in such a situation.
Response The reviewers noted that the standard applies to actuaries providing professional services on dividends
whether working for a direct insurer or a reinsurer.
13
Comment One commentator noted that, in the case of a closed block of participating policies, one or more dividend
factors, such as the factor related to expenses, may be specifically addressed in a plan of reorganization.
The commentator suggested the standard should provide guidance in this situation.
Response The reviewers noted that the scope of the standard recognized that the actuary should satisfy the
requirements of “other legally binding authority” in performing professional services.
Comment Several commentators believed that the distinction in guidance for paid dividends and illustrated dividends
was unclear.
Response The reviewers assessed the scopes of ASOP Nos. 15 and 24 and believed they were clear.
Comment Two commentators made comments that can be summarized in three general areas:
1. The standard should provide more guidance to actuaries in the area of the actuary’s responsibility to act
in the beneficial interest of the policyholder in determining dividends and the latitude the actuary may
have in following the contribution principle.
2. The standard did not provide sufficient detail in the level of guidance for performing professional
services, both in the dividend framework and determining dividend factors.
3. The standard should address the role of the actuary, the insurer, and the policyholder in determining
divisible surplus.
Response 1. The reviewers assessed the standard with respect to the actuary’s responsibility to act in the beneficial
interest of the policyholder and the latitude the actuary may exercise in following the contribution
principle and believed the standard provided appropriate guidance and reflected accepted practice.
2. The reviewers assessed the level of detail and made appropriate revisions.
3. The reviewers noted that determining divisible surplus was outside the scope of the standard.
Comment Several commentators stated that the determination of dividends for participating long-term care policies
does not yet have generally accepted practices and should be outside the scope of this standard.
Response The reviewers agreed and removed references to long-term care policies.
SECTION 1. PURPOSE, SCOPE, CROSS REFENCES, AND EFFECTIVE DATE
Comment One commentator suggested that the standard should clearly state that it covers policyholder dividends
whether the policy is issued by a stock, fraternal, or mutual insurer.
Response The reviewers agreed and revised the language in this section to include these entities.
Section 1.2, Scope
Comment One commentator asserted that the actual payment of future dividend scales should be tightly and
permanently linked to those illustrated at issue.
Response The reviewers believed that the standard adequately addressed the dividend allocation process and that the
insurer may change the dividend allocation process, working through the dividend framework, dividend
factors, and divisible surplus, resulting in dividend scales that may differ markedly from those originally
illustrated.
Comment A few commentators asked for more clarity in the definitions of 2.3, Dividend Determination; 2.4,
Dividend Factor; 2.6, Dividend Framework; and 2.8, Policy Factors (now 2.9).
Response The reviewers agreed and amended the definitions.
14
Section 2.2, Contribution Principle

Comment Some commentators suggested that the definition of contribution principle should clarify the point that
policies are grouped into dividend factor classes for the purpose of determining dividends and that the
distribution of surplus among policies is based on such factor classes.
Response The reviewers agreed that such clarity is important and changed the definition of the contribution
principle.
Comment One commentator asked for clarification of the change in the definition of “contribution principle” because
the commentator believed this suggested no difference from current practice.
Response The reviewers added the word “reflects” to acknowledge the impossibility of distributing divisible surplus
to policies literally in exact proportion to the contribution to divisible surplus.
Section 2.4, Dividend Factor
Comment One commentator suggested that the definition be clarified to reflect experience.
Response The reviewers agreed and modified the definition.

Section 2.7, Policies
Comment One commentator suggested that the definition of “policy” with respect to group certificates should be
clarified to cover group certificates that include dividend provisions similar to individual participating
policies.
Response The reviewers agreed and changed the definition to better reflect that concept.
Section 3.1, Contribution Principle
Comment One commentator suggested that the reference to the contribution principle being applied over an extended
period of time be transferred from the appendix to section 3.1, where it was in the previous standard.
Response The reviewers agreed and restored this reference to section 3.1.
Comment One commentator suggested that the contribution principle should include smoothing out and leveling
variations in factors, such as mortality, to avoid anomalies in the progression of dividends by duration.
Response The reviewers agreed but believed that the standard adequately covered this.
Comment One commentator noted that some dividend frameworks may provide for a step-up in premium that may
be offset by a dividend. The commentator asked whether the contribution principle is being followed in
that situation.
Response The reviewers noted that the standard provides for approximations, simplified processes, or other
adjustments considering relevant conditions and circumstances. Such latitude is intended to allow for a
variety of reasonable practices in following the contribution principle.
Section 3.3, Dividend Factors
Comment One commentator suggested that the list of reasons for making adjustments to dividends or dividend
factors, which was in appendix 1 of the exposure draft, be moved to the end of this section or be cross
referenced.
Response The reviewers believed the list of reasons represented current practice and was more appropriate in the
appendix as education. The reviewers changed the wording of the appendix to refer to section 3.2.
Section 3.3.2, Differences between Dividend Factor Classes (now Dividend Factor Classes)
Comment One commentator suggested that the characteristics to be considered in defining dividend factor classes be
expanded, by making clear that those in the standard are examples, not an exclusive list.
Response The reviewers agreed but believed that the existing language allowed consideration of other
characteristics.
15
Section 3.3.3, Uniform Criteria

Comment One commentator suggested a slight editing of the statement in the draft concerning uniform criteria.
Response The reviewers agreed and revised the language.

Section 3.3.4, Dividend Factors for New Policies
Comment One commentator suggested that, when setting a dividend factor that differentiates between old and new
policies, it may not be appropriate to set that dividend factor on a conservative basis given a fixed
distributable surplus.
Response The reviewers agreed and revised section 3.3.4.

Section 3.5, Mortality, Morbidity, and Policy Termination
Comment One commentator suggested it be made clearer that the list of examples in this section is not exclusive.
Response The reviewers agreed and added the appropriate wording.

Section 3.8, Tax (now section 3.10)
Comment One commentator suggested that generally accepted practice allows dividend formulas determined on a
pre-tax basis with no deduction for taxes and that the standard should make that clear.
Response The reviewers agreed but believed the standard adequately covered this.
Section 3.9, Stockholder Retention on Policies Originally Issued by a Stock Company (now section 3.11)
Comment One commentator suggested that determination of shareholder retention as discussed in this section is a
part of the determination of divisible surplus and therefore not covered by this standard.
Response The reviewers believed that shareholder retention charges, as they relate to the dividend framework, were
appropriately addressed in the revised standard.
Section 3.11, Illustrated Dividends Not Subject to ASOP No. 24 (now section 3.13)
Comment One commentator suggested that the standard clarify that illustrated dividends not covered by ASOP
No. 24 should reasonably relate to recent paid dividends, not all past dividends paid.
Response The reviewers agreed and amended this section to reflect that.
Comment One commentator took exception to including experience premium method and percentage of premium
method as involving simplified formulas.
Response The reviewers made a clarifying revision to the sentence to address the commentator’s concern.
16
Repeal of
Actuarial Standard
of Practice
No. 16
Actuarial Practice Concerning

Health Maintenance Organizations and
Other Managed-Care Health Plans
Developed by the
Repealed by the
April 2007
(Doc. No. 104)

TABLE OF CONTENTS
Appendix 1 1
ii
April 2007

Actuarial Standards Board and Other Persons Interested in HMOs and Other
Managed-Care Health Plans
SUBJ: Repeal of Actuarial Standard of Practice (ASOP) No. 16
This document notes the repeal of ASOP No. 16, Actuarial Practice Concerning Health
Maintenance Organizations and Other Managed-Care Health Plans.
Background
Managed care health plans (MCHPs) accounted for a small proportion of total health care
financing until the 1980s. The actuarial information related to them was much less abundant than
for indemnity health plans. In June 1989, the ASB requested that its Health Committee draft a
standard of practice concerning such plans and released an exposure draft in October 1989. At
the time, the standard was written to supplement the general health insurance standards and to
deal with a number of considerations unique to or of greater significance for managed-care
health plans.
Given the evolution of HMOs and managed care health plans over the past fifteen years, much of
the information in the current standard is dated. Further, the standard gets into more detail and
educational background than generally expected in an ASOP. While this type of information and
guidance was likely necessary at the time it went into effect, many of the issues included in the
standard are commonplace today.
The current scope for ASOP No. 16 applies for actuaries “performing professional services in
connection with areas requiring special consideration for HMOs and other MCHPs.” Many of the
items generally refer to practice as it relates to determining liabilities and setting rates. In
general, it is believed that the guidance provided in the standard is covered, either explicitly or
implicitly, in other ASOPs (for example, Nos. 5, 8, 23, 28, 31, and 42). Appendix 1 provides a
grid listing pertinent sections from ASOP No. 16 and a cross reference to other ASOPs, NAIC
Instructions, or the Code of Professional Conduct, where actuarial guidance exists for the related
item, or notes where the item was considered educational and should not be included in the body
of any ASOP.
iii
Exposure Draft
The exposure draft of this repeal document was issued in a blast e-mail in November 2006 with a
comment deadline of January 15, 2007 that was subsequently extended to February 1, 2007.
Thirteen comment letters were received. Most comments supported the repeal, but several raised
issues that were considered by the Task Force to Revise ASOP No. 16, the Health Committee,
and the Actuarial Standards Board in finalizing this repeal document. For a summary of the
substantive issues and the reviewers’ responses, please see appendix 2.
The Actuarial Standards Board wishes to thank all who commented on the repeal.
Action
The ASB voted in April 2007 to repeal ASOP No.16.
ASOP No. 16 is repealed for any work performed on or after April 26, 2007.
iv
Appendix 1
Note: This appendix is prepared for informational purposes only.
The Task Force to Revise ASOP No. 16 prepared the following grid highlighting sections 2 and
5 of the current ASOP as a cross reference against other ASOPs, NAIC instructions, or the Code
of Professional Conduct to reflect where appropriate actuarial guidance already exists for the
related item or where the item would have been considered educational material and, therefore,
not included in any proposed revision other than possibly an appendix.
Current Section Reference to Applicable Standards or

Other Guidance
Section 2 Definitions
2.1 Capitation ASOP No. 5
2.2 Exclusive Provider Organization Educational – not needed in standard
2.3 Fee-For-Service Educational – not needed in standard
2.4 Funding Arrangements Educational – not needed in standard
2.5 Group-Model HMO Educational – not needed in standard
2.6 Group Practice Educational – not needed in standard
2.7 Health Care Budget Educational – not needed in standard
2.8 Health Maintenance Organization Educational – not needed in standard
2.9 Hold-Harmless Clause Educational – not needed in standard
2.10 Indemnity Plan Educational – not needed in standard
2.11 Individual Practice Association (IPA) – Educational – not needed in standard
Model HMO
2.12 Managed-Care Health Plan Educational – not needed in standard
2.13 Mixed-Model HMO Educational – not needed in standard
2.14 Non-Indemnity Plan Educational – not needed in standard
2.15 Point-of-Service Product Educational – not needed in standard
2.16 Preferred Provider Organization Educational – not needed in standard
2.17 Prepaid Health Care Plan Educational – not needed in standard
2.18 Primary Care Physician Educational – not needed in standard
2.19 Providers Educational – not needed in standard
2.20 Risk Pool
2.21 Specialist Educational – not needed in standard
2.22 Staff-Model HMO Educational – not needed in standard
2.23 Uncovered Expenditures NAIC Blank Instructions
2.24 Withhold Educational – not needed in standard
1
Section 5 Analysis of Issues and Recommended ASOP No. 5; ASOP No. 8; ASOP No. 42
Practices
5.1 Transfer of Financial Risk to Providers ASOP No. 5 (3.3.6, 3.5.1 - 3.5.5);
ASOP No. 8
5.1.1 Capitation Contracts with Providers ASOP No. 5 (3.3.6); ASOP No. 42 (3.5.4)
5.1.2 Stop-Loss Provisions ASOP No. 5; ASOP No. 42 (3.5.3)
5.1.3 Supplemental Payments ASOP No. 42 (3.5.3, 3.5.5); ASOP No. 5
5.1.4 Financial Condition of Capitated ASOP No. 42 (Sec 3.2, 3.5); ASOP No. 5
Providers
5.1.5 Primary Care Physician Financial ASOP No. 42 (Sec 3.5.5); ASOP No. 5
Incentives
5.1.6 Provider Settlements (General) ASOP No. 42 (Sec 3.5); ASOP No. 5
5.1.7 Covered Liabilities Implicit in Code of Professional Conduct,
General Disclosures, Reliance Section
5.1.8 Experience Rating Educational – not needed in standard
5.2 Management of Health Care Delivery
System
5.2.1 Effect on Claims Liability ASOP No. 5 (3.3.6);
ASOP No. 42 (3.2.1 - 3.2.2)
5.2.2 Effect on the Rate Setting Process ASOP No. 5 (3.2.1-3.2.7); ASOP No. 8
(5.3 - 5.5); ASOP No. 31 (3.7.1 - 3.7.2);
ASOP No. 42 (3.2.1 - 3.2.6); ASOP No.
7; ASOP No. 22
5.2.3 Changes in Mix of Providers ASOP No. 5 (3.3.6); ASOP No. 8 (3.2.4);
ASOP No. 42 (3.5.1 - 3.5.5)
5.2.4 Effect on Data Monitoring ASOP No. 5 (3.6); ASOP No. 23
5.2.5 Basis for Claim Reports ASOP No. 5 (3.4);
ASOP No. 23 (3.4 - 3.5)
5.3 Multiple Delivery Systems and
Financial Structuring
5.3.1 Scope of Services by Contract ASOP No. 5 (3.2.1, 3.2.6, 3.3.6)
5.3.2 Change in Membership Mix ASOP No. 5 (3.2.1, 3.2.4, 3.3.6)
5.4 Capitation Paid to a Provider ASOP No. 8 (3.2.5)
5.5 Health Care Budget ASOP No. 8 (3.2.2)
5.6 Reliance on Data or Other Information ASOP No. 8; ASOP No. 23; Code of
Supplied by Others Professional Conduct
5.7 Documentation ASOP No. 8; ASOP No. 31;
ASOP No. 41
2
Appendix 2
The exposure draft of the repeal of ASOP No. 16, Actuarial Practice Concerning Health
Maintenance Organizations and Other Managed-Care Health Plans, was issued to the
membership by blast e-mail in November 2006 with a comment deadline of January 15, 2007
that was subsequently extended to February 1, 2007. Thirteen comment letters were received,
one of which was submitted on behalf of multiple commentators, such as a firm or committee.
Seven commentators stated they agreed with the repeal of this ASOP. Four commentators did not
make any affirmative statement either for or against the repeal but did not raise any opposition to
the repeal. Two of these raised certain process issues and are not included in the responses
below, while the other two offered comments and suggestions. Two commentators either
opposed or offered an alternative to repealing ASOP No. 16. The ASB, Health Committee, and
Task Force to Revise ASOP No. 16 carefully considered all comments received. Summarized
below are the significant issues and questions contained in the comments and responses to each.
GENERAL COMMENTS
Comment One commentator suggested that ASOP No. 16 be retained with all text being deleted
except the references to the ASOPs that are appropriate to HMOs and other managed-care
health plans.
Response This repeal document lists the ASOPs that provide guidance for HMOs and other managed-
care health plans. In addition, appendix 1 has been added, which shows sections 2 and 5 of
ASOP No. 16, and whether guidance is provided in other ASOPs, by NAIC instructions, or
by the Code of Professional Conduct, or the material is considered educational and is not
appropriate for inclusion in an ASOP.
Comment One commentator opposed repeal of ASOP No.16. The commentator expressed concern
regarding certain regulatory issues and statutory reserve requirements. The commentator
also stated that he/she believes the purpose of an ASOP is to inform/educate actuaries of
past and current risks that have been identified and urged the task force to revise ASOP No.
16 rather than repeal.
Response The reviewers believe that instruction on regulatory and statutory requirements should not
be explicitly incorporated in an ASOP. All ASOPs require that the actuary comply with
applicable law. Both ASOP No. 5, Incurred Health and Disability Claims, and ASOP No.
42, Determining Health and Disability Liabilities Other Than Liabilities for Incurred
Claims, which deal with actuarial liabilities, cover this topic. The reviewers believe that the
purpose of ASOPs is to give guidance on appropriate practices, not to educate and inform.
3
Comment One commentator expressed concern that statutory minimum reserves for uncovered
claims, which are mentioned in ASOP No. 16, are not covered in ASOP No. 42 and thus
not identified as a standard of practice.
Response The reviewers note that the concern expressed by the commentator is implicitly covered in
NAIC Blank Instructions. As noted in the previous response, the reviewers believe that
instruction on regulatory and statutory requirements should not be explicitly incorporated
in an ASOP. All ASOPs require that the actuary comply with applicable law. Both ASOP
Nos. 5 and 42, which deal with actuarial liabilities, cover this topic.
Comment One commentator suggested certain items from ASOP No.16 be incorporated into other
ASOPs, namely, handling of risk sharing-capitation, withholds, and stop loss provisions;
financial conditions of risk sharing providers; experience rating as it compares to
community rating; PCP financial incentives; and effect of data monitoring. The
commentator also suggested adding or expanding comments on reliance on clinic data and
personnel, highlighting differences between the different types of managed-care health
plans, and risk based capital.
Response The reviewers believe that the other ASOPs noted in the repeal document adequately
address the items from ASOP No. 16 as noted above. The reviewers note that appendix 1
has been added, which indicates where these items are covered in other ASOPs or are
considered educational material and would not have been included in any revision to ASOP
No. 16. The task force also believes the other items that the commentator suggested be
added to any revision are considered educational and are not appropriate for inclusion in an
ASOP.
4
Actuarial Standard
of Practice
No. 17
Expert Testimony by Actuaries
Revised Edition
Developed by the
Expert Witness Task Force of the
Adopted by the
March 2002
(Doc. No. 087)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Actuarial Assumption 2
2.2 Actuarial Method 2
2.3 Actuarial Opinion 2
2.4 Data 2
2.5 Expert 2
2.6 Material 2
2.7 Principal 2
2.8 Testimony 2

3.1 Review and Compliance 3
3.2 Conflict with Laws and Regulations 3
3.3 Conflict of Interest 3
3.4 Advocacy 3
3.5 Identity of Principal 3
3.6 Prescribed or Alternative Methods and Assumptions 3
3.7 Hypothetical Questions 4
3.8 Testifying Concerning Other Relevant Testimony 4
3.9 Cross-Examination 4
3.10 Consistency with Prior Statements 4
3.11 Discovery of Error 4
3.12 Limitation of Expert Testimony 4

4.1 Written Reports 4
4.2 Oral Testimony 5
ii
APPENDIXES

Background 6
Current Practices 6
Appendix 2—Comments on the 2001 Exposure Draft and Subcommittee Responses 10
iii
March 2002

Actuarial Standards Board and Other Persons Interested in Expert Testimony by
Actuaries
This booklet contains the final version of ASOP No. 17, Expert Testimony by Actuaries.
Background
The ASB originally adopted ASOP No. 17, Expert Testimony by Actuaries (Doc. No. 029) in 1991.
Since that time, actuarial practice in this area has evolved. Under the direction of the ASB, the Expert
Witness Task Force has revised ASOP No. 17 to be consistent with the current ASOP format adopted
by the ASB in May 1996 for all future actuarial standards of practice and to reflect current practices in
the area of expert testimony.
Actuarial opinions that are widely divergent may raise a question about the reasonableness of one or
more opinions. This question is likely to arise when the basis for any opinion is not soundly thought out
or not well explained. By contrast, actuarial opinions that are supportable and carefully prepared and
explained, though divergent, can generate confidence in actuaries’ competence to evaluate the costs and
benefits of future contingent events. The focus of this standard is on the preparation and delivery of
sound expert testimony by actuaries.
Exposure Draft
The exposure draft of this revised standard was issued in March 2001 with a comment deadline of
August 15, 2001. The Expert Witness Task Force with the help of the General Committee carefully
considered the eighteen comment letters received. For a summary of the substantive issued contained in
these comment letters, please see appendix 2.
iv
1. The first paragraph of section 1.2, Scope, was reworded to clarify the extent to which the
standard applies to actuaries providing litigation support;
2. A sentence was added to section 3.5, Identity of Principal, to specifically address the extent to
which the actuary can rely upon information and instructions received from representatives of
principals;
3. The last sentence of section 3.9, Cross-Examination, which advised that the actuary should
expect to be cross-examined on the basis of prior statements, was stricken as being redundant
with section 3.10, Consistency with Prior Statements;
4. Section 3.12, Limitation of Expert Testimony (previously titled, “Nature of the Forum”), was
retitled and substantially rewritten in response to suggestions that the disclosure and compliance
obligations of the actuary be more precisely identified; and
5. Section 4.3, Prescribed Statement of Actuarial Opinion, was amended to use the alternative
language provided in the Transmittal Memorandum of the exposure draft.
The task force would like to thank former General Committee members Donald F. Behan, Lee R.
Steeneck, and Paul B. Zeisler for their contribution to the revision of this standard.
Expert Witness Task Force
Charles L. McClenahan, Chairperson

Frederick W. Kilbourne Lee A. Zinzow
Patricia L. Scahill
William C. Cutlip, Chairperson

William Carroll Donna C. Novak
Janet M. Carstens William H. Odell
Ethan E. Kra Robert A. Potter

Ken W. Hartwell Alan J. Stonewall
v
vi
EXPERT TESTIMONY BY ACTUARIES
1.1 Purpose—This actuarial standard of practice (ASOP) provides guidance to actuaries providing
expert testimony.
1.2 Scope—This standard applies to actuaries when they testify as actuarial experts at trial, in hearing
or arbitration, in deposition, or by declaration or affidavit. This standard does not apply to actuaries
providing litigation support other than the expert testimony itself. However, actuaries providing such
litigation support may consider the guidance in this standard to the extent that it is applicable and
appropriate.
This standard supplements the Code of Professional Conduct and is intended to provide specific
guidance with respect to expert testimony. Reference should also be made to other actuarial
standards of practice concerned with the actuarial substance of the assignment.
Nothing in this standard is intended to discourage reasonable differences of actuarial opinion, or to

inhibit responsible creativity in advancing the practice of actuarial science. Further, this standard is
not intended to restrain unreasonably the selection of actuarial assumptions or methods, the
communication of actuarial opinions, or the relationship between the actuary and a principal.
Nothing in this standard is intended to prevent the actuary from challenging the application or a
particular interpretation of existing precedent, law, or regulation where such application or
interpretation would, in the opinion of the actuary, be inconsistent with otherwise appropriate
actuarial practice.
To the extent that the guidance in this standard may conflict with the guidance in other ASOPs, the
actuary should use professional judgment in reconciling such conflict. If a conflict exists between this
standard and applicable law or regulation, compliance with applicable law or regulation is not
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
1
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 is effective for all expert testimony provided on or after July 15,
2002.
2.1 Actuarial Assumption—The value of a parameter or other actuarial choice having an impact on an
estimate of a future cost or other actuarial item under evaluation.
2.2 Actuarial Method—A procedure by which data are analyzed and utilized for the purpose of
estimating a future cost or other actuarial item.
2.3 Actuarial Opinion—A conclusion drawn by an actuary from actuarial knowledge or from the
application of one or more actuarial methods to a body of data.
2.4 Data—Statistical or other information that is generally numerical in nature or susceptible to

quantification.
2.5 Expert—One who is qualified by knowledge, skill, experience, training, or education to render an
opinion or otherwise testify concerning the matter at hand.
2.6 Material—An item is material if it has an impact on the affected actuarial opinion, which is significant
to the interested parties.
2.7 Principal—A client or employer of the actuary.
2.8 Testimony—Communication presented in the capacity of an expert witness at trial, in hearing or

arbitration, in deposition, or by declaration or affidavit. Such testimony may be oral or written,
direct or responsive, formal or informal.
2
An actuary providing expert testimony performs an important service to the actuary’s principal, the forum,
and the public by explaining complex technical concepts that can be critical to resolution of disputes.
Actuaries may differ in their conclusions even when applying reasonable assumptions and appropriate
methods, and a difference of opinion between actuaries is not, in and of itself, proof that an actuary has
failed to meet professional standards. However, an actuary providing expert testimony should comply with
the requirements of the Code of Professional Conduct. In particular, the actuary should act honestly, with
integrity and competence, and in a manner to fulfill the profession’s responsibility to the public, and should
take reasonable steps to ensure that the expert testimony is not used to mislead other parties.
3.1 Review and Compliance—In addition to complying with this standard, the actuary providing expert
testimony should review and comply with applicable actuarial standards of practice, the
Qualification Standards for Prescribed Statements of Actuarial Opinion, and the Code of
Professional Conduct.
3.2 Conflict with Laws and Regulations—If the actuary believes that a relevant law or regulation
contains a material conflict with appropriate actuarial practices, the actuary should disclose the
conflict, subject to the constraints of the forum.
3.3 Conflict of Interest—The actuary should be alert to the possibility of conflict of interest, and should
address any real or apparent conflict of interest in accordance with Precept 7 of the Code of
Professional Conduct.
3.4 Advocacy—There may be occasions when an actuary acts as an advocate for a principal when
giving expert testimony. Nothing in this standard prohibits the actuary from acting as an advocate.
However, acting as an advocate does not relieve the actuary of the responsibility to comply with the
Code of Professional Conduct and to use reasonable assumptions and appropriate methods
(unless using prescribed or alternative methods or assumptions and so disclosing in accordance with
section 3.6).
3.5 Identity of Principal—The actuary should identify the principal on whose behalf the actuary is to
give expert testimony. This principal usually names a representative, such as an attorney or
manager, to whom the actuary reports during the course of the assignment. Even though that
representative may retain or pay the actuary, the actuary’s ultimate obligation is to the principal and
not to the principal’s representative. However, in the absence of evidence to the contrary, the
actuary may rely upon information and instructions from the representative as though they came
directly from the principal.
3.6 Prescribed or Alternative Methods and Assumptions—If the actuary performs calculations using
prescribed or alternative assumptions or methods different from the assumptions or methods
3
selected by the actuary in forming the actuary’s expert opinion, the actuary should state, subject to
the constraints of the forum, whether the results are consistent with the actuary’s own expert
opinion.
3.7 Hypothetical Questions—The actuary may be asked to answer hypothetical questions. Hypothetical
questions may fairly reflect facts in evidence, may include only a part of the facts in evidence, or
may include assumptions the actuary believes to be untrue or unreasonable. The actuary may refuse
to answer hypothetical questions based upon unreasonable assumptions, subject to the constraints
of the forum.
3.8 Testifying Concerning Other Relevant Testimony—When the actuary testifies concerning other
relevant testimony, including opposing testimony, the actuary should testify objectively, focusing on
the reasonableness of the other testimony and not solely on whether it agrees or disagrees with the
actuary’s own opinion.
3.9 Cross-Examination—Although the actuary must respond truthfully to questions posed during cross-
examinations, the actuary need not volunteer information that may be adverse to the interest of the
principal.
3.10 Consistency with Prior Statements—When giving expert testimony, the actuary should be mindful of
statements the actuary may have made on the same subject. If the actuary employs different
methods or assumptions in the current situation, the actuary should be prepared to explain why.
3.11 Discovery of Error—If, after giving expert testimony, the actuary discovers that a material error
was made, the actuary should make appropriate disclosure of the error to the principal or the
principal’s representative as soon as practicable.
3.12 Limitation of Expert Testimony—The actuary’s expert testimony should be presented in a manner
appropriate to the nature of the forum. If any constraints are imposed or expected to be imposed
on the actuary’s ability to comply with the Code of Professional Conduct or other professional
standards, the actuary should consider whether it is appropriate to serve or continue to serve as an
expert.
4.1 Written Reports—Expert testimony delivered by means of a written report should describe the
scope of the assignment, including any limitations or constraints. The written report should include
descriptions and sources of the data, actuarial methods, and actuarial assumptions used in the
analysis in a manner appropriate to the intended audience.
4
4.2 Oral Testimony—In delivering expert testimony orally, the actuary should express opinions in a
manner appropriate to the intended audience. In addition, the actuary should, to the extent
practicable, be prepared to document oral testimony.
4.3 Prescribed Statement of Actuarial Opinion—The actuary providing expert testimony should satisfy
the Qualification Standards for Prescribed Statements of Actuarial Opinion promulgated by
the American Academy of Actuaries in each practice area that is a primary subject of the actuary’s
testimony.
4.4 Deviation from Standard—An actuary must be prepared to justify the use of any procedures that
depart materially from those set forth in this standard and must include, in any actuarial
communication disclosing the results of the procedures, an appropriate statement with respect to the
nature, rationale, and effect of such use, subject to the constraints imposed by the nature of the
forum.
5
Appendix 1
Note: The following appendix is provided for informational purposes, but is not part of the standard of
practice.
Background
The Actuarial Standards Board first adopted Actuarial Standard of Practice No. 17, Expert Testimony
by Actuaries, in January of 1991. The standard addressed a type of practice, expert testimony, which
had not been explicitly addressed in previously adopted standards. The standard also crossed traditional
practice areas to apply whenever actuaries offered expert testimony concerning pensions or insurance.
As such, the standard contained a significant amount of educational material.
Since the standard was first adopted, actuaries have become increasingly active as expert witnesses,
appearing in a greater variety of venues and addressing an expanding range of topics. As actuaries have
become more knowledgeable about providing expert testimony, the need for educational material has
lessened to some degree. The Actuarial Standards Board has also adopted a new format for standards,
and this standard reflects that format.
Current Practices
Actuaries may be called upon to give expert testimony concerning a broad range of issues, such as the
following:
a. actuarial present values of retirement or other benefits;
b. actuarial values incident to a divorce;
c. adequacy or appropriateness of reserves, premium rates, pricing or underwriting

procedures, or provision for administrative costs;
d. cost impact of claims-made or claims-paid financing;
e. cost impact of risk classification systems, tort liability decisions, or

legislative/regulatory proposals;
6
f. lost earnings of a decedent or injured person and the actuarial present value of such lost
earnings;
g. malpractice alleged of an actuary;
h. relationships between risk and return on investments;
i. value of an insurance company or other entity; and
j. withdrawal liability assessments under multiemployer benefit plans.
Actuarial expert testimony may be given in many forums including, but not limited to, the following:
a. administrative hearings or other executive branch proceedings;
b. arbitration or other extra-judicial proceedings;
c. committee hearings or other legislative branch proceedings; and
d. courts of law or other judicial branch proceedings, including depositions, declarations, and
affidavits.
Actuarial testimony may be oral or written, direct or responsive, formal or informal. Actuaries may also
be called upon to provide expert analysis or other litigation support in settings where they are not
expected to testify.
Although actuaries sometimes provide expert testimony and support directly to a legislator, regulator,
arbitrator, or judge, more typically the actuary’s principal is a party to the proceedings at which
testimony is to be given. Parties to such proceedings may be the shareholders of a corporation, the
policyholders of an insurer, the electorate of a political jurisdiction, the employers who maintain a state
fund, or another individual or group of persons. In most instances, the principal will have retained an
attorney or other representative. Often, it is the attorney or representative who retains the actuary on the
principal’s behalf.
Actuaries may find themselves testifying in opposition to the opinions of other actuaries or other experts
in another field (for example, accountants, statisticians, or economists) who are on opposite sides of a
proceeding. At times, the opinions, assumptions, and/or conclusions expressed in expert testimony by
others will be in conflict with those of the actuary. These situations may generate doubt in the minds of
the audience as to which expert to believe. In such a situation, if asked to comment on the differences in
testimony, actuaries attempt to demonstrate factually that the other expert’s opinions, assumptions,
and/or conclusions are based on flawed data or methods. Alternatively, depending on the
7
circumstances, the actuary may seek to demonstrate that differences between the actuary’s conclusions
and those of the other expert are not material.
One challenge faced by actuaries testifying as experts is that often the audience lacks the necessary
background to readily understand an actuary’s testimony. Individuals who are unfamiliar with actuarial
concepts may be unable to understand communications that presuppose basic actuarial knowledge,
particularly if such communications are presented using terms or acronyms with which they are
unfamiliar. When an actuary testifies, it is generally important to explain technical terms and concepts so
that, to the extent practicable, the audience can understand them, particularly if the audience is not
sufficiently familiar with actuarial methods and assumptions to distinguish testimony that is precisely
accurate but ultimately misleading. It is usually beneficial for the actuary to provide expert testimony as
clearly as practicable.
Actuarial projections have a degree of uncertainty because they are based on the probability of
occurrence of future contingent events. An important challenge for the testifying actuary, and arguably a
most difficult one, is to convey the inherent uncertainty of actuarial estimates. Because a projection
necessarily has a degree of uncertainty associated with it, actuaries may be called upon to explain the
concept of uncertainty and to convey to the audience whether the actuary’s own expectations for future
results are within a range believed to be acceptable to most actuaries. Moreover, when providing expert
testimony, actuaries generally defend against the characterization of actuarial science or specific actuarial
opinions as “guesses,” “guesstimates,” or the like. Although there are uncertainties inherent in future
projections and stochastic processes, that uncertainty does not make an actuarially sound analysis the
equivalent of a “guess.”
Attorneys may seek on cross-examination to attack actuarial opinions and judgments incrementally, a
tactic that may be harmful to the credibility of a testifying actuary who does not respond appropriately to
it. For example, if an actuary has testified to an opinion that a reasonable range for a specific liability is
between $5 and $6 million, when asked on cross-examination whether $4,999,999 would be a
reasonable liability, an appropriate response would be along the lines of, “that number would fall outside
of my range of reasonable estimates and would therefore be categorized as not being reasonable.” A
response such as “that liability is only one dollar below my range of reasonable estimates and, therefore,
could be reasonable,” is likely to generate further incremental attacks (for example, “what about
$4,999,998?”) that weaken the credibility of the actuary’s testimony.
Disclosure of pertinent information (including, but not limited to, the name of the principal, the actuarial
methods used, the assumptions selected and support therefor, and any potential conflicts of interest)
strengthens the credibility of the actuary’s testimony. Such disclosure can be particularly important when
testimony is subsequently discovered to be in error. The actuary testifying as an expert witness may not
have access to all parties who have relied upon expert testimony subsequently discovered to be in error,
but an actuary who discovers a material error in testimony is usually prudent to correct the error,
particularly if the actuary is recalled to the stand, and to document in writing the corrective steps taken.
8
Ultimately, the actuary seeks to provide the forum with a valid actuarial opinion based upon truthful
expression of the underlying facts. This serves not only the actuary’s principal, but others who may be
directly or indirectly affected by the proceedings. These others may include the principal’s opponent in a
lawsuit, the current and potential policyholders in a rate hearing, the plan participants and their
dependents in an employee benefit plan action, the creditors in bankruptcy court, or others. Actuaries
benefit the public when they apply their professional skills in a manner that promotes the general welfare,
and they enhance relations with their professional peers when they represent their work fairly and give
credit where appropriate.
9
Appendix 2
Comments on the 2001 Exposure Draft and Task Force Responses
The exposure draft of this actuarial standard of practice (ASOP), titled Expert Testimony by
Actuaries, was issued in March 2001, with a comment deadline of August 15, 2001. Eighteen
comment letters were received. The Expert Witness Task Force, with the help of the General
Committee, carefully considered all comments received. Summarized below are the significant issues
and questions contained in the comment letters and the task force’s responses.
GENERAL COMMENTS
Comment Some commentators suggested that the standard should more explicitly address the actuary’s duty to
the public and the actuarial profession by emphasizing objectivity and explicitly requiring the actuary
to consider all material factors.
Response The task force believes that the standard appropriately addresses the commentators’ concerns and
made no change.
Comment One commentator suggested establishing a hierarchy of actuarial standards of practice to address
potential conflicts between standards.
Response The task force believes that the actuarial standards of practice appropriately address potential conflicts
and, in any event, that the establishment of such a hierarchy would be beyond the scope of this
standard.
Comment Several commentators suggested editorial changes in various sections of the standard.
Response The task force implemented such suggestions if they enhanced clarity and did not alter the intent of
the section.
SECTION 1. PURPOSE, SCOPE, CROSS-REFERENCES, AND EFFECTIVE DATE
Section, 1.1, Purpose
Comment One commentator suggested changing “the actuary” to “actuaries” in this section.
Response The task force adopted the commentator’s suggestion.

Section 1.2, Scope
Comment Some commentators expressed support for the scope of the proposed standard. One commentator
suggested editorial changes to clarify this section. Another commentator suggested clarifying how an
actuary might challenge existing precedent, law, or regulation.
Response The task force adopted the commentators’ proposed changes as appropriate.
Comment One commentator stated that an actuary who challenges existing precedent, law or regulation should
note that fact as part of the testimony.
Response The task force believes that section 3.2 adequately addresses this point.
10
Comment One commentator suggested adding a definition of “declaration.”
Response The task force believes that this term is adequately defined in common legal usage and that, therefore,
no definition is needed.
Comment One commentator suggested restoring the definition of “actuarial literature.”
Response The term “actuarial literature” is not used in the standard and it is not the practice of the ASB to define
terms that do not appear in a standard. The task force made no change.
Section 2.3, Actuarial Opinion
Comment One commentator suggested revising the definition of “actuarial opinion” to be “an opinion drawn by
an actuary from actuarial knowledge or from the application of one or more actuarial methods and
actuarial assumptions that the actuary endorses to a body of data.”

Section 2.7, Principal
Comment One commentator suggested changing this definition to provide a broader description of client
relationships and the actuary’s duty to other participants in litigation.
Response The definition is consistent with the Code of Professional Conduct and the task force believes that
section 3.5 of the standard adequately addresses the actuary’s responsibilities to the various
participants in litigation. No changes were made in the definition.
Section 3.1, Review and Compliance
Comment One commentator thought the reference to the Code of Professional Conduct should have spoken to
the Codes of the five U.S.-based organizations representing actuaries.
Response The task force disagreed, noting that all of the U.S.-based organizations have adopted the same Code
of Professional Conduct.
Section 3.3, Conflict of Interest
Comment One commentator suggested that Precept 7 of the Code of Professional Conduct be reprinted in this
section.

Section 3.4, Advocacy
Comment One commentator suggested revising this section to be more specific in addressing particular
circumstances.
Response Although the task force did not agree that particular circumstances needed to be addressed more
specifically, the task force did revise section 3.4 to emphasize the actuary’s responsibilities under the
Code of Professional Conduct
Section 3.5, Identity of Principal
Comment One commentator suggested clarifying revisions to this section.
Response The task force adopted the commentator’s suggestion.
11
Section 3.6, Prescribed or Alternative Methods and Assumptions
Comment Two commentators observed that this section was unclear.
Response The task force disagreed, finding the guidance in this section clear and appropriate.
Comment One commentator suggested that this section might be interpreted to require the actuary to disclose an
excessively broad range of results.

Comment One commentator suggested that this section be revised to direct the actuary to explain why the
opinion lies within the reasonable range of results rather than requiring the actuary to identify
particular results that might differ.
Response The task force believes that the guidance in the standard is appropriate and made no change.
Comment One commentator suggested that this section might be inconsistent with section 3.9, Cross-
Examination.

Section 3.7, Hypothetical Questions
Comment One commentator suggested adding guidance on how the actuary should respond if required to
answer a hypothetical question.

Section 3.9, Cross-Examination
Comment Some commentators believed that this section gave the actuary too much leeway to withhold
information inimical to the principal.
Response The task force disagreed, concluding that the guidance offered in this section is appropriate when
considered in conjunction with section 3.4, Advocacy.
Comment One commentator suggested deleting the last sentence of this section as unnecessary.
Response The task force agreed that this sentence was redundant with section 3.10 and deleted it.
Section 3.10, Consistency with Prior Statements
Comment One commentator believed that the guidance in this section was generic and should be moved to the
appendix.
Response The task force believed the guidance was appropriately placed within the standard and made no
change.
Section 3.11, Discovery of Error
Comment Some commentators suggested that the actuary’s responsibility to disclose error should extend
beyond disclosure to the actuary’s principal.
Response The task force disagreed, concluding that the scope of the actuary’s responsibility is appropriately
stated and noting that the Code of Professional Conduct and other Actuarial Standards of Practice
also provide guidance on this issue.
12
Section 3.12, Limitation of Expert Testimony (previously titled, “Nature of the Forum”)
Comment One commentator expressed discomfort with the actuary’s merely reviewing and explaining the
standard with the principal. Another commentator offered clarifying language which focused on the
actuary’s presentation within a forum and the appropriate actions to be taken when constraints occur.
Response The task force adopted part of the second commentator’s suggested language and strengthened the
language dealing with constraints, thereby addressing the concerns of the first commentator as well.
Section 4.2, Oral Testimony (previously titled “Oral Reports and Testimony”)
Comment One commentator suggested that an actuary be required to provide a written actuarial report or
memorandum to support all oral testimony.

Section 4.3, Prescribed Statement of Actuarial Opinion
Comment Some commentators objected to characterizing expert testimony as a “prescribed statement of actuarial
opinion” for purposes of the Qualification Standards for Prescribed Statements of Actuarial Opinion.
Other commentators agreed with the characterization, while still others expressed support for the more
limited approach described in the transmittal memorandum accompanying the exposure draft.
Response After carefully considering all comments received, the task force decided to adopt the more limited
language described in the transmittal memorandum.
13
Actuarial Standard
of Practice
No. 18
Long-Term Care Insurance
Revised Edition
Developed by the
Long-Term Care Task Force of the
Adopted by the
January 1999
(Doc. No. 064)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Activities of Daily Living 1
2.2 Adult Day Care 1
2.3 Assisted Living Facility 1
2.4 Cognitive Impairment 2
2.5 Continuing Care Retirement Community 2
2.6 Custodial Care 2
2.7 Functional Impairment 2
2.8 Guaranteed Renewable Contract 2
2.9 Home Care 2
2.10 Hospice Care 2
2.11 Instrumental Activities of Daily Living 2
2.12 Insurer 2
2.13 Intermediate Nursing Care 2
2.14 Long-Term Care 3
2.15 Long-Term Care Insurance Plan 3
2.16 Nonforfeiture Benefits 3
2.17 Nursing Home 3
2.18 Respite Care 3
2.19 Skilled Nursing Care 3

3.1 Coverage and Plan Features 3
3.2 Assumption Setting 4
3.2.1 Morbidity Assumptions 4
3.2.2 Mortality Assumptions 5
3.2.3 Voluntary Termination (Lapse) Assumptions 5
3.2.4 Expense Assumptions 5
3.2.5 Tax Assumptions 6
3.2.6 Investment Return Assumptions 6
3.2.7 Mix-of-Business Assumptions 6
3.2.8 Change-over-Time Assumptions 6
3.3 Premium Rate Recommendations 6
3.4 Reserve Determination 6
3.5 Sensitivity Testing 7
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3.7 Experience Monitoring 7

4.1 Documentation 7
4.2 Disclosure 8
APPENDIXES

Background 9
Reasons for This Actuarial Standard of Practice 9
An Evolving Type of Coverage 11
Existing Practice 12
Appendix 2Comments on the Exposure Draft and Task Force Responses 14
iii
February 1999

Actuarial Standards Board and Other Persons Interested in Long-Term Care
Insurance
SUBJ: Revised Actuarial Standard of Practice No. 18
This booklet contains the revised edition of Actuarial Standard of Practice (ASOP) No. 18, Long-
Term Care Insurance.
Revision to ASOP No. 18
In 1991, ASOP No. 18, Long-Term Care Insurance, was adopted by the Actuarial Standards
Board. This text is a revision to that standard, developed by the Long-Term Care Task Force of
the ASB. The reasons for producing a revised standard are as follows:
1. There have been a number of new developments in the field of long-term care (LTC)
insurance, including new financing mechanisms, expansion of covered services in LTC
insurance policies, the emergence of additional experience information, and changes in
the regulatory environment. It was felt that these developments warranted a revised
standard.
2. It seemed appropriate to modify the content of the standard. As originally developed,

ASOP No. 18 had been somewhat educational in nature, because it addressed a new
topic. While LTC insurance is still a relatively young industry, there has been enough
progress in this field so that the standard no longer needs to have the same educational
focus.
3. The ASB has revised the format for all actuarial standards of practice. This revised
edition is in the current format, as adopted by the ASB in May 1996 for all future
actuarial standards of practice.
4. Finally, there was some overlap between ASOP No. 18 and other ASOPs. This revised
edition eliminates some of that duplication.
Exposure Draft
The proposed revision to ASOP No. 18 was exposed for review in May of 1998, with a comment
deadline of September 1, 1998. Fourteen comment letters were received. The more significant or
frequent comments were as follows:
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1. Should the actuary use separate claim incidence rates and claim termination rates for
nursing home and home care benefits? Several thoughts were expressed why the actuary
needn’t or couldn’t always do so.
2. Several subjects were suggested for inclusion within the standard of practice, such as
recent regulatory developments, loss ratios, data sources, and tax-qualified policies.
3. It was suggested that the subject of asset-liability management be highlighted instead of

cash flow testing.
For a more detailed discussion of the points that were raised in the comment letters—including
the items listed above—and how the task force responded to the commentators, please see
appendix 2.
The Long-Term Care Task Force of the ASB appreciates all who submitted comment letters and
comment postcards. The input was helpful in developing a final standard.
The ASB voted in January 1999 to adopt the revised edition of ASOP No. 18.
Long-Term Care Task Force of the ASB
Bartley L. Munson, Chairperson

Loida Rodis Abraham Dennis M. O’Brien
Donald M. Charsky Andrew M. Perkins
Gary L. Corliss Robert K. W. Yee
Jeffrey S. Drake
David G. Hartman, Chairperson

Frank S. Irish James R. Swenson
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LONG-TERM CARE INSURANCE
Revised Edition
1.1 Purpose—This standard sets forth recommended practices for actuaries involved in
designing, pricing, funding, or in evaluating liabilities for insurance contracts or similar
arrangements providing long-term care (LTC) benefits.
1.2 Scope—This standard applies to actuaries when performing professional services for
individual and group LTC insurance plans, LTC insurance benefits issued as riders or
included within other insurance and annuity products, and self-insured plans providing
LTC benefits. It is not intended to apply when LTC insurance benefits may be an
immaterial feature of a contract providing other benefits.
If a conflict exists between this standard and applicable law, compliance with applicable
law is not considered to be a deviation from this standard.
1.3 Effective Date—This revised standard is effective for work performed on or after June 1,
1999.
2.1 Activities of Daily Living (ADLs)—Basic functions used as measurement standards to

determine levels of personal functioning capacity. Typical ADLs include bathing, conti-
nence, dressing, eating, toileting, and transferring (between bed and chair or wheelchair).
2.2 Adult Day Care—A program of social and health-related services designed to meet the
needs of functionally or cognitively impaired adults, provided in a group setting other
than the adult client’s home.
2.3 Assisted Living Facility—A facility that provides residents some assistance with ADLs.
Residents have apartments, rooms, or shared dwellings, and often share community living
and dining areas with other residents. Usually meals, utilities, housekeeping, laundry,
1
ambulation assistance, and personal care supervision is provided. Staff members may
supervise the self-administration of medication.
2.4 Cognitive Impairment—A deficiency in a person’s short- or long-term memory;

orientation as to person, place, and time; deductive or abstract reasoning; or judgment as
it relates to safety awareness.
2.5 Continuing Care Retirement Community (CCRC)—A residential facility for retired
people that provides stated housekeeping, social, and health care services in return for
some combination of an advance fee, periodic fees, and additional fees.
2.6 Custodial Care—Care to help a person perform ADLs and other routine activities; also
known as personal care. It is usually provided by people without professional medical
skills. It is less intensive or complicated than skilled or intermediate nursing care, and can
be provided in many settings, including nursing homes, assisted living facilities, adult
day care centers, or at home.
2.7 Functional Impairment—The inability to perform one or more ADLs.
2.8 Guaranteed Renewable Contract —A contract which provides that the insured has the
right to continue the insurance in force for a specified period by the timely payment of
premiums, and that the insurer may not unilaterally change the contract during that
specified period, except that premium rates may be revised by the insurer on a class basis.
2.9 Home Care—Care received at the patient’s home, such as part-time skilled nursing care,
custodial care, speech therapy, physical or occupational therapy, part-time services of
home health aides, or help from homemakers or chore workers.
2.10 Hospice Care—A program that provides health care to a terminally ill person and
counseling for that person and his or her family. Hospice care can be offered in a hospice
setting established for this single purpose, a nursing home, or in the person’s home,
where nurses and social workers can visit the person regularly.
2.11 Instrumental Activities of Daily Living (IADLs)—Functions, more complex than ADLs,
that are used as measurement standards of functioning capacity; examples include
preparing meals, managing medications, housekeeping, telephoning, shopping, and
managing finances.
2.12 Insurer—An entity that accepts the risk of financial losses or, for a specified time period,
guarantees stated benefits upon the occurrence of specific contingent events, in exchange
for a monetary consideration.
2.13 Intermediate Nursing Care—Care needed for persons with stable conditions that require
daily, but not 24-hour, nursing supervision. Intermediate nursing care is less specialized
than skilled nursing care and often involves more custodial care.
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2.14 Long-Term Care (LTC)—A wide range of health and social services, which may include
adult day care, custodial care, home care, hospice care, intermediate nursing care, respite
care, and skilled nursing care, but generally not care in a hospital.
2.15 Long-Term Care Insurance Plan—A policy, contract, or arrangement providing LTC
benefits, either on a stand-alone basis or as part of a plan that provides other benefits as
well (except where the LTC benefits are an immaterial feature). The plan will usually
describe requirements for benefit eligibility, covered services, benefit amount, benefit
payment duration, maximum benefit amount, and other coverage features.
2.16 Nonforfeiture Benefits—Benefits that are available if premiums are discontinued.
2.17 Nursing Home—A facility that provides skilled, intermediate, or custodial care.
2.18 Respite Care—Temporary care for frail or impaired persons that allows volunteers to
have a rest from care giving.
2.19 Skilled Nursing Care—Care provided by skilled medical personnel, such as registered
nurses or professional therapists, but generally not care in a hospital.
3.1 Coverage and Plan Features—When providing professional services with respect to an
LTC insurance plan, the actuary should be aware of and take into consideration all
pertinent provisions found in the LTC insurance plan, including benefit eligibility,
covered services, benefit amounts, benefit payment duration, and other coverage features
that may significantly impact cost. (Such provisions are discussed in more detail in
appendix 1 under Current Practices.) These provisions apply primarily to stand-alone
individual, association-sponsored group, or employer-sponsored group LTC insurance
plans.
However, there are other insured and self-insured plans that include material LTC plan
features and that may need special consideration. Such plans include the following:
a. Acceleration of Benefits under Life Insurance Contracts—Long-term care

insurance benefits may be provided by the acceleration of benefits otherwise
payable upon death under a life insurance product. The actuary should ensure that
assumptions concerning the amount and timing of payments are determined
consistently for the contingencies of both mortality and LTC morbidity.
b. Other Insurance Products—Insurance products that primarily provide benefits

other than long-term care may be designed to provide considerable LTC benefits
also. The actuary should consider that the methods and assumptions appropriate
for such products might be different from those used for stand-alone LTC
insurance plans.
3
c. Other Programs—Long-term care benefits can be provided by various
administrative and risk-assuming programs, such as health maintenance
organizations (HMOs), preferred provider organizations (PPOs), and exclusive
provider organizations (EPOs). The actuary should consider that the LTC
methods and assumptions appropriate for such programs might be different from
those used for other LTC insurance plans.
d. Retirement Communities—Long-term care services may be provided for insureds

living within retirement communities. How the insured pays for such services and
what those services are can vary considerably among communities. The actuary
should consider any unique implications of the community’s administration or
service delivery process for persons covered by such programs.
3.2 Assumption Setting—In order to estimate costs or evaluate liabilities, the actuary utilizes
a number of assumptions. Actuarial assumptions in combination should reflect the
actuary’s professional judgment of future events affecting the incidence and cost of LTC
benefits. In setting actuarial assumptions, the actuary should consider available
experience data and reasonably foreseeable future changes in experience over the term of
the benefit promises. Appropriate provisions for adverse deviation should be considered.
Sections 3.2.1–3.2.8 below discuss important considerations for the actuary in setting
actuarial assumptions for LTC insurance plans.
3.2.1 Morbidity Assumptions—The actuary should determine morbidity assumptions

consistent with all significant plan features, including the types of LTC insurance
benefits being provided, the types of optional benefits being provided, the plan’s
benefit eligibility criteria, the claim adjudication process, the benefit amounts and
benefit limits, and exclusions.
In order to estimate total claim costs, the actuary, where appropriate, should
establish claim incidence rates, claim termination rates, and costs of eligible
benefits. Also where appropriate, these three components of the total claim costs
should be established separately for at least nursing home, assisted living facility,
and home care benefits. When setting assumptions for total claim costs, the
actuary should consider at least the following:
a. the fact that the claim cost elements will vary by nursing home, assisted
living facility, and home care;
b. the possible substitution effect among the various benefits in the instances
where more than one type is available;
c. the effect of induced demand for LTC services due to the presence of LTC
insurance;
4
d. the availability of benefits from other public and private programs such as
Medicare, Medicaid, and Medicare supplement policies;
e. the availability of LTC services;
f. the effect of selection and classification of applicants;
g. the financial benefit to the claimant of remaining eligible for benefits; and
h. the effect of mortality on termination rates.
Specific data from the entity to which the actuary’s calculations apply generally
are preferable to data from other sources. Where such data are not adequately
credible, industry data should be considered next in setting assumptions. As a last
but sometimes necessary source, general population noninsured data may be
utilized. When assumptions are being set, evaluated, or updated, the actuary
should carefully evaluate data provided from any source, and consider
modifications as appropriate.
Because selection and classification affect the incidence and termination rates of
claim, the actuary should consider the underwriting and claim processes being
utilized. These include, for example, the intensity of application questions, the
marketing methods, the number and types of underwriting requirements, the
number and definitions of underwriting classes, the effect of regulations on the
underwriting and claim process, and the experience of the underwriting and claim
personnel.
3.2.2 Mortality Assumptions—The actuary should consider the effects of both selection
and classification of applicants on expected mortality experience and use a
mortality table that appropriately reflects the expected mortality of the insureds.
3.2.3 Voluntary Termination (Lapse) Assumptions—Voluntary termination (lapse) as-

sumptions are critical to the estimation of costs and to the evaluation of liabilities,
because for most plans, higher lapse rates will produce lower expected costs. The
actuary should select appropriate lapse assumptions, taking into consideration the
method of marketing, policyholders expected to be covered, product and premium
competitiveness, premium mode, premium payment method, nonforfeiture
benefit, and the service of the entity providing the benefits. At the time any rate
change is determined, the effect on voluntary lapses should be considered.
3.2.4 Expense Assumptions—Expense assumptions should be consistent with the

entity’s business plan and method of LTC insurance plan delivery. The actuary
should consider the cost of product development, marketing, producer
compensation (heaped versus level commissions, as well as regulatory controls
over commissions), regulatory compliance, underwriting, issue, policyholder
service, and claim administration.
5
3.2.5 Tax Assumptions—Tax assumptions should reflect the tax reserve basis of the
plan and the premium, income, or any other applicable tax rates of the entity.
3.2.6 Investment Return Assumptions—The actuary should recognize the time value of
money, especially for level-premium issue age products. The expected investment
return used should be consistent with the initial and reinvestment returns on assets
supporting the LTC insurance benefit promise. For loss ratio and reserve
calculations, the actuary should be familiar with applicable regulatory
considerations.
3.2.7 Mix-of-Business Assumptions—To the extent total financial results could be

affected materially by the mix of business, assumptions should reflect the
characteristics of the anticipated distribution of business. Some characteristics to
consider are age, gender, marital status, underwriting classes, distribution system,
and plan options (such as benefit period, elimination period, inflation option, daily
benefit, and rider options).
3.2.8 Change-over-Time Assumptions—An LTC insurance plan is expected to remain

in force for a very lengthy period of time. Accordingly, when such a plan is
developed, the actuary should identify the assumptions for which experience is
likely to change materially over the term of the plan and consider reflecting such
expected changes when setting the assumptions. At the time of any subsequent
review or revision of assumptions, the actuary should, in the same fashion,
consider likely future changes in experience when setting assumptions for the
remaining term of the LTC insurance plan.
3.3 Premium Rate Recommendations—Any premium rates recommended by the actuary

should conform with statutory requirements, including those for loss ratios. Such
recommended rates should reflect any premium guarantees of the contract. In developing
such recommendations, the actuary should not use assumptions that are unreasonably
optimistic. If a premium rate schedule is described by the actuary as applicable for the
lifetime of the insured, the actuary should use assumptions that are consistent with that
description and that have a reasonable probability of being achieved. In particular, the
actuary should not rely on anticipated future premium rate increases to justify the
selection of unreasonably optimistic assumptions when recommending premium rates.
On the other hand, the actuary should not use assumptions that are unreasonably
pessimistic. It may be appropriate, however, to include provision for adverse deviation in
assumptions.
When an actuary makes recommendations regarding premium rates, he or she should be

aware of any material variations in experience that would make changes in premium rates
for in-force business advisable, and should recommend such changes in a timely fashion.
3.4 Reserve Determination—Reserves typically required by and appropriate for LTC

insurance plans are premium reserves, contract reserves, and claim reserves for both
6
reported claims and incurred but not reported claims. Reserves may be calculated using
the same methods as are utilized for other health insurance coverages. In calculating
reserves, the actuary should use methods and assumptions in compliance with all
applicable regulatory requirements and accounting standards, and should take into
account the benefit features of the particular LTC insurance plan in question, including
any optional benefits.
In setting statutory reserves, the actuary should be familiar with applicable reserve
standards, such as the Long-Term Care Insurance Model Regulation and the Minimum
Reserve Standards for Individual and Group Health Insurance Contracts of the National
Association of Insurance Commissioners (NAIC) and the regulations of any states that
govern the specific plan for which the reserves are to be calculated.
3.5 Sensitivity Testing—The actuary should perform sensitivity testing of reasonable

variations in assumptions prior to finalization of assumptions. Where the data used for
establishing actuarial assumptions have limited statistical credibility, the range of
sensitivity testing should be expanded.
3.6 Cash Flow Testing—Because of the long-term nature of the LTC benefits, future liability
cash flows may be different from future asset cash flows. Therefore, the actuary should
consider cash flow testing as a potentially important part of any LTC insurance plan’s
financial analysis. This is especially true if LTC insurance is the sponsoring entity’s only
product or a major portion of the entity’s business.
3.7 Experience Monitoring—The actuary should inform the sponsoring entity that experience
data should be collected in a manner that permits an actuary to compare prior
assumptions with emerging experience and assess the implications of any significant
differences.
To the extent that industry or noninsured data were used in determining assumptions for
estimating benefit costs or establishing reserves, an actuary reviewing LTC insurance
plan experience should be aware of significant changes in such data. To the extent such
changes are material, the actuary should apply such new data in a timely and appropriate
fashion when reviewing the appropriateness of premium rates and reserves.
4.1 Documentation—Because an LTC insurance plan is expected to remain in force over a

very lengthy period of time, all assumptions are subject to review and update on a regular
basis. Therefore, the actuary should document the assumptions, processes used, and the
general sources of the data in sufficient detail such that another actuary could use the
documentation where appropriate.
The actuary should document in detail the assumptions used and the general sources of
the data used for deriving such assumptions. For further guidance, the actuary is referred
7
to Actuarial Standard of Practice (ASOP) No. 23, Data Quality; ASOP No. 25,
Credibility Procedures Applicable to Accident and Health, Group Term Life, and
Property/Casualty Coverages; and ASOP No. 31, Documentation in Health Benefit Plan
Ratemaking.
4.2 Disclosure—The actuary should disclose to the client or employer the sensitivity of the
actuarial work to reasonable variations in assumptions. Documentation should be
available for disclosure to the actuary’s client or employer, and, where appropriate and
proper, it should be made available to other persons when the client or employer so
requests.
8
Appendix 1
practice.
Background
Reasons for This Actuarial Standard of Practice —The utilization of long-term care (LTC) ser-
vices has been increasing rapidly, and that growth is expected to continue in the decades ahead
as the number of senior citizens increases dramatically. Paying for these services is expected to
be a challenge for society for the foreseeable future. Many of the funding methods in use involve
long-term contractual commitments and estimation of expected costs many years in the future—
work that requires actuarial analysis and training.
However, this is still a relatively new field of actuarial work. The LTC insurance industry is a
young one, and estimating future results is a difficult process for which standards beyond those
already established for other products are appropriate. Some of the reasons that actuarial activity
in LTC insurance is such a challenge include the following:
1. A very limited amount of data is available, especially data on insured lives. While the
Society of Actuaries produced an LTC insurance experience study in 1995, based on
experience from 1984–1991, this was the first such study and it was, of necessity, some-
what limited in scope.
2. Long-term care insurance products have changed considerably in recent years, in terms of
the covered services, benefit design, and benefit eligibility criteria. As a result, there is no
experience for the newer policy provisions.
3. New financing approaches are periodically being introduced, such as the funding arrange-
ments for LTC services being provided by continuing care retirement communities and
accelerated-benefit riders on other insurance products. These approaches might have
quite different experience than traditional stand-alone LTC insurance policies.
4. Underwriting, marketing, distribution, and claim payment practices can be quite dis-
similar under different LTC insurance financing plans, producing diverse results. This
compounds the difficulty of developing homogeneous experience data from which to
estimate future activity.
5. There is a very real possibility that consumers behavior will change in the future in ways
that will affect LTC insurance costs. The following are examples of such possible
changes.
9
a. The use of LTC services may tend to increase when such services are provided in
an increasingly insured environment. Increased availability of private or public
LTC insurance could encourage much higher utilization of LTC services.
b. Construction of additional nursing home beds has been strictly controlled by

many states in order to limit the escalation of Medicaid expenses. If those
limitations were altered or entirely removed, nursing home utilization would be
likely to change.
c. Medical advances might reduce LTC insurance costs by preventing or curing

maladies requiring LTC services (e.g., a cure for Alzheimer’s disease). However,
medical advances could also increase the life expectancy of impaired persons and
enable some persons who would have died to survive in an impaired condition.
d. Current attitudes associated with nursing home care might change over time. For
example, if improved funding makes nursing homes more attractive places for
care, utilization is likely to increase.
e. The high divorce rate and other changes in the family structure in society may
reduce the number of family members available to care for the impaired,
increasing the need for paid LTC services.
f. Changes may occur in government payment for long-term care, which could
impact payment for LTC services under private insurance. Such governmental
changes could also affect LTC utilization patterns or the rules relating to taxes on
LTC insurance premiums and benefits.
g. New LTC services may be developed and the availability of existing services may
increase substantially. As new services become available, they can cause changes
in consumers’ use of previously existing care services, as well as changes in total
service utilization.
The belief is held by some, including some regulators, that standards or controls beyond those
for other coverages are needed to protect consumers in the LTC insurance field. This is partly
because most LTC users are senior citizens, who are perceived as having few financial options.
Further, many LTC insurance financing mechanisms involve financial commitments of very long
duration. Private LTC insurance is required to be guaranteed renewable for the life of the
insured. It is also a product characterized by an extremely high degree of advance funding, with
most of the claim dollars paid out long after the policy is put into effect.
For all of the reasons stated above, an actuarial standard of practice for LTC insurance is
appropriate.
10
Current Practices
An Evolving Type of Coverage —Long-term care insurance is still a developing practice, and
many diverse methods exist to measure the cost of a benefit design, devise a funding system, and
evaluate liabilities. A basic part of an actuary’s work in this field involves taking into considera-
tion the pertinent provisions in the LTC insurance plan, such as the following:
1. Benefit Eligibility (Definition of Insured Event)—In order to qualify for benefits, an

insured person may have to satisfy an elimination period, and must provide satisfactory
evidence of benefit eligibility. Long-term care insurance plans may define benefit
eligibility in several ways. The most common criteria for benefit eligibility are functional
or cognitive impairment (as defined in the LTC insurance plan), and sometimes medical
necessity. Benefit eligibility is also frequently dependent on the use of covered services
or services on a day for which the benefit is payable.
2. Covered Services—An LTC insurance plan may provide coverage for only a limited set
of LTC services or a very broad set. A particular plan might cover only nursing home
care, or only home care, or could cover a combination of both. Any number of additional
types of care, such as assisted living facility care, adult day care, and respite care, may
also be covered. When coverage is included for different types of services, the coverage
can either be integrated or non-integrated. One example of integrated benefits is a single
lifetime benefit maximum that may be utilized for any combination of nursing home care
or home care.
3. Benefit Amount—The amount payable for a given service, or for a given day of care,
may either be a fixed contractual amount, such as $100 per day of eligibility, or may be
related to the actual cost of services provided that day. In the latter case, the
reimbursement may be either the full cost of services or a percentage of the cost, and may
be capped at a particular daily maximum. If there is a daily maximum, it may vary
depending on the type of service. The daily benefit amount may be increased under an
inflation protection provision.
4. Benefit Payment Duration—There are different ways in which benefit length and
frequency may be structured for payment. Some examples are as follows:
a. Benefit Period of Consecutive Days—The maximum benefit period is defined as

a stated number of days or years, and benefits are payable during a continuous
period of time of that length, starting from the first day of eligibility. Under this
approach, days without covered services may not result in a benefit payment, but
do not extend the benefit period.
b. Benefit Days—The maximum benefit period is defined as a stated number of days

or years, and benefits are payable for days on which the insured person meets the
eligibility requirements, until the maximum number of days or benefits have been
paid. Under this approach, any day for which the insured is ineligible for benefits
11
does not count as part of the benefit period, and the benefit period is thereby
extended.
c. Maximum Benefit—The maximum benefit is defined in terms of a total dollar

amount, and benefits are payable until that amount has been paid. The total dollar
amount may be increased under an inflation protection provision.
5. Other Coverage Features That May Significantly Impact Cost—Some examples of

additional features that may be found in LTC insurance plans are the following:
a. an alternative plan of care provision, under which services not expressly covered
under the insurance contract may become covered, usually when viewed as an
appropriate substitute for a covered service;
b. a shortened benefit period provision, i.e., a type of nonforfeiture benefit under

which the insured has paid-up coverage with a benefit period whose length is
determined by the nonforfeiture benefit value that has accrued;
c. a restoration of benefits provision, under which an insured who has used a portion
of the maximum benefit can have the full benefit restored after a stated minimum
time period during which the insured person either did not use, or was ineligible
for, benefits; and
d. a provider discount benefit provision, under which an insured is entitled to pay a

provider of care a smaller charge than that published for services rendered.
Apart from the actual provisions in the LTC insurance plan, numerous forms of individual LTC
insurance are being offered, ranging from stand-alone nursing home or home care coverage to
combination or integrated products that cover a broad range of services in many locations. Long-
term care insurance plans are available on both tax-qualified and nontax-qualified bases. There
are also LTC insurance riders to life, disability, and annuity products that can enhance benefits,
accelerate benefits, waive surrender charges, guarantee purchase rights, or offer conversion
options.
The group market consists of both insured and self-insured plans. In either instance the employer
or other sponsor may fund none, a portion, or all of the required contribution. Group coverages
also can be extended to eligible groups such as association members, affinity groups, and congre-
gate community residents.
Existing Practice —Much of the current practice employed by actuaries in performing their work
with LTC insurance has been borrowed from the other individual and group insurance products.
ASOP No. 18 provides actuarial guidance specific to LTC insurance. Technically, the individual
and group methodologies employed in designing, pricing, funding, or in evaluating liabilities are
not unique to practice in this area.
12
What is unique to practice in this field is that the actuary has had to rely heavily on noninsured
data and emerging experience in performing his or her work. Given these limitations and relia-
bility concerns, the actuary performing LTC insurance work dedicates much effort to sensitivity
testing of assumptions.
The level funded structure of LTC insurance and the long potential time lags between receipt of
premiums and their disbursement as benefits also requires the actuary to be sensitive to both the
product’s cash flow requirements and the appropriate investment strategies, as well as to monitor
closely future trends in all actuarial assumptions.
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Appendix 2

and Task Force Responses
The proposed revision to Actuarial Standard of Practice (ASOP) No. 18 was exposed for review
in May 1998, with a comment deadline of September 1, 1998. Fourteen comment letters and
twenty-two comment postcards were received. The Long-Term Care Task Force of the ASB
questions contained in the comment letters, printed in roman type. The task force’s responses are
in boldface.
Comment Postcard
As stated above, twenty-two comment postcards were received. There were four choices for
responses given on the postcard, as follows: (1) I have no comments (eleven checked this box);
(2) I concur with the content of the proposed ASOP (ten checked this box); (3) Except as
indicated in the attached written comments, I concur with the content of the proposed ASOP (one
checked this box); and (4) The proposed ASOP should be changed significantly as indicated in
the attached written comments (none checked this box).
Many helpful comments were offered in the letters received, and all were read and discussed by
the task force. Most commentators seemed quite pleased with the draft. Those comments that, in
the task force’s opinion, provided suggestions that improved the proposed standard are reflected
in this revised edition as appropriate.
However, several commentators addressed issues that did not seem appropriate for an actuarial
standard of practice, but seemed better suited for a practice note. For example, there were
suggestions to include LTC tables of data from the Society of Actuaries, methods for pricing
contingent nonforfeiture benefits, procedures for including risk-based capital in pricing, and even
a request for a discussion of the risks and rewards of self-insurance. The task force believes it
would be best for these topics to be examined in more detail elsewhere, such as perhaps in
practice notes or some other such forum.
Transmittal Memorandum Questions
In the transmittal memorandum, the task force posed seven questions, which have been
condensed in this appendix. Commentators’ responses to the questions follow, as well as the task
force’s responses in bold.
14
Transmittal Memorandum Question #1—Does this exposure draft provide clear guidance on the
subject of assumption setting? Two commentators responded to this question, both of them
satisfied with the extent of guidance. One noted, “The intent of a standard of practice, in my
opinion, is to provide general guidance. It should not be a cookbook.” The task force did not
make changes with regard to the level of detail already present.
Transmittal Memorandum Question #2—Is it appropriate to require that claim incidence rates
and claim termination rates be established separately for at least nursing home and home care
benefits?
The issue of whether separate incidence and recovery rates should be required for nursing home
and home care benefits elicited many comments. One commentator said that it is appropriate that
rates be established separately. Others said that such separation should not be required in all
instances, pointing out that such is a moot point for a product with only one of the benefits. It
also is unnecessary for a product that triggers benefits only when the insured is judged disabled
and the product doesn’t require that the insured incur reimbursable costs. The task force made
several changes to section 3.2.1, Morbidity Assumptions, to reflect these helpful comments.
For example, in the first sentence of the second paragraph, the task force added the phrase,
costs of eligible benefits, as another element the actuary should consider in addition to claim
incidence rates and claim termination rates, where appropriate, in estimating total claim
costs. Further, as noted in section 3.2.1(a–b), these claim cost elements will vary by type of
benefit, and there is a possible substitution effect among the various benefits. Finally, the
list of items to consider when setting assumptions for total claim costs was also lengthened.
Transmittal Memorandum Question #3—Has this proposed revision adequately addressed the
mix-of-business assumptions? Several commentators thought that section 3.2.7, Mix-of-Business
Assumptions, could be clarified and strengthened by identifying several other dimensions to the
mix, such as marital status. The task force agreed and revised the section accordingly.
Transmittal Memorandum Question #4—Has section 3.2.8, Change-over-Time Assumptions,

clearly addressed the requirement that the actuary consider that actual experience may change
materially over time? Should the actuary be required to reflect such changes in assumptions
being set? Two commentators asked that this section remain as is and that they had no
recommended changes. Two other commentators spoke to the need to clarify the section. The
task force agreed with those supporting the wording in the first exposure draft. No changes
were made to this section.
Transmittal Memorandum Question #5—What is your response to the standard’s requirement

that the actuary not select unduly optimistic premium rate assumptions based on anticipated but
undisclosed rate increases that are inconsistent with the premium rate schedule? One
commentator observed the difficulty but importance of recommending premiums that are
adequate though not redundant and recommended that no change be made to section 3.3,
Premium Rate Recommendations. Another commentator asked that the task force address the
offsetting pressures that state regulators may place upon actuaries who are pricing, and another
asked that loss ratios be addressed here. Finally, one commentator stated that the last sentence of
the first paragraph, It is appropriate, however, to include provision for adverse deviation in any
15
recommendation, should be deleted. The task force continues to believe that the subjects of
loss ratios and state regulations should not be addressed in this ASOP. However, two
changes were made to the sentence regarding provision for adverse deviation, which now
reads, It may be appropriate, however, to include provision for adverse deviation in
assumptions.
Transmittal Memorandum Question #6—What areas of actuarial practice have been omitted that
should be addressed? One commentator suggested the standard observe that tax-qualified plans
have different reserve requirements than nontax-qualified plans. Another suggested the standard
address the NAIC’s new contingent nonforfeiture benefit, and another suggested the standard
address loss ratios. Recognizing that these subjects are matters of state regulatory
compliance, the task force does not believe they should be covered in an actuarial standard
of practice. Regarding the suggestion for tax-qualified plans, the task force revised section
3.2.5, Tax Assumptions, to read as follows: Tax assumptions should reflect the tax reserve
basis of the plan and the premium, income, or any other applicable tax rates of the entity.
Transmittal Memorandum Question #7—Are the coverage and plan features discussed in the
appendix (now appendix 1) clear, and do they include the significant aspects an actuary
encounters? One commentator suggested there were several omitted coverage and plan features:
(1) assisted living facilities; (2) tax-qualified status of benefits; (3) care management; and (4)
Medicare. The task force responded to these four items as follows. As for the first point, the
task force added a definition for assisted living facility (see section 2.3), and referenced it in
section 3.2.1 (see the second paragraph) and in appendix 1 (see item (2) under the section,
An Evolving Type of Coverage). As for the second point, the task force revised section
3.2.5, Tax Assumptions, and mentioned in appendix 1 (see the second to last paragraph
under the section, An Evolving Type of Coverage) that both tax-qualified and nontax-
qualified plans are sold. However, the task force doesn’t believe a standard should attempt
to fully address this constantly changing, unclear, and essentially nonactuarial matter.
As for care management, the task force added a new section 5(d) (see appendix 1, under the
section, An Evolving Type of Coverage), as an example of another coverage feature;
however, the task force believes that treatment of this subject feature and its many possible
elements is not warranted in an ASOP. Finally, the task force believes that the subject of
Medicare continues to be adequately treated as a consideration for actuaries in section
3.2.1(d).
Two commentators suggested adding a definition for assisted living facility. The task force
agreed; see section 2.3.
Section 2.10, Instrumental Activities of Daily Living (now section 2.11)—One commentator
suggested adding the phrase managing medications to the examples of IADLs. The phrase was
added.
16
Section 2.14, Long-Term Care Insurance Plan (now section 2.15)—One commentator observed
that this definition does not describe the entities that may write such a plan, asking if an HMO or
PPO might write such a plan. This section defines the LTC insurance plan; it does not
address which entities may write such plans. The task force intended not to limit such
entities. All are covered by the standard.
Section 3.2.1, Morbidity Assumptions—Several commentators addressed this section. One

suggested that “the underwriting process” be added to the list of considerations. The task force
believes that this process is covered in section (d) (now section (f)). Another suggested the
phrase elimination period be added as another item to consider. The task force believes this
issue is addressed in the first paragraph of the section by the phrase, the plan’s benefit
eligibility criteria.
One commentator questioned whether another ingredient of total claim costs isn’t the cost of
eligible benefits. Three others questioned the necessity of always establishing incidence and
termination rates separately for different benefits, especially for reserves. Another pointed out
the interrelationship among different benefits, with possible substitution effects among them. As
for the first point, the task force agreed and added cost of eligible benefits to the incidence
and termination rates. As for the latter, the task force agreed that these were good points,
and revised the second paragraph of the section to make it clear that the separation of
claim costs between benefits is not mandatory but should be done where appropriate. In
addition, two new items (see items (a) and (b)) were added to those considerations the
actuary should make when setting assumptions for total claim costs. The intention of the
task force when drafting this section was to permit the actuary flexibility when working
with different types of plans but also to provide the actuary with a list of considerations.
Section 3.2.3, Voluntary Termination (Lapse) Assumptions—Several commentators suggested

some additional considerations be added to those that affect lapse rates, including changes in
policy design that may increase rates. The task force agreed. Several other examples were
included, and a sentence was added to note that the effect on lapses from any rate change
should also be considered.
Section 3.2.7, Mix-of-Business Assumptions—In response to two comment letters, the task
force added marital status and distribution system to the list of characteristics to consider,
but does not believe a standard of practice should address such assumptions in further
detail. However, the task force agreed that this section needed to be clarified as to under
what circumstances the business mix is material and did so by adding the lead-in phrase,
To the extent total financial results could be affected materially by the mix of business.
Section 3.2.8, Change-over-Time Assumptions—One commentator questioned whether this

section is addressing the inclusion of a provision for adverse deviation. Another noted that the
use of the phrase actual experience in the second sentence is misleading. As for the first
question, the answer is no; this topic is covered in section 3.3, Premium Rate
17
Recommendations. As for the latter comment, the task force agreed and deleted the word
actual.
Section 3.3, Premium Rate Recommendations—One commentator suggested replacing the

phrase any recommendation at the end of the first paragraph with the word assumptions. The
task force made the change. Another commentator suggested addressing loss ratios in this
section. The task force believes it is not appropriate to address this topic in this ASOP. No
change was made. One commentator suggested eliminating the last sentence of the first
paragraph concerning the inclusion of a provision for adverse deviation. As noted above, the
task force did not delete the sentence but revised it to state that it may be appropriate to
include provision for adverse deviation. The subject of how to price LTC insurance is not
an easy activity to articulate in an actuarial standard of practice; indeed, it is not the
proper role of a standard to do so. The task force stands by the carefully chosen words of
this section.
Section 3.4, Reserve Determination—One commentator suggested expanding the second

paragraph to require the actuary to also be familiar with valuation methods and assumptions
discussed in the actuarial literature. Another commentator suggested adding references to ASOP
Nos. 7 and 14. As for the first comment, the task force disagrees, believing that an actuarial
standard of practice is not the place to reference sources in the actuarial profession or to
treat any references on this subject in detail. Similarly, references to other ASOPs should
be held to a minimum, since an actuary is bound by all standards.
Section 3.6, Cash Flow Testing—One commentator suggested this section emphasize asset-
liability management and not cash flow testing. The task force believes that cash flow testing
is appropriately a responsibility of the actuary, whereas asset-liability management often is
at least partly beyond the scope of the actuary’s responsibilities.
The task force appreciates the many comments received by those practicing in LTC insurance
and earnestly trying to help create the best standard of practice possible. The input was helpful in
developing this revised edition of ASOP No. 18.
18
Actuarial Standard
of Practice
No. 19
Appraisals of
Casualty, Health, and Life Insurance Businesses
Revised Edition
Developed by the
Adopted by the
June 2005
(Doc. No. 099)

ASOP No. 19⎯June 2005
TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Actuarial Appraisal 2
2.2 Actuarial Appraisal Value 2
2.3 Appraisal 2
2.4 Appraisal Date 2
2.5 Discount Rate 2
2.6 Distributable Earnings 2
2.7 Insurance Business 2
2.8 Intended Audience 2
2.9 Other User 3
2.10 Principal 3

3.1 Introduction 3
3.2 Projected Earnings 3
3.3 Setting Assumptions 3
3.4 Discount Rate 3
3.5 Applicability of Appraisal 4
3.6 Treatment of Assets 4
3.7 Modeling and Model Validation 4

4.1 Appraisal Report 5
4.2 Variation of Results 6
4.3 Appropriate Use of the Term “Actuarial Appraisal” 6
4.4 No Obligation to Communicate with Other Users 6
ii
APPENDIXES

Background 7
Current Practices 7
iii
June 2005
TO: Members of Actuarial Organizations Governed by the Standards of the Actuarial

Standards Board, and Other Persons Interested in Appraisals of Value of
Casualty, Health, and Life Insurance Businesses
This booklet contains the final version of the revision of ASOP No. 19, Appraisals of Casualty,
Health, and Life Insurance Businesses.
Background
The ASB originally adopted ASOP No. 19, then titled Actuarial Appraisals, in 1991. The former
ASOP was prepared by the Actuarial Appraisal Task Force of the Life Committee of the ASB.
The current task force has prepared this revision of ASOP No. 19 to be consistent with the
current ASOP format and to reflect current, generally accepted actuarial practices with respect to
actuarial appraisals and other appraisals.
Exposure Draft
The exposure draft of this ASOP was issued in June 2004, with a comment deadline of
November 30, 2004. Thirteen comment letters were received. The task force carefully considered
all comments received and made clarifying changes to the language in some sections. For a
summary of the substantive issues contained in the exposure draft comment letters and the task
force’s responses, please see appendix 2.
The most significant change from the exposure draft is that the task force revised section 4.3,
which deals with the use of the term “actuarial appraisal” in reference to an appraisal performed
by an actuary. The revised section 4.3 requires that an actuary not use the term “actuarial
appraisal” to refer to an appraisal that does not meet the definition of an actuarial appraisal
contained in the standard. Section 4.3 in the exposure draft required that a report on an appraisal
that did not meet the definition contain a statement that it was not an actuarial appraisal.
The task force thanks everyone who took the time to contribute comments on the exposure draft.
iv
Charles Carroll, Chairperson

Cynthia S. Miller John P. Schreiner
John O. Nigh Joy A. Schwartzman
Forrest A. Richen Barry L. Shemin


v
APPRAISALS OF CASUALTY, HEALTH, AND LIFE INSURANCE BUSINESSES

when performing professional services with respect to appraisals of casualty, health, and
life insurance businesses.
1.2 Scope—This standard applies to actuaries when performing professional services with
respect to appraisals of casualty, health, and life insurance businesses, as defined in
section 2.7.
The actuary should satisfy the requirements of applicable law (including regulation and
other binding authority) and this standard. However, to the extent applicable law conflicts
with this standard, compliance with such applicable law shall not be deemed a deviation
from this standard, provided the actuary discloses that the actuarial assignment was
1.4 Effective Date—This standard is effective for all appraisals of casualty, health, and life
insurance businesses initiated on or after November 1, 2005.
1
2.1 Actuarial Appraisal⎯An appraisal of an insurance business presenting a set of actuarial

appraisal values. A set of actuarial appraisal values is based on a range of discount rates
or a range of assumption sets but may in certain circumstances present a single unique
value for the business.
2.2 Actuarial Appraisal Value⎯The present value, calculated as of the appraisal date, of
projected distributable earnings of an insurance business where the distributable earnings
are based on a set of assumptions.
2.3 Appraisal⎯An assessment of the value of an insurance business including, but not
limited to, an actuarial appraisal.
2.4 Appraisal Date⎯The date as of which an appraisal value is assessed.
2.5 Discount Rate⎯The rate used to discount projected earnings to determine a present value
used in an appraisal.
2.6 Distributable Earnings⎯Amounts that an insurance business can distribute while

retaining the level of capital required to support its ongoing operations. Distributable
earnings consist of earnings of an insurance business computed using the applicable
regulatory accounting basis, adjusted to allow for the injection or release of regulatory
capital and surplus, in recognition of appropriate capital and surplus levels needed to
support ongoing operations. A regulatory accounting basis is the basis required by the
insurance supervisory authority in a particular jurisdiction to be used for financial
statement filings by insurance companies and similar entities in that jurisdiction.
2.7 Insurance Business⎯An enterprise involved in assuming insurance risk, such as one or
any combination of the following: an insurance company or health maintenance
organization; a collection of policies or contracts in-force that cover insurance risk; and a
distribution system that sells such policies or contracts.
2.8 Intended Audience⎯The persons to whom an appraisal report is directed and with whom
the actuary, after discussion with the principal, intends to communicate. Unless otherwise
specifically agreed, the principal is always a member of the intended audience. In
addition, other persons or organizations, such as investors or regulators, may be
designated by the principal, with consent of the actuary, as members of the intended
audience.
2
2.9 Other User⎯Any user of an appraisal report who is not a principal or member of the
intended audience.
2.10 Principal⎯The actuary’s client or employer.
3.1 Introduction⎯When preparing appraisals of life, health, or casualty insurance businesses,

the actuary may use a variety of methods. Often, an actuarial appraisal, as defined in
section 2.1, will be prepared. Other methods may also be used that may or may not
involve actuarial techniques.
3.2 Projected Earnings⎯When performing an appraisal that is based on discounting

projected earnings, the actuary should project earnings using a model of future (a) cash
flows related to such items as premiums, investments, benefit or claim payments, and
expenses; (b) accrual amounts related to these items; and (c) other items such as reserves
for future policy benefits. The actuary should project cash flows in accordance with
ASOP No. 7, Analysis of Life, Health, or Property/Casualty Insurer Cash Flows.
In the case of an actuarial appraisal, the actuary should project distributable earnings.
3.3 Setting Assumptions⎯When setting assumptions for use in an appraisal, the actuary
should consider the historical experience of the insurance business, adjusted to reflect
known material changes in the environment and identifiable trends to the extent such
information is available. When experience of the business is unavailable or insufficient to
provide a credible basis on which to develop assumptions, the actuary should consider
other information sources in setting assumptions. Other information sources may include
the pricing or reserving practices applicable to the insurance business and the available
experience of other insurance businesses with comparable policies or contracts, markets,
and operating environment.
In developing assumptions for which the actuary believes additional expertise is needed,
the actuary should obtain necessary input from persons possessing the relevant
knowledge or expertise, and should give due weight to their input.
When setting assumptions for use in an appraisal, the actuary should take reasonable
steps to ensure that each set of assumptions used is internally consistent.
3.4 Discount Rate⎯If the appraisal is based on the discounted value of projected earnings,
the actuary should consider displaying appraisal values using several discount rates.
3
3.5 Applicability of Appraisal⎯The intended audiences for appraisals may include parties
with different interests and perspectives (for example, management, investors, regulators,
or sellers). The actuary should consider the legitimate circumstances, needs, and
strategies of the intended audience, to the extent these are known by the actuary, in
setting assumptions, choosing discount rates, and choosing what sensitivity tests to
perform.
3.6 Treatment of Assets⎯If the appraisal involves assumptions about future returns on
assets, the actuary should consider the composition of the projected asset portfolio in
terms of type, quality, and maturity. The projected earnings rate of the assets should be
consistent with the valuation of assets (for example, book or market). The actuary should
consider the legitimate circumstances, needs, and strategies of the intended audience, to
the extent these are known by the actuary, in making an assumption as to investment
strategy.
3.7 Modeling and Model Validation⎯When the appraisal is based on projected earnings, the
actuary should calculate such earnings using a model of the insurance business
appropriate to the situation. The actuary should perform validation tests to determine
whether the model reasonably reproduces relevant items of the balance sheet and income
statements of the insurance business. When the appraisal is based on stochastic
projections, the actuary should consider whether the scenarios used are appropriate to the
situation.
3.8 Sensitivity Testing⎯When appropriate and practical in the actuary’s judgment, the
actuary should address the sensitivities of the appraisal value to changes in key
assumptions. The actuary should consider the intended purpose and use of the appraisal
and whether the results reflect a reasonable range of variation in the key assumptions,
consistent with that intended purpose and use, when determining whether these
sensitivities have been appropriately addressed.

3.10 Documentation⎯The actuary should create records and other appropriate documentation
supporting an appraisal and, to the extent practicable, should take reasonable steps to
ensure that this documentation will be retained for a reasonable period of time consistent
with any statutory, regulatory or other requirements, any confidentiality or nondisclosure
agreement, and company policy. The actuary need not retain the documentation
personally; for example, the actuary’s principal may retain it. Such documentation should
identify the data, assumptions, and methods used by the actuary with sufficient detail that
another actuary qualified in the same practice area could evaluate the reasonableness of
the actuary’s work.
4
4.1 Appraisal Report⎯When issuing communications under this standard, the actuary should
refer to ASOP No. 23 and ASOP No. 41, Actuarial Communications. In addition, when
preparing a report on an appraisal, the actuary should disclose the following items to the
extent they are relevant to the work performed by the actuary:
a. the scope of the assignment, including the insurance businesses being valued, and
any limitations as to the availability of data;
b. the actuary’s principal;
c. the duty, if any, that the actuary is assuming with respect to any user of the report
other than the actuary’s principal;
d. a description of the intended use of the report;
e. a description of the corporate organizational structure of the business, its

distribution methods, lines of business, and products;
f. the appraisal date;
g. an appraisal value or range of appraisal values (if a single unique appraisal value
is presented, an explanation of why this is appropriate);
h. the methodology used to develop the appraisal, reasons for the choice of
methodology, and whether a financial projection is part of the methodology;
i. the projection model, the accounting basis used, and other key items included in
the analysis;
j. the results of the model validation;
k. a discussion of the level of capital reflected in the appraisal and the basis on
which the level was determined;
l. the assumptions, described in sufficient detail that another actuary qualified in the
same practice area could evaluate their reasonableness;
m. the source of any assumption selected by someone other than the actuary;
n. the extent to which taxes have been considered and on what basis;
5
o. any sensitivity testing results deemed material by the actuary; and
p. the source and extent of reliance on information supplied by others.
4.2 Variation of Results⎯When the actuary issues a report on an appraisal, the report should
state that actual results can and will vary from projected results used to calculate
appraisal values due to deviations of actual from assumed experience.
4.3 Appropriate Use of the Term “Actuarial Appraisal”—The actuary should not refer to an
appraisal as an actuarial appraisal in any actuarial communication unless the appraisal
meets the definition of an actuarial appraisal in section 2.1.
4.4 No Obligation to Communicate with Other Users⎯Nothing in this standard creates an

obligation for the actuary to communicate with any person or persons other than the
intended audience.
4.5 Prescribed Statement of Actuarial Opinion⎯This ASOP does not require a prescribed
4.6 Deviation from Standard⎯The actuary must be prepared to justify to the actuarial
6
Appendix 1
practice.
Background
Actuaries perform appraisals for a number of purposes and for a variety of users, including
sellers, buyers, management, and regulators. Actuaries perform appraisals of insurance
businesses of various types using a variety of methods. In some cases, appraisals performed by
actuaries show values that are discounted present values of earnings, distributable earnings, or
other amounts. In other cases, appraisals performed by actuaries show values based on “rules of
thumb” applied to reserve balances, premiums, or other amounts, or on multiples of book value
or earnings on various accounting bases.
An actuarial appraisal is a specific type of appraisal. The key distinguishing feature of an

actuarial appraisal is the projection of the future stream of distributable earnings attributable to
the evaluated business based on the applicable regulatory accounting basis. This stream of
earnings includes the runoff of claim liabilities and other liabilities carried on the balance sheet
at the valuation date as projected using actuarial assumptions relating to items such as mortality,
persistency, expenses, and investment return. The projections may be done for existing and new
business separately or in combination. The projected earnings are then discounted at the selected
discount rate(s) to derive the actuarial appraisal value.
Current Practices
In performing an appraisal of an insurance business, the actuary has a myriad of bases for
assumptions from which to choose in developing projections of future earnings and ultimately
deriving an appraisal value or range of appraisal values for the business. Of course, actual
experience can and will vary from the assumptions selected. In actual practice, appraisal values
are sometimes based on extensive analysis of confidential or proprietary information, from
which thorough testing of key assumptions can be performed. In other instances, actuarial
appraisals are based on more limited analysis or data because of materiality considerations or
time limitations, or because internal company data are unavailable and only publicly available
information can be used.
Appraisals are commonly performed in connection with the sale of an insurance business. Buyers
and sellers of insurance businesses often use such appraisals to help them determine the price to
be paid or received, although the value of an insurance business resulting from a negotiated
7
transaction may differ materially from the value or range of values presented in an appraisal.
Appraisals are sometimes used to measure fair values of an insurance business for purposes of
allocating purchase price in a business combination under Statement of Financial Accounting
Standards (SFAS) No. 141 or in testing impairment of identifiable intangible assets or goodwill
of an insurance business under SFAS No. 142. Appraisals can also come into play in calculations
of embedded values of insurance businesses for purposes of reporting financial results in an
embedded value framework. It should be noted that in contrast to actuarial appraisal values, the
embedded value of an insurance business typically does not include future business value.
The discount rate used to discount future earnings is a key element of the actuarial appraisal
analysis and may be an element of other types of appraisal. This rate impacts both the present
value of future earnings and the cost of capital. Often one discount rate is selected for the entire
actuarial appraisal. However, because risks vary by product line and between in-force and new
business, discount rates sometimes vary similarly, and multiple discount rates may be used in the
actuarial appraisal.
Generally, regulatory accounting determines the earnings available to the owner of an insurance
business, which is why actuarial appraisals are based on regulatory earnings. Future earnings
based on generally accepted accounting principles (GAAP) or other accounting bases may also
be relevant to the value of an insurance business. However, appraisals of value based on such
other accounting bases are not considered actuarial appraisals.
The present value of distributable earnings in an actuarial appraisal is often expressed as (a)
adjusted net worth; plus (b) existing business value; plus (c) future business value; and less
(d) cost of capital. For certain types of business (for example, most property/casualty business),
existing and future business components are frequently combined into a single component. The
sum of (a) through (d) is mathematically equivalent to the present value of all distributable
earnings, inclusive of any initial surplus releases or infusions at the inception of the earnings
projection period, and inclusive of the release of the all capital and surplus at the conclusion of
the earnings projection period.
The adjusted net worth component includes regulatory capital and surplus; any regulatory
liabilities that in essence represent allocations of surplus (for example, asset valuation reserve,
regulatory portions of casualty Schedule P reserves); any regulatory non-admitted assets that
have realizable value; the difference between market value and book value of assets in support of
adjusted net worth, and other items impacting value that are not reflected elsewhere (for
example, reserve shortfalls or surplus notes).
The existing business value component equals the present value of future earnings attributable to
business inforce on the appraisal date, including any remaining effects of coverage previously
provided, such as the runoff of claim liabilities.
The future business value component equals the present value of future earnings attributable to
business issued or acquired after the appraisal date. Under some circumstances, actuarial
8
appraisal values do not include a future business value component. Sometimes it is not practical
to split earnings between existing business and future business, and in that case future earnings
are often projected for the combined existing and future business.
The sum of the above components is often adjusted for the cost of capital so that it is equivalent
to a present value of distributable earnings. The cost of capital reflects the fact that capital and
surplus needed to be retained in the insurance business are not available as distributable earnings.
The cost of retaining capital is often calculated based upon the differential between the after tax
rate of investment return expected to be earned on retained capital and the discount rate. The
amount of retained capital will depend on the level of capital believed necessary for the risks
inherent in the business and to achieve desired ratings from the various rating agencies. Because
different users of the actuarial appraisal will have different views on the appropriate level of
retained capital, it is often useful to calculate and illustrate the cost of capital separately from the
first three components of the actuarial appraisal value.
In recent years, the use of stochastic modeling approaches in performing actuarial appraisals has
become more common. Stochastic methodology has been used for assumptions such as
investment returns, mortality rates, and claim frequency and severity.
9
Appendix 2
The exposure draft of this proposed actuarial standard of practice (ASOP), titled Appraisals of
Casualty, Health, and Life Insurance Businesses, was issued in June 2004, with a comment
deadline of November 30, 2004. 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 Task Force to Revise ASOP No. 19 carefully considered all
comments received. Summarized below are the significant issues and questions contained in the
comment letters and the task force’s responses. Unless otherwise noted, the section numbers and
titles used below refer to those in the exposure draft.
GENERAL COMMENTS
Comment Several commentators questioned the applicability of the standard to property/casualty appraisals. Other
commentators stated the scope was appropriate.
Response The task force believed that the scope of the standard was appropriate as written. In reaching this
conclusion, the task force noted that property/casualty appraisals were included in the scope of the existing
ASOP No. 19, and that at the request of the ASB, a property/casualty actuary actively participated in the
drafting of the standard. In addition, after receiving these comments, the task force consulted several
property/casualty actuaries, including the Casualty Practice Council, and the responses indicated that the
scope was appropriate.
Comment One commentator questioned why the ASOP was assigned to the ASB Life Committee.
Response The ASB assigns ASOPs that might apply to more than one practice area, but not necessarily to all
practice areas, to the operating committee that it deems most appropriate. The ASB usually bases this
determination on which committee represents the practice area that would be most affected by the ASOP
or has the most history with the development or periodic review of the ASOP. In this case, the ASB
assigned ASOP No. 19 to the ASB Life Committee but requested health and property/casualty members be
recruited for the task force.
Comment One commentator suggested that “embedded value” be defined in the standard.
Response The task force added a definition of “embedded value” in appendix 1.

The task force implemented editorial changes in addition to those addressed specifically below if they enhanced clarity
and did not alter the intent of the section.
Section 2.1, Actuarial Appraisal
Comment One commentator suggested that the definition should mention that distributable earnings projections
should reflect the applicable regulatory accounting basis.
Response The task force believed that section 2.7 (now 2.6) sufficiently covered this concern.
10
Comment One commentator was concerned that the specific definition of an actuarial appraisal in the standard could
put U.S. actuaries at a disadvantage when asked to perform an appraisal of a non-U.S. entity.
Response The task force believed that, while this could be the case, it was important to have a clear definition of this
term.
Section 2.7, Distributable Earnings (now 2.6)
Comment One commentator urged that the standard provide guidance as to what is the level of “appropriate capital.”
Response The approaches to determining the level of required capital continue to evolve, and the appropriate level of
capital has varied over time with the evolution of regulatory accounting and will likely vary in the future.
For these reasons, the task force believed that the determination of the appropriate level of capital should
not be addressed in the standard. Note, however, that Section 4.1(k) requires disclosure of the level of
capital and the rationale for that level.
Comment One commentator suggested that this definition did not correctly describe the recognition of capital flows
in the determination of distributable earnings.
Response The task force agreed and revised the definition to reflect more clearly the recognition of capital flows.
Section 2.8, Insurance Entity (now 2.7, Insurance Business)
Comment Several commentators believed that the term “insurance entity” could be misunderstood to refer to a legal
entity and that a more descriptive term such as “insurance business” would better convey the intended
meaning.
Response The task force agreed and changed the defined term to “insurance business.”
Section 3.1, Introduction
Comment One commentator suggested the second sentence be revised. The commentator acknowledged that in some
types of work, particularly certain property/casualty work, it is not typical that an actuarial appraisal will
be done.
Response The task force agreed and changed the word “typically” to “often.”
Section 3.2, Projected Earnings
Comment Several commentators suggested the definition of projected earnings should be clarified.
Response The task force explicitly included the terms “investment earnings” and “claim payments” in the discussion
of cash flow and accrual amounts to clarify the definition.
Section 3.4, Discount Rate
Comment One commentator believed that this section left the impression that an actuarial appraisal should be
performed based on a single deterministic set of assumptions, as opposed to a stochastic approach. The
commentator believed that this was not an accurate reflection of current trends in actuarial practice.
Response The task force agreed that stochastic approaches to performing actuarial appraisals are an important part of
current practice in this area, revised section 3.7 to include review of stochastic scenarios, and added a
section to appendix 1 that discusses stochastic methods applied to appraisals.
Section 3.5, Applicability of Appraisal
Comment One commentator suggested that reference to sensitivity testing be included.
Response The task force agreed and added wording to this section to address sensitivity testing.
11
Comment One commentator asked if the actuary should consider the perspective of the entity initiating the appraisal.
Response The task force believes that this has been addressed, in that section 3.5 states the actuary should consider
the circumstances, needs, and strategies of the intended audience for the appraisal.
Section 3.6, Treatment of Assets
Comment One commentator suggested deleting the phrase “that support related liabilities” from the first sentence of
this section since there could also be assets supporting required surplus.
Response The task force agreed and deleted the phrase.

Comment One commentator suggested adding wording to state that projected earnings rates should be consistent
with a company’s current investment strategy.
Response Although this will often be the case, the task force believes that it may be appropriate at times for an
appraisal to reflect an investment strategy different from a company’s current strategy and made no
change.
Section 3.7, Modeling and Model Validation
Comment One commentator suggested adding guidance regarding when an actuary should do stochastic testing.
Response The task force carefully considered this issue and noted that any recommendation on when to use
stochastic testing is likely to be obsolete quite quickly as this is a rapidly changing area. The task force
concluded that the choice of appropriate methodology should be left to the professional judgment of the
actuary given the particular circumstances involved and made no change.
Section 3.9, Documentation (now 3.10)
Comment One commentator suggested that the term “actuary’s employer” be changed to “actuary’s principal” as it
relates to retention of documentation.
Response The task force agreed and changed the term to “actuary’s principal.”
Section 4.1, Appraisal Report
Comment One commentator believed the report should include a summary of information provided/reviewed in
connection with performing the appraisal.
Response The task force believed that the disclosures called for in sections 4.1, 4.3, and 4.4 sufficiently covered
what the commentator suggested.
Section 4.3, Required Disclosure If Not an Actuarial Appraisal (now Appropriate Use of the Term “Actuarial
Appraisal”)
Comment Several commentators thought that the disclosure required by section 4.3 was inappropriate, that it could
be confusing to some readers, and that it perhaps could lead some actuaries to an inappropriate application
of an actuarial appraisal simply to avoid the disclosure.
Response The task force agreed that it was more important to disclose what was done rather than what was not done
and revised the language in sections 4.3, 4.1(h), and 4.1(i) to address this concern.
Comment Two commentators challenged the necessity for this type of disclosure.
Response The task force believed that only appraisals that meet the definition in this standard should be considered
actuarial appraisals. The task force wanted to distinguish any appraisal done by an actuary from an
actuarial appraisal that meets the definition per this standard.
The task force revised the requirements of section 4.3 to state that actuarial communications related to an
appraisal that does not meet the definition of an actuarial appraisal contained in this standard should not
refer to the appraisal as an actuarial appraisal.
12
Comment One commentator thought that there might be an inconsistency between this section and ASOP No. 41,
Actuarial Communications, and asked what an actuary calls an actuarial communication that is an
appraisal but not an actuarial appraisal as defined in ASOP No. 19.
Response While acknowledging that this may be somewhat awkward, the task force believed that this problem
would not prevent the actuary from preparing a suitable communication and disclosure and made no
change.
Section 4.7, Deviation from Standard (now 4.6)
Comment One commentator thought that section 4.7 (now 4.6) was too harsh without proper context as might be
found in the proposed Introduction to the Actuarial Standards of Practice.
Response The task force revised this section to be consistent with the new wording developed by the ASB in light of
the adoption of the Introduction to the Actuarial Standards of Practice.
Comment One commentator thought that since appraisals are often based on a set of stochastic projections, this
should be acknowledged in the appendix.
Response The task force agreed and added language on stochastic projections to the appendix.
Comment One commentator thought that the discussion of current practices should make clearer the distinction
between an appraisal value itself and the items, such as price or fair value, that may be influenced by the
appraisal value.
Response The task force believed the existing language was clear and made no change.
13
Actuarial Standard
of Practice
No. 20
Discounting of Property and Casualty Loss

and Loss Adjustment Expense Reserves
Developed by the
Subcommittee on Reserving of the
Adopted by the
April 1992
(Doc. No. 037)

TABLE OF CONTENTS
PREAMBLE

1.1 Purpose 1
1.2 Scope 1
2.1 Asset Valuation Basis 1
2.2 Book Value 1
2.3 Credit Risk 1
2.4 Discounted Reserve 1
2.5 Full-Value Reserve 1
2.6 Investment Risk 2
2.7 Market Interest Rates 2
2.8 Market Risk 2
2.9 Market Value 2
2.10 Portfolio Interest Rate 2
2.11 Present Value 2
2.12 Reinvestment Risk 2
2.13 Risk-Free Interest Rate 2
2.14 Risk Margin 2
2.15 Rate of Investment Return 2

5.1 Appropriateness in Context 5
5.2 Determination of Full-Value Reserve 5
5.2.1 Principles and Considerations 5
5.2.2 Specification by Components 5
5.2.3 Consistency of Assumptions and Considerations 5
5.2.4 Relative Materiality of Considerations 5
5.3 Payment Timing for Discounting 5
5.3.1 Data Sources 5
5.3.2 Reconciliation of Estimates 6
5.3.3 Consistency of Assumptions and Considerations 6
ii
5.3.4 Consistency with Expected Future Conditions 6
5.3.5 Data Organization 6
5.3.6 Effect of Reinsurance, Salvage, and Subrogation 6
5.4 Selected Interest Rates for Discounting 6
5.4.1 Time Value of Money Approach 6
5.4.2 Consistency with Asset Valuation Basis 6
5.4.3 Portfolio Interest Rate Approach 7
5.4.4 Effect of Income Taxes 7
5.4.5 Selected Interest Rates Supplied by Another 7
5.4.6 Incorporating Risk Margin through Interest Rate Reduction 7
5.5 Risk Margins 7
5.5.1 Considerations in Determining the Amount of Risk Margin 7
5.5.2 Implicit and Explicit Margins 7

6.1 Documentation and Disclosure Standard Applies 8
6.2 Disclosure of Assumptions as to Selected Interest Rates 8
6.3 Disclosure of Amount of Discount 8
iii
April 1992
TO: Members of Actuarial Organizations Governed by the Standards of the Actuarial

Standards Board and Other Persons Interested in Discounting of Property and
Casualty Loss and Loss Adjustment Expense Reserves
SUBJ: Actuarial Standard of Practice No. 20: Discounting of Property and Casualty Loss
and Loss Adjustment Expense Reserves
This booklet contains the final version of the captioned standard of practice. It is a revised
version of the second exposure draft, and reflects changes made at a meeting of the ASB
Casualty Committee in September 1991 and in response to a public hearing on the standard held
September 25, 1991.
Background
The purpose of this standard of practice is to define the issues and considerations that an actuary
should take into account in determining discounted loss and loss adjustment expense reserves.
The standard applies to practices that relate to the Casualty Actuarial Society’s Statement of
Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves. The
standard does not address the appropriateness of discounting.
The document was developed by the Subcommittee on Reserving of the ASB Casualty
Committee. The initial exposure draft was approved for exposure by the ASB in October 1989
with a comment deadline of March 15, 1990. A second exposure draft was approved in January
1991, with a comment deadline of April 30, 1991.
Thirty responses to the first exposure draft and seventeen to the second exposure draft were
received. Major issues addressed by reviewers of the first and second exposure drafts, and the
drafting subcommittee’s responses, are discussed below. Comments received are followed by the
subcommittee responses in boldface.
Following the second exposure period, the ASB held a public hearing on the issues raised. A
report on this hearing appears at the end of this memo.
iv
Reviewers’ Comments and Subcommittee Responses on the First Exposure Draft
I. Major issues
1. Should discounting be addressed?
Many respondents questioned whether a standard on discounting should be issued. Some

were concerned that the issuance of a standard would be interpreted as a de facto
endorsement of discounting in inappropriate contexts. Others suggested that the
disavowal of opinion on the appropriateness of discounting (subsection 1.2) be somehow
emphasized, expanded, or changed to state specifically that discounting is inappropriate
in some circumstances.
The subcommittee agreed with many respondents that the issue of discounting is
important enough to warrant the issuance of a standard. Greater emphasis of the
disavowal is not appropriate within the stylistic constraints of a standard. The
subcommittee believed that the statement was clear and unlikely to be
misinterpreted except intentionally. The subcommittee further believed that this
standard should not address the appropriateness of discounting in any particular
context.
2. Risk Margins
A number of respondents emphasized the importance of using increased risk margins

when discounted reserves are used in financial statements. Some expressed the opinion
that risk margins required more extensive treatment and/or more emphasis. It was
suggested that this standard not be issued until a standard on risk margins is issued. On
the other hand, certain respondents opined that the inclusion of any risk margin in the
reserves is inconsistent with GAAP accounting.
A number of respondents objected to the endorsement of implicit risk margins.
The subcommittee agreed that risk margins are a crucial issue when considering
using discounted reserves. At the same time, the subcommittee recognized that a
standard of practice for risk margins had not been issued, and that risk margins
might pose accounting difficulties. The subcommittee considered risk margins
sufficiently important to be addressed fully on their own, and believed that it would
be inappropriate to set standards for risk margins as a subsidiary issue in a
standard on reserve discounting. A special subcommittee of the Casualty Operating
Committee has been formed for the purpose of developing a standard on risk
margins.
Accordingly, the subcommittee included an expanded discussion of the relationship

between discounting and risk margins in the Background and Historical Issues
section. The standard of practice was revised in subsection 5.5 to require the
v
actuary to consider the relationship when determining risk margins, while
specifically stating that the appropriate size and treatment of risk margins are not
addressed in this standard.
The references to implicit risk margins were retained. The subcommittee believed
that the references represent currently common and acceptable actuarial practice.
3. Should a specific portfolio of assets be considered in selecting the interest rate?
Several respondents commented that the evaluation of liabilities should be independent of

specific assets and that discounting should reflect the theoretical time value of money
rather than any particular investment return. It was further noted that the value of a
liability should not change with a change in an investment portfolio. The current
accounting literature on present value was cited as stating that the rate used to discount
any item be appropriate for that item. Furthermore, it was noted that the exposure draft as
written placed an unrealistic burden on the reserving actuary to act as valuation actuary.
Other respondents and members of the subcommittee continue to be concerned that

inconsistent valuations of assets and liabilities in the same financial statement could lead
to significant misstatements of surplus.
The subcommittee agreed that reserve estimates should be able to stand on their
own, and that the interest rate for discounting should normally be selected to reflect
the time value of money. The subcommittee further agreed that valuation
calculations may be unrealistically burdensome in a reserving context. However, the
subcommittee also believed that the actuary should take responsibility, to the extent
practicable, to prevent the use of a discounted reserve in a misleading context.
The standard was revised to base discounting calculations on a “selected interest

rate” rather than a “rate of investment return.” In most cases, the selected interest
rate would reflect the time value of money rather than any particular investment
return. The actuary remains responsible for being aware of the valuation basis of
assets, but may now satisfy that responsibility by a clear disclosure of any
inconsistency between the valuations of assets and liabilities. The actuary retains the
option of using a portfolio-based rate, but in that case more complex valuation-type
calculations may be necessary. Furthermore, the actuary should use a low-risk rate
of return; thus, a portfolio-based rate may require adjustment.
4. Should investment returns used to determine the interest rate for discounting be before or
after federal income taxes?
A number of respondents interpreted the words “investment returns . . . after the payment
of income taxes” to imply that before-tax investment returns are necessarily reduced by
income tax rates.
vi
In fact, the subcommittee intended the statement to require consideration of the
overall taxation of the entity. In that context, the before-tax return could
approximate the after-tax return if the investment income were sheltered by the
accrual of discount in the tax-basis reserves.
Several respondents who accurately discerned the subcommittee’s intent were concerned
that consideration of the complexities of insurance company taxation is unduly
burdensome for the reserving actuary. Furthermore, it may be inappropriate for this
liability item to vary with a company’s tax position.
The subcommittee agreed that the original language was unclear and potentially
misleading. Furthermore, the subcommittee agreed that a burden of detailed tax
calculations should not be placed on the reserving actuary.
Accordingly, the subcommittee changed the language from “after” income taxes to
“before” income taxes. This will frequently approximate the after-tax situation,
since investment income will often be substantially sheltered by the accrual of
discount in the tax-basis reserves. Furthermore, the before-tax approach is more
consistent with the interpretation of discounting as a reflection of the theoretical
time value of money. The revised language allows the actuary to make an
adjustment to reflect imperfection in the sheltering of investment income, but does
not require such an adjustment.
5. Discounting calculations required by statute or regulation (e.g., IRS calculations) may

differ from this standard.
A number of respondents were concerned that discounting procedures prescribed by the

IRS, specifically those related to payment pattern calculation and interest rate selection,
do not meet the requirements of the proposed standard. Those respondents requested a
more clearly delineated “safe harbor” for calculations required by statute or regulation.
The subcommittee believed that required calculations which do not meet this
standard can be readily accommodated with a relatively simple disclosure statement
per subsection 6.4. The subcommittee did not change the language of the proposed
standard.
6. Many respondents recommended various changes in the definitions.
The subcommittee made a number of changes in the definitions section. Notably, the
definition of discounted reserve was changed to refer only to the use of an interest
rate, rather than investment income. The definition of default risk was broadened to
credit risk, and a definition of market risk was added, along with definitions of
present value and time value of money.
vii
The subcommittee chose not to include definitions of interest rate and liquidity, since
these terms are used in accordance with their common meanings.
II. Other issues
1. Several respondents disapproved of giving the actuary the option of disavowing opinion
on the appropriateness of the interest rate.
The subcommittee believed that the actuary should not be prohibited from
performing calculations requested by a client or employer, as long as there are clear
disclosures intended to prevent the actuary’s work from being misused. The
subcommittee recognized that actuaries sometimes do work according to
specifications provided by others.
2. Several respondents were concerned that the requirement to consider the timing of
reinsurance recoveries is unduly burdensome.
Appropriate “consideration” may be achieved by a relatively simple approximation

in many cases. The need for detailed, complicated calculation varies with the
materiality of the issue. If the issue is very significant for a particular reserve
evaluation, more detailed calculations may be necessary.
3. Several respondents were concerned that the “whenever possible” language of subsection
6.3 was too severe, since the calculation will always be “possible” even when highly
impractical.
The subcommittee changed the language to “whenever the full-value reserve has
been calculated. . . .”
4. Several respondents advocated a requirement for disclosure of the amount of risk margin.
As previously noted, the subcommittee increased the emphasis on the relationship

between discounting and risk margin, but specifically avoided establishing a
standard for risk margin. Disclosure of the amount of risk margin may be a
requirement of a risk-margin standard.
5. One respondent noted that the NAIC has taken a more specific (generally unfavorable)
view of discounting than implied by section 3 of the draft.
The proposed standard was revised to include language suggested by the

respondent.
viii
6. One respondent noted that the proposed standard states that the calculation of a full-value
reserve may not be required, but that subsequent sections appear to imply that such a
calculation is required.
The subcommittee did not intend to imply that the calculations of a full-value
reserve is required in every case, but the subcommittee recognized that the
calculation of a full-value reserve will most commonly be performed. Certain
sections of this standard may be inapplicable if a different approach is taken.
The subcommittee carefully reviewed all responses received, and made numerous other changes
suggested by respondents. Many of these were editorial in nature. The above discussions cover
issues considered to be most in need of discussion.
Reviewers’ Comments and Subcommittee Responses on the Second Exposure Draft
I. Major issues
1. Possible Misinterpretation of Standard as an Endorsement of Discounting in

Inappropriate Circumstances
The subcommittee made several changes after the second exposure draft to
discourage potential misinterpretation. First, a new subsection 5.1 makes the
actuary responsible for the context in which the discounted reserves are to be used.
Second, there is an expanded discussion of the relationship between discounting,
risk margins, and economic value of reserves. This is further discussed below.
2. Risk Margins
A number of respondents to the second exposure draft disagreed with the statement that
discounting and risk margins are closely related. Adherents of financial theory noted that
the proper interest rate for discounting is a function of both the time value of money and
the riskiness of the cash flows. One respondent noted that use of the term risk margins
was unclear, and suggested that some categories of risk should be compensated for in
reserves, and other categories should not.
Some respondents repeated the views that a discounting standard should not be issued
prior to a risk margin standard; that the standard’s admonitions regarding risk margins
were not strong or clear enough, and that regardless of these admonitions, issuance of this
standard would lead to unsound practices and/or weaker financial statements.
The subcommittee made several changes after the second exposure draft. In
response to specific comments, the standard now notes that the close relationship
between discounting and risk margins is historical rather than theoretical. The
approach of using an interest rate based on the risk-free rate adjusted to reflect the
ix
risk associated with uncertainty in loss reserve estimates was acceptable in the
previous draft; the language was further clarified by adding a new subsection 5.4.6,
in which it is noted that a risk adjustment of the interest rate is allowable. However,
the standard does not specify this method as the only acceptable means of reflecting
risk.
Finally, the subcommittee believed that more precise definitions of categories of

risks to be included in risk margins should be in a risk margins standard, rather
than a discounting standard.
In response to more general concerns, the subcommittee expanded the discussion in

section 3, Background and Historical Issues, noting that discounting and risk
margins are both considerations in estimating the economic value of loss reserves.
The added language went so far as to caution that undiscounted reserves may
approximate economic value better than discounted reserves without risk margin.
In subsection 5.5, which gives the recommended practices concerning risk margins,
the following sentence was inserted: “The actuary should be aware that a discounted
reserve is an inadequate estimate of economic value unless appropriate risk margins
are included.”
With the above changes, the subcommittee believed that the standard was unlikely
to be misinterpreted. The expanded statements on the relationship between
discounting, risk margins, and economic value should act as a positive force to
prevent irresponsible use of discounting.
3. Returns on Assets
In the comments on the second draft, there was some concern expressed with reference to
returns on assets (old subsections 5.3.2 and 5.3.3, now numbered 5.4.2 and 5.4.3). One
respondent objected to the apparent obligation of the reserving actuary to value assets.
Some respondents said that the interest-rate subsection as a whole needed clarification.
The requirement to consider assets does not require the actuary to value assets, but
to be aware of their valuation basis and to disclose material inconsistencies between
the valuation basis for assets and that for loss reserves. This is part of the actuary’s
general obligation to be responsible for the context in which the discounted reserves
are to be used. Under the portfolio interest rate approach (now 5.4.3), the actuary
has greater obligations regarding assets.
To clarify the interest-rate subsection, the subcommittee introduced the term risk-
free interest rate, and made clear that the reference to rates of return on low-risk
investments is included only as an acceptable approximation of the risk-free interest
rate.
x
II. Other issues
1. One respondent suggested that the standard specify that the full-value reserve be
calculated in accordance with the CAS Statement of Principles. Another suggested that
language be included to caution the actuary against discounting full-value reserves that
are inadequate.
The standard states that all principles and consideration for calculating full-value
reserves apply. The subcommittee believed that provision was sufficient, and that to
knowingly discount inadequate full-value reserves would violate that provision.
2. One respondent expressed concern that the requirement to use interest rates “likely to
prevail over the life of the cash flows” placed an unrealistic burden on the actuary to
predict future interest rates. Another suggested that consistency between interest and
inflation assumptions be required.
The adjustment of current interest rates to anticipated future levels was made
optional, and a requirement for consistency with inflation assumptions was
introduced. Thus, if a change in future conditions is assumed, the assumptions for
both inflation rates and interest rates should be consistent.
3. One respondent noted that the subsection on the effect of reinsurance should also include
salvage and subrogation.
The subsection was broadened to include salvage and subrogation. The

subcommittee noted that paid loss data net of salvage and subrogation usually credit
salvage and subrogation when received, but paid loss data net of reinsurance often
credit reinsurance before it is received. Thus the reinsurance provision is more
likely to require an additional calculation.
4. One respondent commented that incorporating risk margins should have been included
among the common approaches (section 4).
The approaches listed are for discounting. The subcommittee concluded that
common approaches for incorporating risk margin should be part of a risk margin
standard.
5. One respondent noted that the standard continued to include too many unnecessary
references to full-value reserves, and too much implication that calculating full-value
reserves is the preferred approach.
The subcommittee deleted a number of references to full-value reserves, and

attempted to remove any remaining implication that full-value reserves will
xi
necessarily be calculated. However, because starting from full-value reserves is by
far the most common approach, some focus on that approach is unavoidable.
6. One respondent asserted that a proper definition of present value does not allow a
selected interest rate, but rather is based on a market-determined rate reflecting the risk-
free rate and the riskiness of the cash flows.
The subcommittee felt that the broader definition of present value in the standard is
clear and in close correspondence with widespread usage.
7. One respondent said the phrase low investment risk was too imprecise.
The language was changed to make clear that an approximation of the risk-free
interest rate was intended. With that clarification, the phrase “assets with low
investment risk” has been retained to allow reasonable flexibility to the practitioner.
Comments Received at the September 25, 1991 Public Hearing, and Subcommittee Responses
Nine witnesses testified at the hearing. Several testified as representatives of various actuarial
bodies and other interested groups. In addition, four witnesses submitted only written testimony.
A number of the witnesses had previously submitted comment letters.
Most witnesses supported issuance of the standard with little modification. The additional
language added subsequent to the second exposure draft, strengthening the risk margin
requirements, was reviewed with several witnesses in the course of the hearing. Reaction was
generally favorable.
Two witnesses objected to issuance of the standard. Both were previous respondents.
One maintained that issuance of a standard on discounting would be viewed as a de facto

endorsement of discounting, regardless of specific disclaimers in the standard. The
subcommittee believes that the language of the standard is clear on the issue and made no
further change.
The other objecting witness asserted that the standard was inconsistent with financial theory, in
both terminology and substance. In particular, this witness expressed the view that both present
value and discounted value, as used in financial theory, necessarily reflect a discount rate that
incorporates both the time value of money and the market perception of risk. The subcommittee
believed that the more general usage in the standard of the terms present value and
discounted value is consistent with financial theory. The more general definitions also
correspond with widespread usage. The subcommittee believed that using the narrower
definitions would be more likely to lead to confusion.
xii
As to matters of substance, the financial theory approach is intended to be allowed within
the standard. Specifically, the selected interest rate may initially approximate the risk-free
interest rate (per subsection 5.4.1) and then be further adjusted to reflect risk (per
subsection 5.4.6) as a means of incorporating an explicit risk margin. A discounted reserve
so calculated with a risk-adjusted interest rate includes the “appropriate risk margin”
required by subsection 5.5 as a condition for an adequate estimate of economic value.
Adoption
The final version of the standard was prepared by the subcommittee after careful review of all
comments received. It was approved by the parent Casualty Committee in March 1992 and
adopted by the ASB at its April 1992 meeting, with an effective date of August 15, 1992.
Subcommittee on Reserving
(Including past and present members)
James A. Faber, Chairperson

Martin Adler Bertram A. Horowitz
James R. Berquist Stuart N. Lerwick
Spencer M. Gluck Jerry A. Miccolis
David J. Grady Alfred O. Weller
E. LeRoy Heer
Casualty Committee
(Including past and present members)
Michael J. Miller, Chairperson

Martin Adler Steven L. Groot
James R. Berquist James A. Hall, III
Richard Beverage E. LeRoy Heer
Richard S. Biondi Bertram A. Horowitz
LeRoy A. Boison, Jr. Eldon J. Klaassen
Douglas J. Collins R. Michael Lamb
Frederick Cripe Stuart N. Lerwick
James A. Faber Robert J. Lindquist
Daniel J. Flaherty Jerry A. Miccolis
David P. Flynn Robert A. Miller, III
Spencer M. Gluck Gary K. Ransom
Robert W. Gossrow Alfred O. Weller
David J. Grady Paul E. Wulterkens
Gary Grant
xiii
Jack M. Turnquist, Chairperson

Edward E. Burrows Frederick W. Kilbourne
Gary Corbett Richard S. Robertson
Willard A. Hartman Harry L. Sutton, Jr.
xiv
DISCOUNTING OF PROPERTY AND CASUALTY

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
PREAMBLE
1.1 Purpose—The purpose of this standard of practice is to define the issues and
considerations that an actuary should take into account in determining discounted
property or casualty loss and/or loss adjustment expense reserves.
1.2 Scope—This standard applies to practices that relate to the Statement of Principles
Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves, as
adopted by the Casualty Actuarial Society. The standard does not address the
appropriateness of discounting reserves in specific contexts.
1.3 Effective Date—The effective date of this standard is August 15, 1992.
The following terms are used in this standard as defined below:
2.1 Asset Valuation Basis—The method used to determine the stated value of a particular
asset.
2.2 Book Value—The value of an asset or assets, as included in a financial statement or other
financial reporting contest.
2.3 Credit Risk—Risk associated with the possibility of a loss on an investment security,
either in whole or in part.
2.4 Discounted Reserve—The present value, calculated at selected interest rate(s), of the
payment of outstanding losses and/or loss adjustment expenses in the anticipated future
settlement amounts.
2.5 Full-Value Reserve—An undiscounted provision for the payment of outstanding losses
and/or loss adjustment expenses in the anticipated future settlement amounts.
1
2.6 Investment Risk—Uncertainty surrounding the realization of a specified investment
income stream. Elements of investment risk include credit risk, market risk, reinvestment
risk, and liquidity risk.
2.7 Market Interest Rates—Interest rates that are available on funds invested at a particular
date.
2.8 Market Risk—Uncertainty regarding the future market value of an asset.
2.9 Market Value—The price for which an asset could be sold at a particular date.
2.10 Portfolio Interest Rate—Interest rate on an investment portfolio, calculated relative to

current book values or on other asset valuation bases.
2.11 Present Value—The value at a point in time of cash flows at other points in time,
calculated at selected interest rates.
2.12 Reinvestment Risk—Uncertainty regarding the yields that will be available on

reinvestment of proceeds from current investments that are subject to reinvestment in the
future.
2.13 Risk-Free Interest Rate—The interest rate that reflects only the time value of money. (It
is understood that the time value of money includes inflation expectations.) The risk-free
interest rate is lower than rates of investment return on asset portfolios subject to greater
investment risk.
2.14 Risk Margin—An amount to make some provision for the uncertainty in a reserve
estimate.
2.15 Rate of Investment Return—Investment income earned on funds held over time,
generally expressed as an annualized percentage of the amount invested.
The appropriateness of discounting loss and loss adjustment expense reserves in various financial
reporting contexts is a controversial topic. Traditionally, casualty loss and loss adjustment
expense reserves have not been discounted except in certain narrowly defined circumstances.
However, the issue of discounting reserves has been discussed for many years. For example, the
issue appeared in the 1927 Proceedings of the Casualty Actuarial Society, in an article by
Benedict D. Flynn. In 1986, the U.S. Congress passed legislation prescribing discounting
procedures for income-tax purposes. In the past, most state insurance departments prohibited
discounting; some departments have permitted discounting for some lines of business. The
National Association of Insurance Commissioners has consistently been opposed to discounting
except in certain specific circumstances. The accounting profession is studying the issue as it
relates to financial reporting.
2
Historically, the issue of reserve discounting has been closely related to the issue of risk margins.
Full-value reserves are often considered to contain a needed implicit risk margin in the difference
between full-value reserves and discounted reserves. If discounted reserves were incorporated
into financial statements, many would argue that an explicit risk margin would become
necessary. Suggestions for the treatment of that risk margin include treatment as a liability item,
a segregated surplus item, or an off-balance-sheet item.
Reserve discounting and risk margins are both important elements in estimating the economic
value of loss reserves, yet neither is explicitly included in most current financial reporting. Much
of the rationale for reserve discounting is related to the issue of economic value; however, some
believe that discounted reserves without risk margin may be a poorer estimate of economic value
than undiscounted reserves.
Loss reserve discounting calculations are commonly performed in conjunction with valuations of
insurance companies for purposes such as acquisition or merger, or with transfers of portfolios or
reserves. In these instances and for other reasons, there are increasing numbers of circumstances
where actuaries are asked to determine or evaluate discounted loss and loss adjustment expense
reserves.
Common approaches to loss and loss adjustment expense reserve discounting typically include
these steps:
a. Estimate full-value reserves
b. Estimate future loss and loss adjustment expense payment patterns
c. Apportion the full-value reserves to the future payment periods, using the estimated
payment patterns
d. Select the interest rate(s) for discounting
e. Calculate the present value, as of the valuation date, of the projected payments for each
future payment period, using the selected interest rate(s)
f. Sum the present values for all future payment periods
There are many variations on this process. In fact, the initial calculation of a full-value reserve is
not always necessary. Some approaches are based on an assumed difference between future
claim cost trend and future interest rates without specification of the interest rates.
3
Selected interest rates vary with the business context. They may be based on market interest
rates, portfolio interest rates, or a combination thereof, sometimes adjusted to reflect risk, and
adjusted to reflect investment expenses and taxes as appropriate.
4
5.1 Appropriateness in Context—The actuary should be aware of the context in which the
discounted reserves are to be used. The actuary should use assumptions and methodology
in the discounting process that are appropriate for that context.
5.2 Determination of Full-Value Reserve—The determination of a full-value reserve is

generally, though not necessarily, the first step in the determination of a discounted
reserve.
5.2.1 Principles and Considerations—All principles and considerations that apply to the
calculation of a full-value reserve as an end product should also apply to the
calculation of a full-value reserve that will form the basis of a discounted reserve.
5.2.2 Specification by Components—The actuary should give special attention to the

specification of the reserve provision by its components (e.g., line of business,
accident year, etc.), to the extent such specification has a material effect on the
amount of reserve discounting.
5.2.3 Consistency of Assumptions and Considerations—The actuary should be aware of

the assumptions and considerations underlying the selection of the full-value
reserve, in order to ensure that material assumptions and considerations are
consistent throughout the process of calculating the discounted reserve.
5.2.4 Relative Materiality of Considerations—The actuary should be aware of the

differences between full-value and discounted reserves in the relative materiality
of various considerations. For example, a development factor at an advanced
maturity (i.e., a “tail factor”) is less material to a discounted reserve than to a full-
value reserve. Conversely, a change in the timing of loss payments may be more
material to a discounted reserve. To the extent that the materiality of a reserve
consideration determines the amount of analysis that an item receives, the
evaluation of a discounted reserve may require a change in emphasis on the items
analyzed.
5.3 Payment Timing for Discounting—In order to derive a discounted reserve, the actuary
necessarily projects the timing of future payments. A range of payment-timing estimates
may be reasonable.
5.3.1 Data Sources—The actuary should use the entity’s own historical payment data to
project the timing of payments, to the extent that credible data are available. Any
supplementary data that are used should reflect the payment-timing characteristics
of the category of business under consideration, to the extent possible.
5
5.3.2 Reconciliation of Estimates—The actuary should reconcile payment-timing
estimates with the estimates of ultimate amounts to be paid, even if the latter have
not been derived by techniques based on paid losses and loss adjustment
expenses.
5.3.3 Consistency of Assumptions and Considerations—When a full-value reserve has

been estimated, the actuary should use assumptions and considerations in
developing payment-timing estimates that are consistent with the assumptions and
considerations used in developing the full-value reserve estimates.
5.3.4 Consistency with Expected Future Conditions—Payment-timing estimates should

be consistent with internal and external conditions expected to prevail during the
future payment period. If such conditions are expected to be different from those
prevailing during the historical evaluation period, the actuary should make
appropriate adjustments.
5.3.5 Data Organization—The actuary should determine whether better payment-timing

estimates are obtained by treating various data components separately or in some
combination. Examples are losses, allocated loss adjustment expenses, and
unallocated loss adjustment expenses. This determination typically is influenced
by the nature of the available data.
5.3.6 Effect of Reinsurance, Salvage, and Subrogation—In estimating discounted

reserves net of ceded reinsurance, salvage, and subrogation, the actuary should
consider the timing of the expected reinsurance, salvage, and subrogation
recoveries.
5.4 Selected Interest Rates for Discounting—A discounted reserve may be used in a variety
of contexts, and the appropriate selected interest rates are a function of the context. The
selected interest rates may reflect the time value of money without reference to particular
assets (see 5.4.1) or may be based on the rate of investment return from a particular
portfolio (see 5.4.3).
5.4.1 Time Value of Money Approach—The selected interest rate in this approach
should approximate the risk-free interest rate. The risk-free interest rate can be
approximated by rates of investment return available on assets having low
investment risk. Such rates should reflect the market interest rates at the valuation
date and may be adjusted to reflect those rates that are likely to prevail over the
life of the cash flows. Such rates should be consistent with the inflation rates
assumed in the reserve calculation.
5.4.2 Consistency with Asset Valuation Basis—If the discounted reserve is used in a
context which includes the reporting of assets, the actuary should be aware of the
relationship between the selected interest rate and the basis used in valuing the
assets. If assets are included at an overall value significantly different from
6
market value, the actuary should clearly disclose any inconsistency between the
selected interest rate for discounting and the asset valuation basis.
5.4.3 Portfolio Interest Rate Approach—If portfolio interest rates are used, the actuary
should consider the relationships between the book and market values of assets,
between the portfolio interest rates and market interest rates, and between the
maturities of the assets and the estimated timing of loss and loss adjustment
expense payments. The actuary should adjust the portfolio rates, if necessary, to
be consistent with assets having low investment risk. The portfolio rates should be
net of investment expenses.
5.4.4 Effect of Income Taxes—The actuary normally should use an interest rate or rates
consistent with investment returns that are available before the payment of
income taxes. The actuary may consider adjusting this rate if the amount of
discount for tax purposes differs significantly from the amount of discount
determined in accordance with this standard.
5.4.5 Selected Interest Rates Supplied by Another—In certain contexts, the actuary may
provide a discounted reserve estimate without providing an opinion on the
appropriateness of the selected interest rates. In these cases, the actuary should
clearly disclose the selected interest rates, the source of or basis for the selected
interest rates, and the fact that the actuary is expressing no opinion on the
appropriateness of the rates.
5.4.6 Incorporating Risk Margin through Interest Rate Reduction—The actuary may
reduce the selected interest rate as a means of incorporating a risk margin.
5.5 Risk Margins—The actuary should be aware of the historical relationship between
reserve discounting and risk margins and include appropriate risk margins. Discounting a
reserve diminishes the risk margin implicit in a full-value reserve by the difference
between the full-value and the discounted reserve. The discounting process itself
introduces additional uncertainties. The actuary should be aware that a discounted reserve
is an inadequate estimate of economic value unless appropriate risk margins are included.
Considerations with regard to the inclusion of risk margins follow. It is not intended that
this standard address the amount of risk margin necessary, nor the appropriate treatment
of risk margin in a particular context.
5.5.1 Considerations in Determining the Amount of Risk Margin—In determining the

amount of risk margin, the actuary should consider the increase in uncertainty
associated with the discounting calculation, as well as the decrease in the margin
implicit in the full-value reserve.
5.5.2 Implicit and Explicit Margins—Implicit margins may be introduced at one or

more steps in the discounting process, including the estimation of the full-value
reserve and the selection of the payment pattern from a range of reasonable
7
estimates. Explicit margins may be included as an absolute amount and/or through
an explicit adjustment to the selected interest rate(s).
6.1 Documentation and Disclosure Standard Applies—All documentation and disclosure

requirements contained in Actuarial Standard of Practice No. 9, Documentation and
Disclosure in Property and Casualty Insurance Ratemaking, Loss Reserving, and
Valuations, apply to actuarial calculations and communications involving discounted
reserves.
6.2 Disclosure of Assumptions as to Selected Interest Rates—The actuary should give

emphasis to the disclosure of the assumptions as to selected interest rates, and the basis
for those assumptions. In particular, the actuary should clearly identify those instances
where the actuary expresses no opinion as to the appropriateness of the rates used.
6.3 Disclosure of Amount of Discount—Whenever the full-value reserve has been calculated,
the actuary should disclose the amount of the difference between the full-value reserve
and the discounted reserve.
6.4 Deviation from Standard—An actuary must be prepared to defend the use of any
procedure that departs materially from this standard and must include, in any actuarial
communication disclosing the result of the procedure, an appropriate and explicit
statement with respect to the nature, rationale, and effect of such use.
8
Actuarial Standard
of Practice
No. 21
Responding to or Assisting Auditors or Examiners

in Connection with Financial Statements for All Practice Areas
Revised Edition
Developed by the
Adopted by the
September 2004
(Doc. No. 095)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Auditor 2
2.2 Examiner 2
2.3 Financial Statement 2
2.4 Prescribed Assumption 2
2.5 Responding Actuary 2
2.6 Reviewing Actuary 2

3.1 Responsibilities of the Responding Actuary 2
3.1.1 Data, Assumptions, and Methods 2
3.1.2 Environmental Considerations 3
3.1.3 Requests for Information 3
3.2 Responsibilities of the Reviewing Actuary 3
3.2.1 Planning 3
3.2.2 Documentation 4
3.3 Relationship with the Entity Whose Financial Statement is Being Audited
or Examined 4
3.4 Confidentiality 4

4.1 Communication and Disclosure 4
ii
APPENDIXES

Background 6
Current Practices 6
Appendix 2⎯Comments on the Second Exposure Draft and Task Force Responses 8
iii
September 2004

Actuarial Standards Board and Other Persons Interested in Responding to or
Assisting Auditors or Examiners in Connection with Financial Statements for All
Practice Areas
This booklet contains the final version of a revision of ASOP No. 21, now titled Responding to
or Assisting Auditors or Examiners in Connection with Financial Statements for All Practice
Areas.
Background
Financial Reporting Recommendation 2, Relations with the Auditor, was adopted in 1974 by the
American Academy of Actuaries (Academy) and revised by the Academy in 1983.
Recommendation 2 was limited in its application to audits in connection with financial
statements of stock life insurance companies prepared in accordance with generally accepted
accounting principles (GAAP).
In 1993, Financial Reporting Recommendation 2 was replaced by ASOP No. 21, which
expanded the scope of the existing standard to apply to an actuary who acts for an organization
in the preparation or review of a financial statement or report that is expected to be audited by a
public accounting firm retained by that organization. The title was changed to The Actuary’s
Responsibility to the Auditor to make clear that the standard did not address auditors’
responsibilities to actuaries. ASOP No. 21 also superseded Financial Reporting
Recommendation 3, Actuarial Report and Statement of Actuarial Opinion [for Stock Life
Insurance Company Financial Statements Prepared in Accordance with GAAP], also adopted in
1974 and revised in 1983.
In 2002, the ASB decided that a revision of ASOP No. 21 was necessary because accounting and
financial reporting have become increasingly complex since the original standard was issued and
because audit issues have received increased attention in recent years.
The format has been revised to be consistent with the current format adopted by the ASB and
reflects the adoption of other standards since ASOP No. 21 was originally developed.
iv
The first exposure draft of this proposed revision was issued in September 2002, with a comment
deadline of March 15, 2003. The first exposure draft expanded the scope of the original standard
to provide guidance to actuaries responding to or assisting examiners when the examiners are
engaged in the review of a financial statement and made clear that the scope includes statutory
financial statements as well as GAAP financial statements. The first exposure draft removed any
reference to the preparation of financial statements, because other ASOPs provide guidance for
such preparation. Instead, the first exposure draft provided guidance to actuaries serving as
responding actuaries. The first exposure draft provided for express designation of both
responding and reviewing actuaries to clarify the assignment of the significant responsibilities
associated with each role. Thirty-six comment letters were received. The task force carefully
considered all comments received and made changes to the language in some sections.
The second exposure draft of this proposed revision was issued in January 2004 with a comment
deadline of April 30, 2004. Twelve comment letters were received. The task force carefully
considered all comments received and made appropriate changes in a few sections. For a
summary of the substantive issues contained in the comment letters on the second exposure and
the task force’s responses, please see appendix 2.
The Task Force to Revise ASOP No. 21 thanks everyone who took the time to contribute
comments on the exposure drafts.
v
James B. Milholland, Chairperson

Jerry D. Allen Michael G. McCarter
Vincent G. Mace, Jr. Robert A. Potter

Phillip N. Ben-Zvi Ethan E. Kra
Thomas K. Custis Mark E. Litow
Larry M. Gorski Donna C. Novak

vi
RESPONDING TO OR ASSISTING AUDITORS OR EXAMINERS

IN CONNECTION WITH FINANCIAL STATEMENTS FOR ALL PRACTICE AREAS
1.1 Purpose—This actuarial standard of practice (ASOP) provides guidance to actuaries when
providing professional services while responding to or assisting auditors or examiners in
connection with an audit or examination of a financial statement.
1.2 Scope—This standard applies to actuaries when providing professional services as a

responding actuary, as defined in section 2.5, or as a reviewing actuary, as defined in section
2.6, in connection with an audit or examination of a financial statement, as defined in section
2.3. The standard does not apply to actuaries when providing services in connection with
filings, such as tax returns or Form 5500 filings, which may contain financial information
but do not constitute financial statements as defined herein.
When applicable law, regulation, or other binding authority conflicts with this standard,
compliance with such law, regulation, or other binding authority shall not be deemed a
deviation from this standard, provided the actuary discloses that the actuarial work was
performed in accordance with the requirements of such law, regulation, or other binding
authority.
1.4 Effective Date—This standard is effective for an actuary’s work in connection with an audit
or examination for which the actuary’s involvement as the responding or reviewing actuary
begins on or after April 30, 2005.
1
The terms below are defined for use in this standard of practice.
2.1 Auditor—The firm or professional engaged to conduct an examination in accordance with

generally accepted auditing standards for the purpose of issuing an opinion on a financial
statement.
2.2 Examiner⎯Employee of or contractor to state or federal regulators performing an

examination of a financial statement on behalf of a governmental agency responsible for
oversight of the financial condition of the entity. Most commonly, examiners are financial
examiners of the various state departments of insurance.
2.3 Financial Statement⎯A report prepared for the purpose of presenting the financial position
and the change in the financial position for the reporting period of an entity, prepared in
accordance with accounting requirements prescribed or permitted by state regulators,
governmental accounting standards, or applicable generally accepted accounting principles.
2.4 Prescribed Assumption⎯A specific assumption that is mandated, or that is selected from a
specified range that is deemed to be acceptable, by law, regulation, or other binding
authority.
2.5 Responding Actuary⎯An actuary expressly designated by an entity to respond to the auditor
or examiner with respect to specified elements of the entity’s financial statement that are
based on actuarial considerations. An entity may expressly designate one or more actuaries
as responding actuaries for a particular audit or examination.
2.6 Reviewing Actuary—An actuary expressly designated by the auditor or examiner to assist
with the audit or examination of a financial statement with respect to specified elements of
the financial statement that are based on actuarial considerations.
3.1 Responsibilities of the Responding Actuary⎯The actuary should be appropriately

responsive to the auditor’s or examiner’s reasonable requests, as described below. The
responding actuary may involve other actuaries in responding to the auditor or examiner.
3.1.1 Data, Assumptions, and Methods⎯The responding actuary should be prepared to

discuss with the auditor or examiner the following items, based on existing
2
documentation, underlying those elements of the financial statement for which the
actuary is the responding actuary:
a. the data used;
b. the source of prescribed assumptions, if any;
c. the methods used; and
d. the basis for assumptions that are not prescribed assumptions.
3.1.2 Environmental Considerations⎯The responding actuary should be prepared to

discuss with the auditor or examiner known circumstances that, in the actuary’s
professional judgment, had a significant effect on the preparation of those elements
of the financial statement for which the actuary is the responding actuary. Examples
of such circumstances may include the following:
a. changes in the operating environment;
b. trends in experience;
c. product or plan changes and changes in product mix or demographic mix;
d. changes in the entity’s methods, policies, or procedures, or in statutory

valuation bases; and
e. compliance with relevant new or revised accounting rules, laws and

regulations, or other government promulgations.
3.1.3 Requests for Information⎯The responding actuary should be appropriately

responsive to the auditor’s or examiner’s reasonable requests for other relevant
information such as data, analyses, and sample calculations.
3.2 Responsibilities of the Reviewing Actuary—The reviewing actuary has responsibility with
respect to the planning and documentation of the audit or examination procedures, as
described below.
3.2.1 Planning⎯The reviewing actuary should discuss the scope of the audit or
examination with the auditor or examiner as well as the nature, extent, and timing of
the reviewing actuary’s procedures, including how the results of the review will be
communicated. The reviewing actuary should inform the responding actuary or the
entity about the expected timing of the audit or examination and request the
3
information needed by the reviewing actuary to perform the planned procedures.
3.2.2 Documentation⎯In addition to the documentation requirements of ASOP No. 41,

Actuarial Communications, the reviewing actuary’s documentation should include
the following:
a. evidence that the reviewing actuary’s procedures have been planned and
coordinated with the auditor or examiner;
b. a summary description of the items subject to the reviewing actuary’s audit

or examination procedures;
c. a summary description of the procedures followed by the reviewing actuary;

and
d. a summary description of the results of the review, providing conclusions or

findings.
3.3 Relationship with the Entity Whose Financial Statement is Being Audited or Examined—
The responding actuary and the reviewing actuary should disclose to the auditor or examiner
their relationships, if any, with the entity whose financial statement is being audited or
examined.
3.4 Confidentiality—An audit or examination may give rise to the exchange of confidential
information. Any information received by the reviewing actuary should be considered
confidential, except as to the auditor or examiner, unless otherwise indicated by the entity.
The reviewing actuary should take appropriate steps to preserve the confidentiality of such
information.
4.1 Communication and Disclosure—Both the responding actuary and the reviewing actuary
should comply with ASOP No. 41 in communicating findings and documenting work subject
to this standard.
4.2 Prescribed Statement of Actuarial Opinion⎯This ASOP does not require a prescribed
Prescribed Statements of Actuarial Opinion, promulgated by the American Academy of
4
respect to the nature, rationale, and effect of such use.
5
Appendix 1
Note: The following appendix is provided for informational purposes, but is not part of the
Background
Financial Reporting Recommendation 2, Relations with the Auditor, was adopted in 1974 by the
Academy and revised in 1983. Recommendation 2 was limited in its application to audits in
connection with financial statements of stock life insurance companies prepared in accordance
with generally accepted accounting principles (GAAP). In 1993, Financial Reporting
Recommendation 2 was replaced by ASOP No. 21, which expanded the scope of the existing
standard to apply to any actuary who acts for any organization in the preparation or in the review
of a financial statement or report that is expected to be audited by a public accounting firm
retained by that organization. Financial Reporting Recommendation 3, Actuarial Report and
Statement of Actuarial Opinion [for Stock Life Insurance Company Financial Statements
Prepared in Accordance with GAAP], also adopted in 1974 and revised in 1983, was withdrawn
in 1993 because the ASB determined that it was no longer needed.
Current Practices
Actuaries routinely work with auditors and examiners when financial statements are being
reviewed. Because accounting and financial reporting have become increasingly complex in the
period since ASOP No. 21 was adopted, and audit issues have received increased attention in
recent years, the ASB decided that a revision of ASOP No. 21 was necessary.
Many organizations have a number of actuaries involved in financial statement preparation but
frequently want to have the auditor assistance coordinated. This will, in many cases, define the
role of the responding actuary as different from that of the preparing actuary. The responding
actuary, while not necessarily responsible for the preparation of the financial statement, is
usually well versed in the organization’s financial statement work (or, in a large organization, a
specific portion thereof) performed by actuaries and therefore is in a position to provide positive
and timely responses to auditors or examiners. In many cases the responding actuary (or
actuaries in the case of a large organization) may also have been the preparing actuary (or
actuaries).
6
This revision of ASOP No. 21 expands the scope of the standard to include responsibilities to
examiners when the examiners are engaged in the examination of a financial statement. This
revision also clarifies that the standard applies to the audit or examination of statutory financial
statements.
7
Appendix 2
The second exposure draft of this actuarial standard of practice (ASOP), then titled Responding
to or Assisting Auditors or Examiners in Connection with Financial Statements (for All Practice
Areas), was issued in January 2004, with a comment deadline of April 30, 2004. Twelve
comment letters were received. The Task Force to Revise ASOP No. 21 carefully considered all
comments received and made appropriate changes in a few sections. Summarized below are the
significant issues and questions contained in the comment letters and the task force’s responses
to each. Unless otherwise noted, the section numbers and titles used below refer to those in the
second exposure draft.
GENERAL COMMENTS
Comment One commentator believed that the ASOP should explicitly state that the appointed actuary will be
considered a responding actuary with respect to statements of actuarial opinion.
Response The task force had discussed this issue previously with respect to the first exposure draft and believed
that the appointed actuary will not necessarily be a responding actuary. The scope of the standard does
not include the duties of the appointed actuary with respect to statements of actuarial opinion.
Comment One commentator suggested that the ASOP include a definition of “preparing actuary.”
Response The task force believed that the duties of the preparing actuary were beyond the scope of this standard.
Section 2.2, Examiner
Comment One commentator questioned whether this definition was meant to include financial analysts who
perform “desk reviews” on annual and quarterly statutory statements.
Response The task force believed that a review that does not constitute an audit or an examination of a financial
statement is not in the scope of the standard.
Section 2.3, Financial Statement
Comment One commentator believed that this definition should include the upcoming international accounting
standards.
Response The task force believed that the phrase “applicable generally accepted accounting principles” was
sufficiently broad to include upcoming international accounting standards.
8
Comment One commentator believed that the definition should be expanded to cover presentations of financial
position that are intended to be publicly available, “regardless of whether in accordance with standards or
regulations.” Another commentator questioned whether “special reports” and incomplete financial
statements subject to audit or examination were covered by this definition. Another commentator
believed the definition should include “agreed upon procedures” to cover times when accounting firms
are asked to audit financial information that is not technically a financial statement, such as closed block
statutory filings.
Response The task force intended that the scope of the standard be limited to audits or examinations of financial
statements, as defined in section 2.3.
Section 2.5, Responding Actuary
Comment One commentator noted that the reviewing actuary normally has access to any actuary at an attest client
and that the reviewing actuary may not question whether the other actuary was expressly designated by
the client to respond to the auditor or not. The commentator suggested that any actuary responding to the
auditor or examiner, whether expressly designated or not, should follow this standard.
Response The task force disagreed and made no change. The purpose of this ASOP is to provide guidance for those
who have been expressly assigned the roles of a reviewing actuary or a responding actuary, as defined in
this standard.
Comment One commentator believed the definitions should explicitly state that a consultant could perform these
roles.
Response The task force believed that the definitions were sufficient to include consultants.
Section 2.6, Reviewing Actuary
Comment One commentator sought clarification about what it means to be “designated” in this context and
questioned whether an actuary would be designated if he or she researched and responded to an
examiner’s question about some actuarial aspect of a company’s financial statement.
Response The task force modified the definition by adding “expressly” before “designated,” which is consistent
with the definition of “responding actuary.”
Comment One commentator questioned whether a regulatory actuary who does not typically become integrally
involved in the planning of periodic financial examinations could be considered a reviewing actuary.
Response The task force believed that a regulatory actuary is a reviewing actuary when expressly designated to
assist with an audit or examination of a financial statement.
Section 3.1, Responsibilities of the Responding Actuary
Comment One commentator believed that the standard should require actuaries to provide an assessment for all
assumptions used in the measurements, whether prescribed or not.
Response This task force believed generally accepted actuarial practice does not require the responding actuary to
comment on the reasonableness of prescribed assumptions.
9
Section 3.1.1, Data, Assumptions, and Methods

Comment One commentator suggested adding new list items about the impact of any change in actuarial
assumptions and the identification of any assumptions used that are not the responding actuary’s best
estimate of future results.
Response The task force believed that some such requests, where appropriate, would be covered by sections 3.1.2
or 3.1.3.
Comment One commentator sought clarification about what was meant by the phrase “based on availability.”
Response The task force clarified the language.

Section 3.1.2, Environmental Considerations
Comment One commentator suggested adding a new list item about circumstances surrounding recent changes to
the company’s appointed actuary.
Response The task force noted that the list of examples was not intended to be exhaustive and the actuary may
consider other factors.
Comment One commentator suggested that language be added to state that the responding actuary should be
prepared to discuss the listed environmental considerations to the extent available.
Response The task force believed the existing language covered this.
Section 3.1.3, Requests for Information
Comment One commentator believed the language was overly broad. Several other commentators believed that the
language was consistent with generally accepted actuarial practice.
Response The task force believed that the language was appropriate.
Comment One commentator suggested adding the phrase “in support of those elements of the financial statement
for which the actuary is the responding actuary.”
Response The task force believed the existing language, read with the definition of “responding actuary” in section
2.5, encompassed this.
Section 3.2, Responsibilities for the Reviewing Actuary
Comment One commentator suggested that wording be added to indicate that additional requirements will exist in
some situations, such as when a reviewing actuary employed in an audit capacity as an external or
internal auditor is subject to additional requirements such as generally accepted auditing standards.
Response The task force believed that guidance with respect to auditing standards was beyond the scope of this
standard.
Comment One commentator suggested adding language similar to the last sentence of section 3.1 to state that the
reviewing actuary may involve other actuaries in performing the audit or examination.
Response The task force did not change the language. The second sentence of 3.1 had been included to make it
clear that the responding actuary may in many cases be in a managerial role and is not necessarily
expected to be the actuary most familiar with all items subject to audit or examination. The task force did
not consider it necessary to add such language to 3.2 as the scope of the actuary’s review is agreed to by
the auditor or examiner. It is generally understood that an actuary may require the assistance of others.
10
Section 3.2.1, Planning

Comment One commentator believed that language should be added to cover instances in which the reviewing
actuary has performed a comparable review in prior periods and the results might be assumed to be
similar if significant changes did not occur.
Response The task force believed the existing language was appropriate.
Comment One commentator noted that, based on the definition of reviewing actuary, the actuary designated by the
auditor or examiner to review some actuarial financial statement item is a reviewing actuary. This would
imply that, if the auditor asks an actuary at the company or at the auditing firm to assist with a small
piece of the overall financials, the actuary becomes a reviewing actuary and is, therefore, responsible to
comment to the responding actuary or the company with respect to the scope, procedures, and timing of
the overall audit. The commentator recommended that the definition of reviewing actuary be revised or
that this section make it clear that the reviewing actuary should discuss only items related to the piece of
the audit on which the actuary is working.
Response The task force believed that the definition of “reviewing actuary” was sufficiently clear in this context.
Section 3.2.2, Documentation
Comment One commentator suggested adding a requirement to include documentation of changes in scope in the
course of the audit.
Response The task force believed that this was implicit in the language.
Section 3.4, Confidentiality
Comment One commentator suggested that the section be revised to read “except as to the reviewing actuary and
others in the reviewing actuary’s organization with a need to know.”

Comment One commentator believed that this section should caution actuaries that the confidentiality safeguards
offered by the standard are unlikely to keep documents produced for and provided to the government
outside of the public domain.
Response The task force believed it was not appropriate to add such guidance to the ASOP.
Comment One commentator suggested that the section include language that permits an actuary to disclose
confidential data if the actuary is legally obligated to do so.
Response The task force noted that nothing in the ASOP precludes the actuary from complying with applicable law
and that compliance with applicable law is not a deviation from the standard.
11
Actuarial Standard
of Practice
No. 22
Statements of Opinion Based on

Asset Adequacy Analysis by Actuaries
for Life or Health Insurers
Revised Edition
Developed by the
Cash Flow Testing Task Force of the
Adopted by the
September 2001
(Doc. No. 083)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.2 Appointed Actuary 2
2.3 Asset 2
2.4 Asset Adequacy Analysis 2
2.5 Asset Risk 2
2.6 Cash Flow 2
2.7 Cash Flow Analysis 2
2.9 Gross Premium Reserve 3
2.10 Gross Premium Reserve Test 3
2.12 Insurer 3
2.13 InvestmentRate-of-Return Risk 3
2.14 Liability 3
2.15 Moderately Adverse Conditions 3
2.17 Policy Cash Flow Risk 3
2.18 Policy Cash Flows 3
2.19 Qualified Actuary 4
2.20 Scenario 4

3.1 Requirements to Consider 4
3.2 Appointed or Qualified Actuary 4
3.3 Statement of Opinion 4
3.3.1 Asset Adequacy Analysis 4
3.3.2 Analysis Methods 5
3.3.3 Assumptions 6
ii
3.3.4 Additional Considerations 7

3.4 Forming an Opinion with Respect to Asset Adequacy Analysis 7
3.4.1 Reasonableness of Results 7
3.4.2 Adequacy of Reserves and Other Liabilities 8
3.4.3 Analysis of Scenario Results 8
3.4.4 Aggregation During Testing 8
3.4.5 Aggregation of Results 8
3.4.6 Trends 8
3.4.7 Management Action 8
3.4.8 Subsequent Events 9

4.1 Required Communications 9
4.2 Format and Content of Statement 9
4.3 Reliance on Others for Data, Projections, and Supporting Analysis 9
4.4 Opinions of Other Actuaries 9
4.5 Additional Disclosures 9
4.7 Conflict with Applicable Law 10
4.8 Retention 10
APPENDIXES

Background 12
iii
September 2001

Actuarial Standards Board and Other Persons Interested in Statements of Opinion
by Actuaries for Life or Health Insurers
This booklet contains the final version of ASOP No. 22. The original title, Statutory Statements
of Opinion Based on Asset Adequacy Analysis by Appointed Actuaries for Life or Health
Insurers, has been changed to Statements of Opinion Based on Asset Adequacy Analysis by
Actuaries for Life and Health Insurers. This standard, along with a revision of ASOP No. 7, now
titled Analysis of Life, Health, or Property/Casualty Insurer Cash Flows, supersedes ASOP No.
14, When to Do Cash Flow Testing for Life and Health Insurance Companies, which has been
repealed, all effective April 15, 2002.
Background
The model Standard Valuation Law (SVL) promulgated by the National Association of Insurance
Commissioners (NAIC), as amended in 1990, allowed for two different types of actuarial
opinions. Opinions required under Section 7 of the NAIC model Actuarial Opinion and
Memorandum Regulation (AOMR) do not include an asset adequacy analysis. Opinions required
under Section 8 of the 1991 NAIC model AOMR include an asset adequacy analysis, that is,
analysis of whether the company’s assets supporting the reserves are adequate to mature the
company’s obligations.
ASOP No. 22, adopted by the Actuarial Standards Board in October 1993, replaced Financial
Reporting Recommendation No. 7 of the American Academy of Actuaries (Academy), Statement
of Actuarial Opinion for Life Insurance Company Statutory Annual Statements, and its related
Interpretations as guidance for Section 8 opinions by appointed actuaries that were filed in states
that had enacted the 1990 amendments to the SVL and promulgated the AOMR. In those states,
ASOP No. 22 also replaced the Academy’s Financial Reporting Recommendation No. 11,
Statement of Actuarial Opinion for Interest-Indexed Universal Life Insurance Contracts.
As all states have passed the 1991 AOMR, and since ASOP No. 22 is general enough to cover
relevant issues on interest-indexed universal life, Financial Reporting Recommendation No. 7
(and its related Interpretations) and No. 11 were repealed by the Academy in conjunction with the
adoption of this revised ASOP at the September 2001 ASB meeting.
iv
Prior to the adoption of the 1993 version of ASOP No. 22, there had been discussions as to
whether ASOP No. 22 should cover opinions under both Section 7 and Section 8 of the 1990
NAIC model AOMR. The ASB decided to limit ASOP No. 22 to cover opinions required under
only Section 8 of that model regulation. The ASB adopted Actuarial Compliance Guideline
(ACG) No. 4, Statutory Statements of Opinion Not Including an Asset Adequacy Analysis by
Appointed Actuaries for Life and Health Insurers, in October 1993 to provide guidance on
opinions required under Section 7 of the 1991 NAIC AOMR.
The proposed revision of the NAIC AOMR, as of this writing, does not make a distinction
between opinions with and without asset adequacy analysis. However, applicable law may still
provide for an opinion not including asset adequacy analysis. In conformance with the proposed
revision of the NAIC AOMR, ASOP No. 22 has eliminated reference to Section 8 of the AOMR.
In order for this standard to be consistent with current applicable law, which may still provide for
an opinion not including asset adequacy analysis, section 1.2, Scope, of this standard was
revised. Section 1.2 notes that, if applicable law is in conflict with this standard, compliance with
applicable law, is not a deviation from this standard, provided the actuary discloses such conflict
in his or her report. Because Section 7 opinions are allowed by the AOMR as of the time of this
revision to ASOP No. 22, and because they may be allowed by some states after the NAIC adopts
the proposed version of the AOMR that exists as of this writing, it was decided to keep ACG No.
4, which was adopted in October 1993. If such a time comes when Section 7 opinions are no
longer allowed in any jurisdiction, it is expected that ACG No. 4 would be repealed.
In addition to the AOMR, actuarial opinions are required under the NAIC’s Synthetic Guaranteed
Investment Contracts Model Regulation, and under the NAIC’s Separate Accounts Funding
Guaranteed Minimum Benefits Under Group Contracts Model Regulation. The revision of
ASOP No. 22 will apply to these and any similar regulation requiring the actuary to opine on the
adequacy of reserves and other liabilities in light of supporting assets.
In addition to ASOP No. 22, as part of the project to look at all cash flow testing standards of
practice, ASOP No. 7 and ASOP No. 14 were also reviewed. Relevant portions of ASOP No. 14
were incorporated within the 2001 revisions of ASOP No. 7 and ASOP No. 22.
At its September 2001 meeting, the ASB voted to adopt the revised ASOP No. 7 and ASOP No.
22, and to repeal ASOP No. 14.
Actuaries performing work for health benefit plans such as health insurers, health service plans,
and HMOs should note that this standard potentially applies to each of these types of plans.
Applicable law will determine for which of these types of plans an appointed or qualified actuary
is required to submit a statement of actuarial opinion based on asset adequacy analysis subject to
this standard.
v
Exposure Draft
The exposure draft of this revised standard was issued in September 2000 with a comment
deadline of March 31, 2001. The Cash Flow Testing Task Force carefully considered the fifteen
comment letters received. For a summary of the substantive issues contained in these comment
letters, please see appendix 2.
1. As noted above, it was decided to keep ACG No. 4 in order to continue to provide
guidance to actuaries issuing Section 7 opinions. If such a time comes when Section 7
opinions are no longer allowed in any jurisdiction, it is expected that ACG No. 4 would
be repealed.
2. Section 3.4.3, Analysis of Scenario Results—Words were added to note that the failure of
a small percentage of scenarios may not indicate the need for further analysis.
The task force thanks all those who commented on the exposure draft.
Cash Flow Testing Task Force
Marc A. Cagen, Chairperson

Michael A. Cioffi Thomas A. Phillips
Owen M. Gleeson David K. Sandberg
David H. Jungk Herbert S. Wolf
Lew H. Nathan

John W. Brumbach Robert G. Meilander
Charles Carroll Barry L. Shemin
vi

David G. Hartman Michael A. LaMonica
Ken W. Hartwell Heidi Rackley
William C. Koenig Robert E. Wilcox
vii
STATEMENTS OF OPINION BASED ON

ASSET ADEQUACY ANALYSIS BY ACTUARIES
FOR LIFE OR HEALTH INSURERS
1.1 PurposeThis actuarial standard of practice (ASOP) provides guidance to actuaries when
serving as an appointed actuary or a qualified actuary in providing a statement of actuarial
opinion relating to asset adequacy analysis of a life or health insurer, when such opinion is
prepared pursuant to applicable law such as the following:
a. applicable law based on the model Standard Valuation Law as amended by the
National Association of Insurance Commissioners (NAIC) in 1990, in conjunction
with the model Actuarial Opinion and Memorandum Regulation (AOMR) adopted by
the NAIC in 1991 and subsequently amended;
b. applicable law based on the NAIC’s Synthetic Guaranteed Investment Contracts

Model Regulation;
c. applicable law based on the NAIC’s Separate Accounts Funding Guaranteed

Minimum Benefits Under Group Contracts Model Regulation; or
d. other applicable laws requiring an actuary to opine on the adequacy of a life or health
insurer’s reserves and other liabilities in light of supporting assets.
1.2 ScopeThis standard applies to actuaries when providing statements of opinion and
supporting memoranda for life or health insurers, including fraternal benefit societies and
health benefit plans, to satisfy applicable law as specified in section 1.1 of this standard.
This standard does not require the actuary to perform asset adequacy analysis in situations
where an actuarial opinion relating to asset adequacy analysis is not required by applicable
law.
1
When applicable law conflicts with this standard, complying with such applicable law shall
not be deemed a deviation from this standard, provided the actuary discloses that the asset
adequacy analysis was performed in accordance with the requirements of such applicable
law.
1.3 Cross ReferencesWhen this standard refers to the provisions of other documents, the
1.4 Effective DateThis standard is effective for all statements of actuarial opinion issued on or
after April 15, 2002.
2.1 Applicable Law—Federal, state, and local statutes, regulations, case law, and other
binding authority that may govern statements of actuarial opinion based on asset
adequacy analysis.
2.2 Appointed ActuaryAny individual who is appointed or retained in accordance with the
requirements set forth by applicable law.
2.3 AssetAny resource that can generate revenue or reduce disbursement cash flows.
2.4 Asset Adequacy AnalysisAn analysis of the adequacy of reserves and other liabilities
being tested, in light of the assets supporting such reserves and other liabilities, as specified
in the opinion.
2.5 Asset RiskThe risk that the amount or timing of items of cash flow connected with assets
will differ from expectations or assumptions for reasons other than a change in investment
rates of return. Asset risk includes delayed collectibility, default, or other financial
nonperformance. This has been commonly referred to in actuarial literature as the C-1 risk or
credit risk.
2.6 Cash Flow—Any receipt, disbursement, or transfer of cash.
2.7 Cash Flow Analysis—Any evaluation of the risks associated with the timing or amount of
cash flows.
2
2.8 Cash Flow TestingA form of cash flow analysis involving the projection and comparison
of the timing and amount of cash flows resulting from economic and other assumptions.
2.9 Gross Premium ReserveThe actuarial present value of benefits, expenses, and related
amounts less the actuarial present value of premiums and related amounts.
2.10 Gross Premium Reserve Test—The comparison of the gross premium reserve computed
under one or more scenarios to the financial statement reserve.
2.11 Health Benefit Plan—A contract providing medical, dental, vision, disability income,
accidental death and dismemberment, long-term care, and similar benefits, whether on a
reimbursement, indemnity, or service benefit basis, regardless of the form of the risk-bearing
organization, including benefit plans provided by self-insured plan sponsors.
2.12 Insurer—An entity that accepts the risk of financial losses or, for a specified time period,
guarantees stated benefits upon the occurrence of specific contingent events, in exchange for
a monetary consideration.
2.13 Investment Rate-of-Return RiskThe risk that investment rates of return will differ from
expectations or assumptions, causing a change in the amount or timing of asset, policy or
other liability cash flows. This has been commonly referred to in actuarial literature as the
C-3 risk or asset/liability mismatch risk.
2.14 Liability—Any commitment by, or requirement of, an insurer that can reduce revenue or
generate disbursement cash flows.
2.15 Moderately Adverse ConditionsConditions that include one or more unfavorable, but not
extreme, events that have a reasonable probability of occurring during the testing period.
2.16 Other Liability Cash Flows—Cash flows not specifically associated with asset or policy cash
flows. Examples are corporate expenses, payables, surplus notes, shareholder dividends, or
balance sheet items that result from litigation.
2.17 Policy Cash Flow RiskThe risk that the amount or timing of cash flows under a policy or
contract will differ from expectations or assumptions for reasons other than a change in
investment rates of return or a change in asset cash flows. This has been commonly referred
to in actuarial literature as the C-2 risk.
2.18 Policy Cash FlowsAll premiums and other amounts paid by policyholders or contract
holders to the insurer and all benefits, expenses, and other amounts paid to policyholders or
others as required by policy or law.
3
2.19 Qualified ActuaryAn actuary who meets qualification requirements set forth by applicable
law.
2.20 ScenarioA set of economic and other assumptions used in performing cash flow analysis.
3.1 Requirements to ConsiderWhen performing an asset adequacy analysis, the actuary should
review and apply applicable law and applicable actuarial standards of practice, such as ASOP
No. 7, Analysis of Life, Health, or Property/Casualty Insurer Cash Flows. The actuary
should be aware of the Actuarial Guidelines published in the NAIC’s Examiners Handbook,
and make a reasonable effort to be aware of generally distributed interpretations of each
regulatory authority.
3.2 Appointed or Qualified ActuaryBefore accepting an appointment or serving as an

appointed or qualified actuary, the actuary should determine that he or she meets the
requirements of the Qualification Standards for Prescribed Statements of Actuarial Opinion,
promulgated by the American Academy of Actuaries. The appointment should be in writing,
from the board of directors or its designee, citing the applicable law. If the appointment as an
entity’s appointed actuary is required by applicable law, the actuary should accept or
withdraw from such an appointment in conformance with the applicable law. Acceptance of
or withdrawal from the position should be in writing.
3.3 Statement of OpinionThe form, content, and recommended language of the statement of
opinion may be specified by applicable law. The actuary should include in the opinion a
statement on the adequacy of reserves and other liabilities based on an asset adequacy
analysis, the details of which are contained in the supporting memorandum.
3.3.1 Asset Adequacy AnalysisThe actuary performs asset adequacy analysis on the
underlying asset, policy, or other liability cash flows. In performing an asset
adequacy analysis, the actuary should choose a block of assets such that the book
value of those assets is no greater than the book value of the reserves and other
liabilities being tested. If the actuary determines that additional assets are needed to
support these reserves and other liabilities being tested, then the actuary should
establish an additional reserve equal to the book value of those additional assets.
The actuary should disclose and justify in the supporting memorandum any material
change in the method of allocating assets to the reserve and other liabilities from the
method used in the asset adequacy analysis underlying the prior actuarial opinion.
4
The actuary should consider the type of asset, policy, or other liability cash flows and
the severity of risks associated with those cash flows, including the investment
rate-of-return risk. The actuary may use a single analysis for reserves and other
liabilities in aggregate or a number of analyses for each of several blocks of business.
In either case, a number of considerations may affect the actuary’s work. The actuary
should use professional judgment in determining which considerations apply.
3.3.2 Analysis MethodsA number of asset adequacy analysis methods are available to,
and used by, actuaries. The most widely used method is cash flow testing (see ASOP
No. 7). Cash flow testing is generally appropriate where cash flows of existing assets,
policies, or other liabilities may vary, or where the present value of combined asset,
liability, or other cash flows may vary under different economic or interest-rate
scenarios.
Asset adequacy analysis test methods other than cash flow testing may be appropriate
in other situations. The following are examples of acceptable methods. These
methods would test moderately adverse deviations in the actuarial assumptions,
except for the investment rate-of-return assumptions. The actuary should use
professional judgment in choosing an appropriate testing method and in determining
which assumptions should be varied for the particular test.
a. A gross premium reserve test may be appropriate where the policy and other
liability cash flows are sensitive to moderately adverse deviations in the
actuarial assumptions underlying these cash flows. For example, this type of
method may be appropriate for term insurance backed by noncallable bonds,
where the testing would emphasize the sensitivity of moderately adverse
deviations in the underlying mortality, morbidity, withdrawal, and expense
assumptions.
b. To the extent that the degree of conservatism in the reserves and other
liabilities is so great that moderately adverse deviations in the actuarial
assumptions underlying the policy and other liability cash flows are covered,
the actuary may demonstrate this degree of conservatism. For example, this
type of method may be appropriate for a block of accidental death and
dismemberment insurance if that block is reserved using conservative interest
rates and mortality/morbidity tables.
5
c. Some products may have risks that are not subject to material variation,
where the policy and other liability cash flow risks have been limited by
product design and the investment strategy. Rather than do cash flow testing,
the actuary may demonstrate that these risks are not subject to material
variation and that moderately adverse deviations in actuarial assumptions
underlying the policy and other liability cash flows are covered. For example,
this type of method may be appropriate for a variable annuity with no
guarantees and no unamortized expense allowance.
d. The risks inherent in products with short-term liabilities supported by short-

term assets may be more appropriately analyzed by measuring moderately
adverse deviations in actuarial assumptions underlying the policy and other
liability cash flows using risk theory techniques. These risks may involve a
small number of large individual claims over a short-term period.
e. Loss-ratio methods may be appropriate when the asset, policy, and other
liability cash flows are of short duration. Under this method, moderately
adverse deviations in the actuarial assumptions underlying the morbidity or
mortality costs may be tested. Loss-ratio methods are described in ASOP
No. 5, Incurred Health and Disability Claims.
If the actuary is uncertain as to whether moderately adverse deviations in the

investment rate-of-return assumptions will have a material impact on the asset
adequacy analysis results, then the actuary should also test moderately adverse
deviations in the investment rate-of-return risk assumptions.
The actuary should document the asset adequacy analysis methods chosen.
3.3.3 AssumptionsIn addition to selecting an appropriate analysis method, the actuary

should select appropriate assumptions. Accepted methods include the following:
a. adaptation of company experience or industry studies;
b. use of a deterministic scenario or set of scenarios; and
c. statistical distributions or stochastic methods.
The actuary should document the assumptions chosen and provide supporting
rationale for the appropriateness of the assumptions.
6
3.3.4 Additional ConsiderationsAdditional considerations include the following:
a. Use of Analyses or Data Predating the Valuation DateIf appropriate, the

actuary may use asset adequacy analyses performed prior to the valuation
date, an analysis performed at the time of policy issue, modeling based on
data taken from a time that predates the valuation date, or other methods.
For example, if appropriate, the actuary may use a prior analysis of a closed
block of business, or the actuary may use September 30 data to support a
December 31 valuation.
The actuary should document the reasonableness of such prior period data,
studies, analyses or methods, that key assumptions are still appropriate, and
that no material events have occurred prior to the valuation date that would
invalidate the asset adequacy analysis on which the actuary’s opinion is
based.
b. Testing HorizonAsset adequacy should be tested over a 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 analysis.
c. CompletenessThe asset adequacy analysis should take into account

anticipated material cash flows such as renewal premiums, guaranteed and
nonguaranteed benefits, expenses, and taxes. In determining the assets
supporting the tested reserves and other liabilities, any asset segmentation
system used by the company should be considered. For a reserve or other
liability to be reported as “not analyzed,” the actuary should determine that
the reserve or other liability amount is immaterial.
3.4 Forming an Opinion with Respect to Asset Adequacy AnalysisThe actuary should use
appropriate analysis methods when forming an opinion with respect to asset adequacy. In
judging whether the results from the asset adequacy analysis are satisfactory, the actuary
should use professional judgment in determining which of the following, or other,
considerations apply:
3.4.1 Reasonableness of ResultsThe actuary should review the modeled future economic
and experience conditions and test results for reasonableness.
7
3.4.2 Adequacy of Reserves and Other LiabilitiesWhen forming an opinion, the actuary
should consider whether the reserves and other liabilities being tested are adequate
under moderately adverse conditions, in light of the assets supporting such reserves
and other liabilities. To hold reserves or other liabilities so great as to withstand any
conceivable circumstances, no matter how adverse, would usually imply an excessive
level of reserves or liabilities.
3.4.3 Analysis of Scenario ResultsIn the event that the supporting assets are insufficient
to meet the reserves and other liabilities under a scenario, the actuary may determine
that further analysis is required. However, this situation does not necessarily mandate
additional reserves or liabilities. Further analysis may indicate that current reserves
and other liabilities are adequate. For example, if a large number of scenarios were
run, the failure of a small percentage of them may not indicate the need for additional
reserves or liabilities. The basis of any such judgment should be documented in the
supporting memorandum.
3.4.4 Aggregation During TestingWhen performing an asset adequacy analysis, the

actuary should not aggregate the reserves and other liabilities of two or more blocks
of business during testing if the assets supporting the reserves and other liabilities of
one block of business can not be used to discharge the reserves and other liabilities of
other blocks of business. For example, separate account assets are generally not
available during the testing period to discharge general account reserves and other
liabilities.
3.4.5 Aggregation of ResultsAfter testing is done, the actuary may offset deficiencies in
one business segment with sufficiencies in another business segment for the purposes
of reporting and documenting the results of testing. The actuary should review
applicable law regarding the aggregation of results.
3.4.6 TrendsTest results from prior years can provide the actuary with valuable insight
into the dynamics of asset adequacy analyses, particularly if successive years’ results
have been reconciled. The actuary should consider using analysis of trends and
reconciliation analyses in forming an opinion.
3.4.7 Management ActionAny anticipated future actions by management to address

adequacy concerns identified by the actuary should be considered in forming an
opinion. The assumed results of any such actions should be quantified and
documented by the actuary in the supporting memorandum.
8
3.4.8 Subsequent EventsWhether or not applicable law requires the actuary to consider
subsequent events, the actuary should consider all material events that are likely to
affect the actuary’s analysis up to the date the opinion is signed and disclose those
events in the opinion. The actuary has an obligation to be reasonably informed about
such events. The actuary’s reliance, if any, on representations of company
management regarding subsequent events should be disclosed in the opinion.
4.1 Required CommunicationsThe actuary should provide reports, opinions, and memoranda
as required by applicable law.
4.2 Format and Content of StatementApplicable law may specify the content of the statement
of actuarial opinion and the supporting memorandum to the company. If the actuary departs
materially from the recommended language or gives an adverse opinion, such departure or
adverse opinion should be disclosed in both the opinion and the supporting memorandum.
4.3 Reliance on Others for Data, Projections, and Supporting Analysis—The actuary may rely on
data, projections, and supporting analysis supplied by others. In doing so, the actuary should
disclose both the fact and the extent of such reliance. Such disclosure may be prescribed in
applicable law. The accuracy and comprehensiveness of data, projections, and supporting
analysis supplied by others are the responsibility of those who supply the data, projections,
and supporting analysis. When practicable, the actuary should review the data, projections,
and supporting analysis for reasonableness and consistency, and disclose such a review. For
further guidance, the actuary is directed to ASOP No. 23, Data Quality.
4.4 Opinions of Other ActuariesWhen more than one actuary contributes to forming an
opinion, supporting memoranda from the other contributing actuaries may be included in the
actuary’s memorandum. The actuary should review the contributions of these other actuaries.
The actuary should then form an overall opinion without claiming reliance on the opinions of
other actuaries. The use of the work product of other actuaries should be described in the
supporting memorandum.
4.5 Additional Disclosures In addition to the details of the asset adequacy analysis that may be
required by applicable law, the supporting memorandum should include disclosure and
discussion of the following:
a. identification of the intended users of the memorandum;
b. the actuary’s reliance, if any, on representations of company management regarding

subsequent events; and
9
c. any material change in the method of allocating assets to the reserve and other
liabilities from the method used in the asset adequacy analysis forming the prior
actuarial opinion.
4.6 Documentation—In addition to complying with section 4.3, Documentation, of ASOP

No.7, the actuary should document the following, as appropriate, for the cash flow
analysis being conducted:
a. the asset adequacy analysis methods chosen;
b. the assumptions chosen;
c. the reasonableness of any prior period data, studies, analyses, or methods, that key
assumptions are still appropriate, and that no material events have occurred prior
to the valuation date that would invalidate the asset adequacy analysis on which
the actuary’s opinion is based;
d. the basis of any judgment as to the adequacy of reserves or other liabilities;
e. whether any aggregation was done, either during testing or during analysis of
results; and
f. the assumed results of management actions considered in forming an opinion.
4.7 Conflict with Applicable LawWhen applicable law conflicts with this standard,
compliance with such applicable law shall not be deemed a deviation from this standard,
provided the actuary discloses that the opinion was rendered in accordance with the
requirements of such applicable law.
4.8 Retention—The actuary, to the extent practicable, should take reasonable steps to ensure that
the documentation will be retained for a reasonable period of time (and no less than the
length of time necessary to comply with any statutory, regulatory, or other requirements). The
actuary need not retain the documentation personally; for example, it may be retained by the
actuary’s employer.
4.9 Prescribed Statement of Actuarial OpinionAny actuarial communication described in

section 4.1 of this standard is a prescribed statement of actuarial opinion as described in the
Qualification Standards for Prescribed Statements of Actuarial Opinion promulgated by the
American Academy of Actuaries.
10
4.10 Deviation from StandardThe actuary must be prepared to defend the use of any procedure
that departs materially from this standard and must include, in any actuarial communication
disclosing the result of the procedures, an appropriate statement with respect to the nature,
rationale, and effect of such departures.
11
Appendix 1
practice.
Background
In 1975, the National Association of Insurance Commissioners (NAIC) began requiring that a
statement of actuarial opinion as to reserves and related actuarial items be included in the annual
statement filed by life and health insurance companies. In response to this requirement, the
American Academy of Actuaries promulgated Financial Reporting Recommendation No. 7,
Statement of Actuarial Opinion for Life Insurance Company Statutory Annual Statements, setting
forth the actuary’s professional responsibilities in providing such an opinion.
The form and content of this actuarial opinion, as specified in the instructions to the annual
statement, dealt specifically with reserves and did not explicitly address the adequacy of the
assets supporting these reserves and other liabilities to meet the obligations of the company.
Although not explicitly required to do so by the opinion or by existing professional standards,
some actuaries began to analyze the adequacy of assets in forming their opinions. In addition,
when the state of New York adopted the 1980 amendments to the Standard Valuation Law, it
established an optional valuation basis for annuities, permitting lower reserves provided that an
asset adequacy analysis supported the actuarial opinion with respect to such reserves.
The type of asset adequacy analysis most widely used by actuaries is multi-scenario cash flow
testing. To guide actuaries choosing to use this technique, the Actuarial Standards Board adopted
ASOP No. 7, then titled Performing Cash Flow Testing for Insurers, in October 1988 (revised
July 1991). In addition, in July 1990, the ASB adopted ASOP No. 14, When to Do Cash Flow
Testing for Life and Health Insurance Companies, to provide guidance in determining whether or
not to do cash flow testing in forming a professional opinion or recommendation.
12
In December 1990, the NAIC amended the Standard Valuation Law, and, in June 1991, the
NAIC adopted the Actuarial Opinion and Memorandum Regulation (AOMR). These actions had
the effect of moving the requirement for the statement of actuarial opinion from the annual
statement instructions into the model law itself, and provided detailed instructions for the form
and content of both the opinion and the newly required supporting memorandum. The most
significant changes made by the NAIC in the 1991 AOMR were that companies are now required
to name an appointed actuary, and, for companies subject to Section 8 of the AOMR, statements
of actuarial opinion as to reserve and other liability adequacy are required to be based on an asset
adequacy analysis described in the supporting memorandum. The asset adequacy analysis
required by the regulation must conform to the standards of practice promulgated from time to
time by the ASB.
For companies subject to Section 7, the 1991 AOMR required an actuarial opinion that the
reserves and related actuarial items have been calculated in accordance with the Standard
Valuation Law and supporting regulations. Section 7 of the 1991 AOMR did not require an
opinion as to reserve adequacy.
The proposed revision of the NAIC AOMR, as of this writing, does not make a distinction
between opinions with and without asset adequacy analysis. However, applicable law may still
provide for an opinion not including asset adequacy analysis. In conformance with the proposed
revision of the AOMR, ASOP No. 22 has eliminated reference to Section 8 of the AOMR.
Current Practices
Statements of actuarial opinion as to reserves and related items have been provided since 1975,
and practice as regards the basic elements of the opinion is well established. With respect to
opinions based on asset adequacy analysis, current practice continues to evolve.
Actuaries who perform asset adequacy analysis use professional judgment in choosing the
appropriate methods, testing periods, modeling techniques, levels of aggregation, etc. The
actuary forms an opinion based on the results of the asset adequacy analysis results and any
additional analyses needed to render that opinion. The actuarial memorandum documents the
details of the asset adequacy analysis and the basis for the actuary’s opinion. Additional
documentation may be prepared by the actuary as appropriate to support the actuarial
memorandum.
13
Appendix 2
The exposure draft of this revised actuarial standard of practice was issued in September 2000
with a comment deadline of March 31, 2001. (Copies of the exposure draft are available from the
ASB office.) Fifteen comment letters were received. The Cash Flow Testing Task Force of the
Life Committee of the ASB carefully considered all comments received. Summarized below are
the significant issues and questions contained in the comment letters and the task force’s
responses.

Section 1.2, Scope
Comment One commentator wanted the ASOP expanded to include GAAP reserve testing.
Response The task force believes that is beyond the scope of this standard.
Comment The exposure draft asked for comments on the wording in the draft about the standard not requiring the
actuary to perform asset adequacy analysis where an actuarial opinion requiring asset adequacy analysis
is not required by applicable law. Some commentators supported the wording in the exposure draft.
Some believed that ACG No. 4 should be kept in place to give the actuary guidance on “Section 7”-type
(non-asset-adequacy testing) opinions. Some commentators believed this standard needed to make it
clear whether Financial Reporting Recommendation No. 7 was still applicable. Some commentators
believed that ASOP No. 22 should be expanded to require actuaries to perform asset adequacy testing
regardless of regulations on the subject.
Response The task force believes the standard’s language regarding the actuary not being required to perform asset
adequacy analysis where an actuarial opinion requiring asset adequacy analysis is not required by
applicable law is appropriate for actuaries who are allowed to issue Section 7 opinions. Further, the task
force agreed with the comments that suggested ACG No. 4 is still appropriate guidance for actuaries in
this situation. The task force also believes that Financial Reporting Recommendation Nos. 7, Statement
of Actuarial Opinion for Life Insurance Company Statutory Annual Statements; 7-A, Responsibilities of
the Actuary and Others; 7-B, Adequacy of Reserves; and 7-C, Qualification of Actuary’s Statement of
Opinion, are no longer appropriate and should be repealed.
Section 2.3, Asset, and 2.14, Liability (previously section 2.13)
Comment Many commentators suggested changes in these definitions.
Response The task force believes the definitions are appropriate. The definitions are consistent with those found in
other standards, where practical. The definitions in ASOP No. 22 are for just this standard and are
appropriate for this standard.
14
Section 2.7, Cash Flow Analysis, and 2.8, Cash Flow Testing
Comment One commentator did not like the distinctions made between “cash flow analysis” and “cash flow
testing.”
Response The task force believes the definitions are appropriate, since ASOP No. 22 is now designed to make a
hierarchy of types of analysis, with “cash flow analysis” being the most general term, and “cash flow
testing” being one type of cash flow analysis.
Section 2.15, Moderately Adverse Conditions (previously section 2.14)
Comment One commentator wanted more guidance on what constitutes a moderately adverse condition; a second
commentator believed the definition “watered-down” the standard.
Response The task force disagreed and believes the term is defined in a reasonable manner for the purposes of this
ASOP.
Section 2.16, Other Liability Cash Flows
Comment One commentator noted that the term “other liability cash flows” was used, but not defined, in the
exposure draft. One commentator thought that the definition should include surplus notes.
Response The task force agreed and added a definition of “other liability cash flows,” which includes a reference
to surplus notes, to both ASOP No. 7 and No. 22.
Section 2.18, Policy Cash Flows (previously section 2.16)
Comment One commentator noted that the definition used in the exposure draft did not treat premium taxes
properly, as premium taxes are not paid on behalf of policyholders, but rather are paid as required by
applicable law.
Response The task force agreed and changed the definition accordingly.
Section 3.2, Appointed or Qualified Actuary (previously titled “Appointment as Appointed or Qualified
Actuary”)
Comment One commentator noted a qualified actuary is not “appointed.”
Response The task force agreed with the point and changed the wording of the section.
Section 3.3.1, Asset Adequacy Analysis
Comment One commentator wanted further guidance about the use of expenses with specific guidance on overhead
expenses.
Response The task force believes the level of guidance in this section is appropriate.
Section 3.3.2, Analysis Methods
Comment One commentator noted that the wording in section 3.3.2 seemed to imply that the list of methods in
section 3.3.2(a–e) was an exhaustive list of methods, and that this implied no other methods were
possible.
Response The task force agreed that the intention was not to exclude other methods from being considered and
clarified the language.
Comment One commentator noted that the wording in the first paragraph did not properly discuss the two separate
issues of testing existing (in force) cash flows vs. testing combined cash flows. On the latter, it was noted
that in some situations changes in asset and liability cash flows may offset.
Response The task force agreed and expanded upon the exposure draft wording to make this clearer.
15
Comment One commentator wanted guidance specifically on allowing other methods of asset adequacy analysis
when either or both the C-1 and C-3 risks are not likely to impact present values.
Response The task force agreed that the exposure draft wording implied the actuary would have to vary all
assumptions, even those that were basically fixed or immaterial to the analysis being performed. The task
force changed the wording to clarify that the actuary should use professional judgment in determining
which assumptions should be varied.
Comment One commentator asked why, under the method discussed in section 3.3.2(b) (conservatism in the
reserves being so great as to not need to cash flow test), accidental death and dismemberment insurance
is always an appropriate example.
Response The task force agreed and added wording that stated accidental death and dismemberment insurance
would be an example only if the block is reserved using conservative interest rates and mortality tables.
Comment A few commentators noted that the phrase “short-term products” in section 3.3.2(d) has meaning under
GAAP.
Response The task force agreed that the use of the phrase “short-term products” could cause confusion in that
regard and changed the language to refer to products with short-term liabilities.
Section 3.3.3, Assumptions
Comment A few commentators wanted more detailed guidance on the choice of assumptions.
Comment Two commentators believed the actuary should provide supporting rationale for the choice of
assumptions in addition to simply documenting what they were.
Response The task force agreed and clarified the wording.

Section 3.3.4, Additional Considerations
Comment A few commentators noted the issue of cash flows being more uncertain the further into the future a
projection is done.
Response The task force agreed, but believed no change to ASOP No. 22 was necessary. Rather, the task force
changed section 3.10.2, Number of Scenarios, in ASOP No. 7, noting more potential for variability the
further into the future the cash flows are projected.
Section 3.4.2, Adequacy of Reserves and Other Liabilities
Comment One commentator noted that the phrase “would usually imply an excessive level of reserves or
liabilities” should be deleted.
Response The task force disagreed, since those words are needed to help define what it means for reserves to be
adequate under moderately adverse conditions.
Comment One commentator wanted wording to clarify what reserving assumptions should be used under the
current Health Insurance Reserves model regulation in doing that regulation’s required gross premium
reserve test.
Response The task force disagreed, since guidance on meeting the Health Insurance Reserves model regulation is
beyond the scope of this standard.
16
Section 3.4.3, Analysis of Scenario Results

Comment A few commentators asked for guidance in terms of what happens if a few scenarios out of a large
number of scenarios tested showed failure.
Response The task force agreed that guidance was needed and added language noting that a small percentage of
failures may not indicate the need for additional reserves.
Section 3.4.4, Aggregation During Testing
Comment One commentator wanted further guidance on what aggregation should be done.
Section 3.4.5, Aggregation of Results
Comment A few commentators noted there may be restrictions on aggregation of results; in addition, some
commentators asked for further guidance.
Response The task force agreed with the first point and added a sentence noting that the actuary should review
applicable law when aggregating results. Regarding further guidance, the task force believes the level of
guidance in this section is appropriate.
Section 3.4.6, Trends
Comment One commentator wanted to require the actuary to analyze trends and reconcile results.
Response The task force disagreed, noting that while the actuaries should consider these steps, the steps should not
be required, as in some situations they may be of limited value.
Section 3.4.8, Subsequent Events
Comment Many comments were received on this section. Some commentators believed the draft went beyond what
is required by the AOMR in requiring an actuary to write a subsequent events paragraph. Other
commentators believed the draft should go further and require the actuary to consider subsequent events
that are in process. Some commentators essentially supported the wording in the draft ASOP.
Response The task force believes that the wording does not go beyond the AOMR, in that it merely clarifies how
the regulation applies to existing practice. The task force further believes that requiring the actuary to
consider events that happen beyond the date the opinion is signed would go too far. The task force left
the wording unchanged.
Comment One commentator asked about procedures to recall the opinion, if subsequent events beyond the date the
opinion was signed lead the actuary to believe that opinion is no longer valid.
Response The task force believes no general guidance is needed on this and that the actuary can deal with this on a
case-by-case basis as needed.
Section 4.2, Format and Content of Statement
Comment Two commentators noted that any departure from the recommended language should be explained, as
well as disclosed.

Section 4.5, Additional Disclosures
Comment One commentator noted that section 4.5(a) on disclosure and discussion of Actuarial Guidelines was not
appropriate for this section.
Response The task force agreed and removed it.
17
Section 4.9, Prescribed Statement of Actuarial Opinion (previously section 4.8)

Comment A few commentators noted that the phrase “whether or not it is issued for purposes of compliance with
the law, regulation, or other standard” at the end of the first sentence does not make any sense, since
opinions are required only when there are laws or regulations.
Response The task force agreed and removed this phrase.
18
Actuarial Standard
of Practice
No. 23
Data Quality
Revised Edition
Developed by the
Actuarial Standards Board and
Applies to All Practice Areas
Adopted by the
December 2004
(Doc. No. 097)

ASOP No. 23⎯December 2004
TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Appropriate Data 2
2.2 Audit 2
2.3 Comprehensive Data 2
2.4 Data 2
2.5 Data Element 2
2.6 Practical 2
2.7 Review 2

3.1 Overview 3
3.2 Selection of Data 3
3.4 Reliance on Other Information Relevant to the Use of Data 4
3.5 Review of Data 4
3.6 Limitation of the Actuary’s Responsibility 5
3.7 Use of Data 5
3.8 Documentation 5

4.1 Disclosure 6
ii
APPENDIXES

Background 8
Current Practices 8
iii
December 2004

Actuarial Standards Board and Other Persons Interested in Data Quality
This booklet contains the final version of a revision of ASOP No. 23, Data Quality.
Background
The ASB originally adopted ASOP No. 23, Data Quality (Doc. No. 044), in 1993. The previous
ASOP was prepared by the Data Quality Task Force of the Specialty Committee of the ASB. The
General Committee has prepared this revision of ASOP No. 23 to be consistent with the current
ASOP format, to reflect current, generally accepted practice with respect to data quality, and to
provide guidance concerning other information relevant to the use of data.
Exposure Draft
The exposure draft of this ASOP was approved for exposure in October 2003 with a comment
deadline of March 31, 2004. Twenty-eight comment letters were received and considered in
developing the final standard. A summary of the substantive issues contained in the exposure
draft comment letters and the General Committee’s responses are provided in appendix 2.
1. Section 1.2, Scope, has been clarified to indicate that if this standard establishes
requirements in addition to those imposed by law, the actuary should satisfy the
requirements of both the standard and the law.
2. When data are supplied by others, section 3.3 clarifies that the actuary should follow the
guidance of section 3.5, Review of Data, before relying on such data. This means that the
actuary should review the data for reasonableness and consistency unless, in the actuary’s
professional judgment, such a review is not necessary or not practical.
iv
3. Similarly, section 3.4, Reliance on Other Information Relevant to the Use of Data, allows
reliance on such information, but now does so “unless it is or becomes apparent to the
actuary during the time of the assignment that the information contains material errors or
is otherwise unreliable.”
4. The standard clarifies that section 3.5, Review of Data, applies whether the actuary
prepared the data or received the data from a third party. The section also suggests that,
in doing the review of the data, the actuary attempt to determine the definition of each
data element used in the analysis. A definition of “review” has been added to section 2,
pointing out that this is an informal examination of the obvious characteristics of the
data.
5. The sentence that appeared in the previous ASOP No. 23 but was removed from the
exposure draft of this revision, which stated that the actuary is not expected to “develop
additional data compilations solely for the purpose of searching for questionable or
inconsistent data,” was reinserted in section 3.6, Limitation of the Actuary’s
Responsibility.
6. Section (c) of 3.7, Use of Data, was expanded to apply to results that are highly
uncertain, in addition to those that have a material bias. Appropriate disclosure is
required in section 4.1 if the actuary decides to complete the assignment in such
circumstances.
7. The committee clarified section 3.8 by explicitly requiring the actuary to document any
material defects in the data, in keeping with the requirements of ASOP No. 41, Actuarial
Communications.
The General Committee thanks everyone who took the time to contribute comments on the
exposure draft.
v

Phillip N. Ben-Zvi Ethan E. Kra
Thomas K. Custis Mark E. Litow
Larry M. Gorski Donna C. Novak

vi
DATA QUALITY
1.1 Purpose—The purpose of this actuarial standard of practice (ASOP) is to give guidance to
the actuary in the following:
a. selecting the data that underlie the actuarial work product;
b. relying on data supplied by others;
c. reviewing data;
d. using data; and
e. making appropriate disclosures with regard to data quality.
1.2 Scope—This standard applies to actuaries when providing professional actuarial services in
all practice areas. Other actuarial standards of practice may contain additional considerations
related to data quality that are applicable to particular areas of practice or types of actuarial
assignment.
This standard does not require the actuary to audit data.
If this standard establishes requirements in addition to those imposed by applicable law,

regulation, or other binding authority, the actuary should satisfy the requirements of both the
applicable law and the standard. To the extent applicable law conflicts with this standard,
compliance with such applicable law shall not be deemed a deviation from this standard,
provided the actuary discloses that the actuarial assignment was performed in accordance
with the requirements of such applicable law.
1
1.4 Effective Date—This standard will be effective for any actuarial work product for which
data were provided to or developed by the actuary on or after May 1, 2005. In all cases, this
standard will be effective for any actuarial work product commenced on or after July 1,
2006.
2.1 Appropriate Data—For purposes of data quality, data are appropriate if they are suitable for
the intended purpose of an analysis and relevant to the system or process being analyzed.
2.2 Audit⎯To conduct a formal and systematic examination of a set of data for the purpose of
testing its accuracy, using techniques commonly employed by audit professionals.
2.3 Comprehensive Data—For purposes of data quality, data obtained from inventory or
sampling methods are comprehensive if they contain sufficient data elements or records
needed for the analysis.
2.4 Data—For purposes of this standard, the term refers to numerical, census, or classification
information and not to general or qualitative information. Assumptions are not data, but data
are commonly used in the development of actuarial assumptions.
2.5 Data Element—An item of information, such as date of birth or risk classification.
2.6 Practical⎯Realistic in approach during the time of the assignment, given the purpose and
nature of the assignment and any constraints, including cost and time considerations.
2.7 Review⎯An informal examination of the obvious characteristics of the selected data to
determine if such data appear reasonable and consistent for purposes of the assignment.
A review is not an audit of data.
2
3.1 Overview⎯Data that are completely accurate, appropriate, and comprehensive are
frequently not available. The actuary should use available data that, in the actuary’s
professional judgment, allow the actuary to perform the desired analysis. However, if
material data limitations are known to the actuary, the actuary should disclose those
limitations and their implications. The following sections discuss such considerations in
more detail.
3.2 Selection of Data—In undertaking an analysis, the actuary should consider what data to use.
The actuary should consider the scope of the assignment and the intended use of the analysis
being performed in order to determine the nature of the data needed and the number of
alternative data sets or data sources, if any, to be considered. The actuary should do the
following:
a. consider the data elements that are desired and possible alternative data elements;
and
b. select the data with due consideration of the following:
1. appropriateness for the intended purpose of the analysis, including whether

the data are sufficiently current;
2. reasonableness and comprehensiveness of the necessary data elements, with

particular attention to internal and external consistency;
3. any known, material limitations of the data;
4. the cost and feasibility of obtaining alternative data, including the ability to
obtain the information in a reasonable time frame;
5. the benefit to be gained from an alternative data set or data source as

balanced against its availability and the time and cost to collect and compile
it; and
6. sampling methods, if used to collect the data.
3.3 Reliance on Data Supplied by Others—In most situations, the data are provided to the
actuary by others. The accuracy and comprehensiveness of data supplied by others are the
responsibility of those who supply the data. The actuary may rely on data supplied by others,
subject to the guidance in section 3.5. In doing so, the actuary should disclose such reliance
in an appropriate actuarial communication.
3
3.4 Reliance on Other Information Relevant to the Use of Data⎯In many situations, the actuary
is provided with other information relevant to the appropriate use of data, such as contract
provisions, plan documents, and reinsurance treaties. The validity and comprehensiveness of
such information are the responsibility of those who supply such information. The actuary
may rely on such information supplied by another, unless it is or becomes apparent to the
actuary during the time of the assignment that the information contains material errors or is
otherwise unreliable. The actuary should disclose reliance on information provided by
another in an appropriate actuarial communication.
3.5 Review of Data⎯A review of data may not always reveal existing defects. Nevertheless,
whether the actuary prepared the data or received the data from others, the actuary should
review the data for reasonableness and consistency, unless, in the actuary’s professional
judgment, such review is not necessary or not practical. In exercising such professional
judgment, the actuary should take into account the extent of any checking, verification, or
auditing that has already been performed on the data, the purpose and nature of the
assignment, and relevant constraints.
When determining the nature and extent of such a review, the actuary should consider the
following:
a. Data Definitions⎯The actuary should make a reasonable effort to determine the

definition of each data element used in the analysis, as described in section 3.2.
b. Identify Questionable Data Values⎯The actuary should review the data used
directly in the actuary’s analysis for the purpose of identifying data values that are
materially questionable or relationships that are materially inconsistent. If the actuary
believes questionable or inconsistent data values could have a material effect on the
analysis, the actuary should consider further steps, when practical, to improve the
quality of the data.
c. Review of Prior Data⎯If similar work has been previously performed for the same
or recent periods, the actuary should consider reviewing the current data for
consistency with the data used in the prior analysis. If the actuary does not have the
prior data, the actuary should consider requesting the prior data.
If, in the actuary’s professional judgment, it is not appropriate to perform a review of the
data, the actuary should disclose that the actuary has not done such a review and should
disclose any resulting limitation on the use of the actuarial work product.
4
3.6 Limitation of the Actuary’s Responsibility⎯The actuary is not required to do any of the
following:
a. determine whether data or other information supplied by others are falsified or

intentionally misleading;
b. develop additional data compilations solely for the purpose of searching for
questionable or inconsistent data; or
c. audit the data.
3.7 Use of Data⎯Because data that are completely accurate, appropriate, and comprehensive are
frequently not available, the actuary should make a professional judgment about which of the
following is applicable:
a. the data are of sufficient quality to perform the analysis;
b. the data require enhancement before the analysis can be performed, and it is practical
to obtain additional or corrected data that will allow the analysis to be performed;
c. judgmental adjustments or assumptions can be applied to the data that allow the
actuary to perform the analysis. If the actuary judges that the use of the data, even
with adjustments and assumptions applied, may cause the results to be highly
uncertain or contain a material bias, the actuary may choose to complete the
assignment, but should disclose the potential existence of the uncertainty or bias,
and, if reasonably determinable, their nature and potential magnitude;
d. if the actuary believes that the data are likely to contain material defects, the actuary
should determine, if practical, the nature and extent of any checking, verification, or
auditing that may have been performed on the data. Then, if, in the actuary’s
professional judgment, a more extensive review is needed, the actuary should arrange
for such a review prior to completing the assignment; or
e. if, in the actuary’s professional judgment, the data are so inadequate that the data
cannot be used to satisfy the purpose of the analysis, then the actuary should obtain
different data or decline to complete the assignment.
3.8 Documentation⎯The actuary should comply with the requirements of ASOP No. 41,
Actuarial Communications, regarding the preparation and retention of the documentation. In
addition, the actuary’s documentation should include the following:
5
a. the process the actuary followed to evaluate the data, including the review or
consideration of prior data;
b. a description of any material defects the actuary believes are in the data;
c. a description of any adjustments or modifications made to the data, other than routine
corrections made by reference to source documents, including the rationale for any
such adjustments or modifications; and
d. any other documentation necessary to comply with the disclosure requirements of

section 4.1.
4.1 Disclosure⎯When issuing communications under this standard, the actuary should refer to
ASOP No. 41. In addition, the actuary should disclose the following items:
a. the source(s) of the data;
b. whether the actuary reviewed the data and, if not, any resulting limitations on the use
of the actuarial work product;
c. the extent of the actuary’s reliance on data and other information relevant to the use
of data supplied by others;
d. any material judgmental adjustments or assumptions that the actuary applied to the
data, or are known by the actuary to have been applied to the data, to allow the
actuary to perform the analysis;
e. any limitations on the use of the actuarial work product due to uncertainty about the
quality of the data;
f. any unresolved concerns the actuary may have about the data that could have a
material effect on the actuarial work product;
g. (1) the existence of results that are highly uncertain or have a potentially material
bias of which the actuary is aware due to the quality of the data; and (2) the nature
and potential magnitude of such uncertainty or bias, if they can be reasonably
determined; and
h. any conflicts that arose from complying with applicable law, regulation, or other
binding authority.
6
intended users of the actuary’s work, the use of any procedures that depart materially from
those set forth in this standard. If a conflict exists between this standard and applicable law
or regulation, compliance with applicable law or regulation is not considered to be a
deviation from this standard.
7
Appendix 1
Note: The following appendix is provided for informational purposes, but is not part of the
Background
An actuarial analysis is based upon an analysis of data, along with practical knowledge of the
field of practice and training in actuarial theory, which together enable the actuary to interpret
the results of calculations. Throughout the analytic process, data play an important role. The
accuracy and validity of the actuarial analysis are dependent on, among other things, the quality
of the data used. Hence, an actuarial standard of practice concerning data quality is appropriate.
Data frequently contain errors, are not fully complete, and are not precisely appropriate for the
intended analysis. Actuaries deal with these limitations, the majority of which are non-critical.
However, actuaries are often called upon to perform actuarial services in situations where data
limitations may be critical. Actuaries use professional judgment when determining whether and
how to refine data or make modifications within the analysis.
Current Practices
Actuaries use informed judgment to determine what kinds of data are appropriate for a particular
analysis. It is important that the data used are relevant to the system or process being analyzed.
Persons or organizations responsible for generating, collecting, or publishing data may apply
different standards of quality assurance, ranging from straightforward compilation of figures to
extensive verification. Actuaries, in turn, deal with the question of the quality of data underlying
their work products in a variety of ways and with varying levels of review or checking.
Actuaries are called upon to provide analyses for a broad range of uses, from limited distribution
within an organization to public exposure.
Important aspects of data utilization include documentation and disclosure of (1) the sources of
data; (2) review of data; (3) material biases resulting from data used by the actuary; (4)
adjustments or corrections made to the data; and (5) the extent of reliance on data supplied by
others. Typically, actuaries do not audit data.
8
APPENDIX 2
The exposure draft of this revision of ASOP No. 23, Data Quality, was issued in October 2003
with a comment deadline of March 31, 2004. Twenty-eight 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 carefully considered all
comment letters and the committee’s responses. Unless otherwise noted, the section numbers and
titles used below refer to those in the exposure draft.
GENERAL COMMENTS
Several commentators suggested various editorial changes in addition to those addressed specifically below. The
committee implemented such suggestions if they enhanced clarity and did not alter the intent of the section.
In the transmittal memorandum of the exposure draft, the committee asked readers to comment on whether the
exposure draft clarified the previous standard. Most commentators believed that the revisions did clarify the standard,
and others had suggestions that are addressed in the following responses.
Comment One commentator suggested that the standard should address issues concerning how results vary when
using data with different time horizons.
Response The committee believed that issue was more about credibility than data quality and made no change in
the standard.
Comment A commentator believed that the standard should also provide guidance on privacy, confidentiality, and
distribution of the actuarial report.
Response The committee believed such issues were beyond the scope of this standard. ASOP No. 41, Actuarial
Communications, provides guidance with respect to actuarial reports.
Comment One commentator recommended expanding the title of the standard to add “Actuaries’ Responsibilities
in Selecting, Reviewing, and Using Data.”
Response The committee believed that this was unnecessary, because section 1.1, Purpose, identifies the specific
professional services discussed in the standard.
Comment A commentator suggested that, since it is common for actuaries to extract their own data for use in their
analyses, the standard should more clearly indicate the actuary’s responsibility to review data that the
actuary has independently created.
Response The committee agreed and revised section 3.5, Review of Data, in response.
Comment One commentator thought that the actuary should be required to disclose and resolve material
differences between prior and current period data.
Response The committee believed that the actuary should be satisfied that the current data are appropriate and
should disclose other concerns related to data quality in accordance with section 4.1(g) (now 4.1(f)). The
reconciliation of data from one period to the next is beyond the scope of this standard.
9

Section 1.2, Scope
Comment One commentator objected to not requiring the actuary to audit the data, while several others supported
the statement in the standard that audits are not required.
Response The committee believed that the actuary should generally be required to review, but not audit the data,
and left this scope limitation unchanged.
Comment Several commentators recognized that the actuary must comply with law, regulation, or other binding
authority, but disagreed that the actuary should disclose such a conflict.
Response The committee disagreed and retained the disclosure requirement, consistent with other standards. In
response to another comment, the committee also added a sentence clarifying that the actuary must
comply with both the standard and the law when the standard has more extensive requirements than the
law. Finally, the wording of this section was modified to clarify that the standard applied only to
professional “actuarial” services.
Comment A commentator pointed out that it is common in some practice areas to use a significant amount of data
collected in prior years and then perform the current analysis after the latest data have been added to the
database or using relevant current data. The commentator believed that the prior data should be subject
only to requirements in effect when the data were originally collected and not be subject to any new
requirements in the standard.
Response The committee discussed this point and made no change to this section, because it believed that other
sections of the standard gave sufficient guidance to the actuary regarding the extent to which the actuary
should review the data, including consideration of practicality and materiality.
Some commentators suggested adding definitions of other terms. In most cases, the committee did not believe that
was necessary. However, it did add a definition of “review,” as suggested by one commentator, to clarify that a
review is less formal than an audit and does not verify the accuracy of data, but merely consists of observing its
obvious characteristics and abnormalities.
Section 2.1, Appropriate (now Appropriate Data)
Comment Several commentators suggested adding the word “data” to the title of this section.
Response The committee agreed and added “data” here and in the title of section 2.3.
Comment One commentator suggested deleting the phrase “relevant to the system or process being analyzed.”
Response The committee thought the existing language was necessary and sufficiently clear and made no change.
Section 2.2, Audit
Comment Some editorial suggestions were made to improve the definition.
Response The committee adopted some of the suggestions, adding “for the purpose of testing its accuracy” and
removing “or review,” because that latter term is now defined and differentiated from an audit.
Section 2.3, Comprehensive (now Comprehensive Data)
Comment A commentator recommended that “sufficient data elements” be used in this definition in place of “each
data element.”
Response The committee agreed that this was more appropriate wording and made the change.
Comment One commentator suggested adding a discussion of inventory or sampling methods.
Response The committee did not see the need for such a discussion.
10
Section 2.4, Data

Comment A commentator pointed out that actuaries often use data contained in reports prepared by other
professionals and suggested that such data be covered by this definition.
Response The committee made no change to this definition, because sections 3.3 and 3.4 address reliance on data
and other information supplied by others.
Comment One commentator suggested expanding the definition to indicate that sometimes assumptions are used to
develop certain data elements.
Response The committee did not believe such an expansion was necessary. The use of assumptions to perform such
analyses is referenced in section 3.7(c).
Section 2.6, Practical
Comment A number of comments were received on the inclusion of the defined term “practical” in response to the
committee’s request in the transmittal letter of the exposure draft. Some commentators thought the
definition was unnecessary, and some offered suggestions for further improvement.
Response Because the concept of practicality is an important consideration in this standard in aiding an actuary to
make professional judgments regarding selection of data, and whether and to what extent to review the
data, among other things, the committee strongly believed that a definition of this term should be
included.
Comment One commentator pointed out that use of hindsight would be inappropriate in determining what was
practical.
Response The committee agreed and added “during the time of the assignment” to the definition.
Comment One commentator wanted to add guidance on considerations for evaluating materiality.
Response The committee believed that materiality is a subjective concept that depends on the actuary’s
professional judgment, and that it was beyond the scope of this standard to define or provide guidance on
materiality.
Section 3.1, Overview
Comment One commentator pointed out that some assignments do, in fact, require perfect data, and that the
standard should recognize this.
Response The committee disagreed that the standard should be written to address specific situations that would
require more diligent treatment. Sections 3.2 and 3.5 state that consideration should be given to the
purpose and nature of the assignment.
Section 3.2, Selection of Data
Comment One commentator wanted to clarify the language relating to “review.”
Response The committee decided to delete reference to “review” in this section as it is thoroughly covered in
section 3.5.
11
Comment One commentator believed that section 3.2(b)(5) should be eliminated or at least restricted to alternate
data sources reasonably known to the actuary.
Response The committee believed this guidance is important and, in view of the comment, carefully considered the
wording again and revised the wording to clarify that the actuary is provided adequate leeway to consider
the benefits of seeking alternative data sources versus the effort necessary to get them.
Comment One commentator suggested that the terms “data sets” and ”data sources” should be consistent here and
in section 3.2(b)(5).
Response The committee agreed and made changes to accomplish this.

Comment One commentator believed “subject to the limitations presented by the actuary’s reliance on others…”
should be added to clarify how this section relates to sections 3.3 and 3.4.
Response The committee believed that the guidance for selection of data should not depend on whether or not the
actuary needs to rely on others to supply the data and did not believe such an addition was necessary or
appropriate.
Comment One commentator suggested deleting “relative availability” and adding “time and” in front of the word
“cost” in section 3.2(b)(5).
Response The committee did drop “relative” and did add “time and.”
Section 3.3, Reliance on Data Supplied by Others
Comment One commentator supported the concept of what was labeled “blind reliance.” A couple of commentators
were uncertain as to whether the implication of such reliance was appropriate and consistent with
sections 3.1 or 3.5. Several others commented that such reliance was inappropriate.
Response After much discussion and careful consideration, the committee ultimately agreed that additional clarity
was needed. Accordingly, the committee added the phrase “subject to the guidance in section 3.5,” and
that section provides that the actuary should review the data for reasonableness and consistency unless,
in the actuary’s professional judgment, it is not practical or not necessary to do so.
Section 3.4, Reliance on Other Information Relevant to the Use of Data
Comment Two commentators were uncomfortable with the implication of absolute reliance in this section,
believing that it could conflict with the guidance in other sections of the ASOP by setting a different
standard.
Response The committee believed a lower standard was appropriate but agreed that the actuary should not proceed
with the analysis based on information that is known by the actuary to be suspect. Accordingly, the
committee added the phrase “unless it is or becomes apparent to the actuary during the time of the
assignment that the information contains material errors or is otherwise unreliable.”
Comment Two commentators thought that “or summaries of such documents” should be specifically added to the
list.
Response Because the list provides examples only, the committee believed that this added language was not
needed.
Section 3.5, Review of Data
Comment Several commentators questioned the meaning of the word “appropriate.”
Response The committee deleted the word “appropriate” where it might be confusing.
Comment Several commentators questioned whether it was always necessary to review prior data and suggested
adding the word “consider” in section 3.5(a) regarding review of prior data.
Response The committee agreed and incorporated this wording change in what is now section 3.5(c).
12
Comment One commentator believed that a new section on the time period of the data should be added.
Response The committee believed this was sufficiently covered in section 3.2(b)(1).
Comment Two commentators were unclear if this section applied to data received from others.
Response The committee clarified that it does apply and that the actuary should review for reasonableness and
consistency “unless, in the actuary’s professional judgment, such review is not necessary or not
practical.”
Comment One commentator suggested adding a new consideration: “Data Definitions⎯The actuary should make a
reasonable effort to determine the definition of each data element provided.”
Response The committee agreed and added what is now section 3.5(a).
Comment One commentator interpreted section 3.5(b) as requiring a datum-by-datum review and a datum-by-
datum correction process, thereby precluding any type of sampling procedure.
Response The committee disagreed with this interpretation. Section 3.2 specifically allows for sampling
procedures. Based on the definition of “review,” the committee believed guidance for the actuary to look
for obvious errors or inconsistencies that may materially affect the analysis was appropriate.
Section 3.6, Limitation of the Actuary’s Responsibility
Comment Several commentators responded to a question requesting comments about whether it was appropriate to
delete the following language from section 5.3(a) of the previous ASOP No. 23: “The actuary is not
required to develop additional data compilations solely for the purpose of searching for questionable or
inconsistent data.” While a couple of commentators believed the deletion was appropriate, most believed
that the language should be put back into the revision.
Response The committee agreed with the majority and reinserted what is now section 3.6(b).
Comment Several comments suggested eliminating the word “intentionally” inaccurate.
Response The committee disagreed and left this wording, because just removing the word “intentionally” would
weaken the standard by implying that the actuary is relieved of any responsibility for inaccurate data,
whether intentional or not. However, after lengthy discussions the committee revised the section by
amending the wording of what is now section 3.6(a), in addition to reinserting section 3.6(b).
Section 3.7, Use of Data
Comment One commentator suggested clarifying section (d) to apply when material defects are likely, not just
possibilities.
Response The committee agreed and added the words “are likely to” to this subsection.
Comment One commentator suggested changing the word “should” to “must,” eliminating the words “when
practical,” and specifying that this disclosure should be in the summary level presentation of the results.
Response The committee disagreed and left the wording as is.

Comment Two commentators suggested changing the wording in the opening paragraph to clarify that data are
rarely completely accurate, appropriate, and comprehensive.
Response The committee agreed and changed the wording in the opening paragraph.
13
Comment One commentator suggested that section 3.7 could be viewed to be in conflict with section 4.1,
Disclosure.
Response The committee disagreed that there would be a conflict. If the actuary believes there is a material defect
in the data, the actuary can still perform the assignment and make the disclosures in section 4.1.
Comment One commentator suggested removing the words “if practical” from section (d).
Response The committee disagreed and left this wording.

Comment One commentator suggested defining a process for what to do if material defects have been found or are
known to exist in the data.
Response The committee prepared this section to provide guidance to the actuary in discriminating between
different types of situations. The committee believed that sections (d) and (e) provided adequate
guidance in this respect.
Comment One commentator suggested removing the first sentence of this section since all items in this section are
based on the premise that the actuary is aware of data deficiencies.
Response The committee revised the first paragraph of section 3.7 to clarify that the actuary should decide which
of the circumstances in sections (a)−(e) apply, even if the actuary is not necessarily aware of material
defects in the data.
Comment One commentator suggested removing the first sentence from section (d).
Response The committee disagreed and left the first sentence.

Comment One commentator suggested that this section provides only two alternatives for inadequate data.
Response The committee disagrees and refers the commentator to the four alternatives contained in sections
(b)−(e). The committee also added a consideration in section (c) to address results that may be highly
uncertain.
Comment One commentator suggested adding a section requiring a description of any material defects the actuary
believes are in the data and the review conducted by the actuary on this data.
Response The committee agreed in respect of material defects and added appropriate wording to section 3.8(b).
Comment Two commentators suggested eliminating the first sentence since it was confusing.
Response The committee agreed with this commentator and eliminated the first sentence of this section.
Comment One commentator suggested changing the wording of section (b) by replacing it with “whether the
actuary reviewed the data as contemplated by section 3.5 and, if so, the scope of the review.”
Response The committee agreed that additional clarity was needed and revised the entire section 3.8.
Comment One commentator suggested changing the wording of section (c) by inserting the words “if reasonably
estimable, the” before “effect.”
Response The committee agreed that this language could be too burdensome and revised the language in section
(c).
14
Comment One commentator suggested adding words to this section similar to those in the disclosure section
pertaining to a description of the insufficiencies or issues with the data that may have an impact on the
results.
Response The committee revised section 3.8, adding sections (b) and (d) to deal with this issue.
Comment One commentator suggested that this section is not needed as long as the disclosure section exists.
Response The committee believed there is a need for this section, because this section applies to the work papers of
the actuary and not the disclosure that goes along with a work product. In addition, some items that
should be documented need not be disclosed.
Comment Numerous commentators suggested changes to section (b).
Response The committee agreed with these commentators and reworded section (b) with consequential changes to
section (a).
Section 4.1, Disclosure
Comment One commentator suggested that the standard does not appear to require disclosure of the actuary’s
unresolved concerns, particularly in the case of an actuarial opinion, regarding data that could have a
material effect on the actuarial work product.
Response Section (g) (now (f)) requires the actuary to disclose any unresolved concerns the actuary may have
about the data. That disclosure is required in an appropriate actuarial communication, regardless of
whether it is an actuarial opinion.
Comment One commentator suggested adding the words “to the principal” after “following items” to clarify to
whom the disclosure is to be made and also wanted to add the words “if other than the principal” to item
(a).
Response The committee did not concur with this commentator.

Comment Several commentators believed that section (b) was unclear or unnecessary.
Response The committee deleted section (b).

Comment One commentator suggested changing the wording in section (c) (now (b)) to reflect the fact that the
standard seems to mandate that actuaries almost always review data. Another commentator believed that
section (c) (now (b)) should read, “the extent of the actuary’s review of the data” rather than “whether
the actuary reviewed the data.”
Response The committee very carefully considered this issue and revised what is now section (b) to require, where
no review was performed, disclosure of any resulting limitations on the use of the actuarial work product.
Comment Two commentators suggested adding “material” before “judgmental adjustments” in section (e) (now
section (d)).
Response The committee agreed and made this change.
15
Comment One commentator believed that section (f) (now (e)) would be clearer if it ended after the phrase “work
product.”
Response The committee revised the language to omit reference to “not sufficiently reviewed,” thereby including
situations where the actuary did not review the data as well as situations where the actuary did review the
data but is uncertain about the data.
Comment One commentator believed that section (g) (now (f)) was unnecessary because it was covered by section
(h) (now (g)). The commentator believed it was burdensome for the actuary to disclose concerns that
would not have a material effect.
Response The committee disagreed and believed that both sections are needed to fully describe required disclosure
because they cover different situations. However, the committee did agree that only “unresolved
concerns the actuary may have about the data that could have a material effect…” are required to be
disclosed, and the wording of these two sections incorporates the word “material” to support this.
Comment One commentator believed that section (g) (now (f)) could conflict with section 3.7, which does not
contain an option for producing a work product with adequate disclosure if there is a material effect in
the data.
Response The committee did not believe there was a conflict, but revised section 3.7(c) to clarify that the actuary
may produce a work product even if the data (after judgmental adjustments or assumptions have been
applied) may produce results that “are highly uncertain or contain a material bias” as long as this is
disclosed.
Current Practices
Comment One commentator suggested inserting the words “important aspects of data utilization include such” in
the last paragraph of this section as well as deleting the words “of such items” after the word
“disclosure” in this same section. The commentator also suggested deleting the word “the” after “reliance
on” and deleting the words “are important aspects of utilization of data” in the last paragraph of this
section.
Response
The committee agreed with the general thrust of these comments and made appropriate changes.
Comment One commentator suggested removing the words “complete and independent verification of the data” in
the second paragraph of this section. The commentator went on to suggest that actuaries deal with the
quality of data in a variety of ways and “with varying levels of review or checking.”
Response The committee agreed with this commentator and changed the wording as suggested.
16
Actuarial Standard
of Practice
No. 24
Compliance with the

NAIC Life Insurance Illustrations
Model Regulation
Revised Edition
Developed by the
Adopted by the
February 2007
(Doc. No. 103)

ASOP No. 24—February 2007
TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Actual Experience 2
2.2 Current Payable Scale 2
2.3 Disciplined Current Scale 2
2.4 Experience Factor Class 2
2.5 Experience Factor 2
2.6 Illustrated Scale 2
2.7 Illustration Actuary 2
2.8 Nonguaranteed Element 2
2.9 Nonguaranteed Element Framework 3

3.1 Regulatory Requirements 3
3.2 Appointment as Illustration Actuary 3
3.3 Illustrated Scale Requirement 3
3.4 Disciplined Current Scale 3
3.4.1 Assumptions Underlying the Disciplined Current Scale 3
3.4.2 Relationship of Actual Experience to Disciplined Current Scale 6
3.5 Requirements for Self-Support 7
3.6 Requirements to Prevent Lapse-Supported Illustrations 8
3.7 Illustrations on Policies In Force One Year or More 8
3.8 Changes in Practice 9

4.2 Notice of Error in Certification 10
ii
APPENDIXES

Background 12
iii
February 2007

Actuarial Standards Board and Other Persons Interested in Compliance with the
NAIC Life Insurance Illustrations Model Regulation
This document contains the final version of the revision of ASOP No. 24, Compliance with the
NAIC Life Insurance Illustrations Model Regulation.
Background
The ASB adopted ASOP No. 24, Compliance with the NAIC Life Illustrations Model Regulation
(hereafter Model), in 1995. Since the promulgation of the original standard, product innovation
has continued. The Task Force to Revise ASOP No. 24 of the Life Committee of the ASB
prepared this revision of ASOP No. 24 to be consistent with the current ASOP format and to
update and reflect current, generally accepted actuarial practices with respect to illustrations
prepared in compliance with the Model.
Exposure Draft
The exposure draft of this revision was issued in April 2006 with a comment deadline of August
1, 2006. The Task Force to Revise ASOP No. 24 carefully considered the seven comment letters
received and made changes to the language in several sections in response. For a summary of the
substantive issues contained in the exposure draft comment letters and the responses, please see
appendix 2.
There were no significant changes from the exposure draft.
The ASB voted in February 2007 to adopt this standard.
iv
Michael A. Cioffi, Chairperson

Jose Andrade-Cora Dale S. Hagstrom
Jess S. Geller Gary E. Wheeler
Charles Carroll, Chairperson

Jeremy J. Brown Esther H. Milnes
Michael A. Cioffi David Y. Rogers
Dale S. Hagstrom

Albert J. Beer David R. Kass
Robert G. Meilander Karen F. Terry
v
COMPLIANCE WITH THE

NAIC LIFE INSURANCE ILLUSTRATIONS
MODEL REGULATION
performing professional services pursuant to an applicable law based on the Life
Insurance Illustrations Model Regulation (hereafter the Model) adopted by the National
Association of Insurance Commissioners (NAIC) in December 1995 or when performing
professional services with respect to illustrations represented to be in accordance with the
Model.
1.2 Scope—This standard applies to actuaries when performing professional services pursuant
to an applicable law based on the Model. The Model applies to illustrations, both for
proposals and in-force policies, as described in the Model, for group and individual life
insurance other than variable life insurance. The Model does not apply to individual and
group annuity contracts, credit life insurance, and life insurance policies with no
illustrated death benefits on any individual exceeding $10,000.
This standard applies to actuaries when performing professional services with respect to
illustrations in the absence of applicable regulations if the illustrations are to be
represented as being in accordance with the Model.
respect to the determination of nonguaranteed elements payable. Determination of these
items, as well as illustrations not included in the scope of this ASOP, are covered by
ASOP No. 1, Nonguaranteed Charges or Benefits for Life Insurance Policies and Annuity
Contracts, or ASOP No. 15, Dividends for Individual Participating Life Insurance,
Annuities, and Disability Insurance.
standard, the actuary should refer to section 4.3 regarding deviation from standard.
1
1.4 Effective Date—This standard is effective for actuarial services performed on or after
June 30, 2007.
The terms below are defined for use in this actuarial standard of practice. Definitions 2.2, 2.3, 2.6,
2.7, and 2.8 are intended to conform to those in the Model.
2.1 Actual Experience—Historical results and trends in those results.
2.2 Currently Payable Scale—A scale of nonguaranteed elements in effect for a policy form as
of the preparation date of the illustration or declared to become effective within the next
95 days.
2.3 Disciplined Current Scale—A scale of nonguaranteed elements, certified annually by the
illustration actuary, constituting a limit on illustrations currently being illustrated by an
insurer that is reasonably based on actual recent historical experience and that satisfies the
requirements set forth in the Model.
2.4 Experience Factor Class—A group of policies for which nonguaranteed elements are
determined by using common numerical values of a particular experience factor.
2.5 Experience Factor—A value or set of values that represents the actual experience of a
policy form. Examples of experience factors include rates of mortality, expense,
investment income, termination, and taxes.
2.6 Illustrated Scale—A scale of nonguaranteed elements currently being illustrated that is not
more favorable to the policyholder than the lesser of the disciplined current scale or the
currently payable scale.
2.7 Illustration Actuary—An actuary who is appointed in accordance with the requirements
set forth in the Model.
2.8 Nonguaranteed Element—Any element within an insurance policy that affects policy costs
or values that is not guaranteed or not determined at issue. A nonguaranteed element may
provide a more favorable value to the policyholder than that guaranteed at the time of
issue of the policy. Examples of nonguaranteed elements include policy dividends, excess
interest, mortality charges, expense charges, indeterminate premiums, and participation
rates and maximum rates of return for indexed life insurance products.
2
2.9 Nonguaranteed Element Framework—The structure by which the insurer determines

nonguaranteed elements. This includes the assignment of policies to experience factor
classes, the method of allocating income and costs, and the structure of the formulas or
other methods of using experience factors. For participating policies this would be the
dividend framework defined in ASOP No. 15. For life policies within the scope of ASOP
No. 1, the nonguaranteed element framework would include the concepts of policy class,
determination policy, and anticipated experience factors.
3.1 Regulatory Requirements—The Model contains detailed instructions, technical

requirements, and prohibitions regarding many aspects of illustrations. Actuaries
providing professional services within the scope of this standard should be familiar with
the Model, any applicable state law based on the Model, including state variations, and this
standard.
3.2 Appointment as Illustration Actuary—Before accepting an appointment as an illustration

actuary, the actuary should determine that he or she meets the qualifications described in
the qualification standards of the American Academy of Actuaries. The appointment
should be in writing and should describe the scope of the illustration actuary’s
responsibilities and establish the effective date. Acceptance of or withdrawal from the
position should also be in writing.
3.3 Illustrated Scale Requirement—The Model requires that the illustrated scale must not be
more favorable to the policyholder than the currently payable scale at any duration. In
addition, the illustrated scale must be no more favorable to the policyholder than the
disciplined current scale at any duration.
3.4 Disciplined Current Scale—The actuary should consider the following when developing
the disciplined current scale:
3.4.1 Assumptions Underlying the Disciplined Current Scale—The actuary should use
experience as analyzed within the insurer’s nonguaranteed element framework
when setting experience factors underlying the disciplined current scale. To the
extent actual experience is determinable, available, and credible, the actuary
should use actual experience when setting experience factors underlying the
disciplined current scale. When such suitable data are lacking, experience factors
should be derived in a reasonable and appropriate manner from actual experience
of other similar classes of business. Similar classes may be found within the same
company, may be found in other companies, or may be from other sources, in that
order of preference. As required by the Model, the experience factors underlying
the disciplined current scale may not include any projected trends of improvement
nor any assumed improvements in experience beyond the effective date of the
illustrated scale, except as provided in section 3.8.
3
The actuary should consider the following when setting assumptions:
a. Investment Return—The investment return factors underlying the

disciplined current scale should be reasonably based on recent actual
investment experience, net of default costs, of the assets supporting the
policy block. For an indexed life insurance product where the investment
assumption is sensitive to business or economic cycles, the actuary should
consider an appropriate time frame commensurate with such cycles and the
characteristics of the underlying index in determining recent actual
experience.
The actuary should have a reasonable basis for allocating investment

income to policies, whether using the portfolio, segmentation, investment
generation, or any other method. The actuary should develop the
investment return factors using the same method that is used to allocate
investment income to policies. The investment return factors may be net of
investment expenses or, alternatively, investment expenses may be treated
separately as expenses.
The actuary should use procedures that have a reasonable theoretical basis
for determining the investment return factors. In determining the
investment return factors, the actuary should reflect the insurer’s actual
practice for nonguaranteed elements with respect to realized and unrealized
capital gains and losses, investment hedges, policy loans, and other
investment items.
b. Mortality—The actuary should base the mortality experience factors on the

insurer’s mortality experience, if credible, adjusted for risk class. In setting
mortality experience factors, the actuary should consider credible variations
by age, gender, duration, marketing method, plan, size of policy, policy
provisions, risk class, and other items (or a combination thereof) consistent
with the insurer’s structure of mortality experience factor classes. To the
extent that the insurer’s actual experience is not sufficiently credible, the
actuary should consider using other credible industry mortality experience,
appropriately modified to reflect the insurer’s underwriting practices. If no
credible industry mortality experience is available, the actuary should use
professional judgment in modifying other sources of information (for
example, general population mortality tables) in order to obtain the
mortality assumption.
c. Persistency—The actuary should base the premium continuation and policy

persistency rates on the insurer’s actual experience, if credible, for this or
similar policy forms. The actuary should consider credible variations by
age, gender, duration, marketing method, plan, size of policy, policy
provisions, risk class, and other items (or a combination thereof) consistent
4
with the insurer’s structure of persistency experience factor classes. To the

extent that the insurer’s recent experience is not credible, the actuary
should consider using other credible industry experience such as that from
the Life Insurance Marketing Research Association, appropriately modified
to reflect the actuary’s professional judgment regarding differences
between the policy form and the basis for the industry experience.
d. Direct Sales Expenses—The actuary should reflect agent commissions,

overrides, and other direct compensation determined by formula or
incurred as a consequence of sales in a manner consistent with new
business activities that generate the cost and are excluded from the expense
factors given in sections (e)(1), (2), and (3) below.
e. All Other Expenses—As described in the Model, the actuary should

consider whether the minimum expenses to be used in the calculation of the
disciplined current scale for all policy forms during the certification year
are based on sections (1), (2), or (3) below and are subject to the criteria
that follow them:
1. Fully Allocated—Unit expenses reflecting total expenses recently

incurred by the insurer when applied to both in force or newly
issued policies are considered fully allocated. Some expenses are
direct in that they can be specifically related to a particular policy
form. Other expenses, such as general overhead costs, are indirect.
The actuary should charge direct expenses to the groups of policies
generating the related costs. Indirect expenses should be fully
allocated using reasonable principles of expense allocation.
Nonrecurring costs, such as systems development costs, may be
spread over a reasonable number of years (for example, system
lifetime) in determining the allocable expenses for a particular year.
2. Marginally Allocated—Marginally allocated expenses are unit

expenses calculated in a manner similar to fully allocated unit
expenses except that indirect expenses, such as corporate overhead
and general advertising, are not allocated to the policy forms.
3. Generally Recognized Expense Table (GRET)—GRET unit

expenses are obtained from an industry expense study based on
fully allocated expenses representing a significant portion of
insurance companies and approved for use by the NAIC or by the
commissioner.
If no GRET is approved and available, the Model requires the use of fully
allocated expenses. If a GRET is approved and available, the Model allows
the use of either a GRET or fully allocated expenses. The Model permits
the use of marginally allocated expenses only to the extent that they
5
generate aggregate expenses that are at least as large as those generated by

a GRET.
The actuary should make the comparison and choice of expense factor
bases in the aggregate for all policy forms. The actuary should use the same
unit expense basis for all policy forms tested. For example, the actuary
should not use marginal expenses for one policy form and fully allocated
expenses for another policy form. Once the actuary selects the unit expense
basis, the actuary should use that basis for the entire certification year.
When calculating unit expenses, the actuary should select average policy
size and volume of sales assumptions that are appropriate for the policy
form.
f. Taxes—The actuary should reflect all cash flows arising from applicable
taxes. Income taxes should be recognized in accordance with their impact
by duration in the development of the disciplined current scale. Non-
income taxes that are classified as investment taxes may be treated as a
deduction from the investment return or may be treated separately. Other
categories of taxes, such as premium taxes or employment taxes, may be
handled separately or included in the category of all other expenses, as
outlined in section 3.4.1(e) above.
Details of taxation vary widely, depending on the application of law and

regulation in various jurisdictions. The actuary should consider the
insurer’s actual practices for allocating taxes for nonguaranteed elements in
determining the tax experience factor.
g. Changes in Methodology—When an insurer changes its methodology in

determining nonguaranteed elements (for example, changing from portfolio
rate methodology to a new money rate methodology or adding a new
underwriting class), the actuary should appropriately modify assumptions
underlying the disciplined current scale to reflect the new methodology.
h. Other Lines of Business—If other lines of business are considered

investments of the illustrated block of business, the actuary should consider
whether cash flows originating in such lines are recognized in the
assumptions underlying the disciplined current scale. In deciding whether
and how to reflect these cash flows, the actuary should consider the time
horizon of the investment/investor relationship and the insurer’s actual
practice for reflecting these cash flows in determining nonguaranteed
elements.
3.4.2 Relationship of Actual Experience to Disciplined Current Scale—The actuary

should select assumptions underlying an insurer’s disciplined current scale that
logically and reasonably relate to actual experience as reflected within the insurer’s
nonguaranteed element framework. The actuary should reflect changes in
6
experience promptly once changes have been determined to be significant and

ongoing.
Actual experience may exhibit improvements from year to year. As required by the
Model, such trends in improvement may not be assumed to continue into the future
beyond the effective date of the disciplined current scale underlying the
illustration.
If trends indicate that significant and continuing deterioration in an experience

factor has occurred or, in the actuary’s professional judgment, is likely to occur
between the date of the experience study and the effective date of the disciplined
current scale underlying the illustration, the actuary should recognize such
deterioration in determining the assumptions to be used.
When an insurer introduces a change in underwriting practice (for example, adding

a new underwriting class) that is not expected to change the insured population, the
actuary should divide the actual experience into the new underwriting classes in
such a way that actual experience is reproduced in the aggregate.
3.5 Requirements for Self-Support—The Model requires every policy form illustrated by an
insurer to be self-supporting according to the assumptions underlying the insurer’s
disciplined current scale. This requirement applies to the illustration of policies in force
for less than one year.
The Model requires the following self-support test. At every illustrated point in time
starting with the fifteenth policy anniversary (with the twentieth policy anniversary for
second-or-later-to-die policies), the accumulated value of all policy cash flows, when
using experience assumptions underlying the disciplined current scale, should be equal to
or greater than the illustrated policyholder value, i.e., the cash surrender values and any
other illustrated benefit amounts available at the policyholder’s election. Where policies
expire according to their terms prior to 15 years (20 years for second-or-later-to-die
policies), the illustrated scale should be self-supporting at the point of expiration.
Each illustration reflects underwriting classification, as well as certain factors that are
subject to policyholder choice. The underwriting classification includes factors such as
age, gender, and risk class. Policyholder choices reflected in the preparation of an
illustration include, but are not limited to, the size of policy, premium payment pattern,
dividend option, coverage riders, and policy loans.
In performing the self-support test for a policy form, the actuary may test the underwriting
classification and policyholder choice factors in aggregate if, in the actuary’s professional
judgment, such combinations would be appropriate. If testing is done in the aggregate, the
actuary should select assumptions for the distribution between underwriting classes and
policyholder choices that are based on actual experience, if available, recognizing possible
shifts in distribution towards any portions of the business that do not meet the self-support
test in their own right.
7
3.6 Requirements to Prevent Lapse-Supported Illustrations—The Model prohibits illustration

of nonguaranteed elements in policies that are deemed to be lapse-supported and
establishes an additional test to demonstrate compliance with this requirement. This
additional test requires that the policy form in question be self-supporting under the same
assumptions and with the same level of aggregation as described in section 3.5, changing
only the persistency assumption. The modified persistency rate assumption will use the
persistency rates underlying the disciplined current scale for the first five policy years and
100% policy persistency thereafter. Where benefits are conditional upon policy
continuation or certain premium payment patterns, the actuary should consider whether
the lapse-support test assumes all policies in force at the end of year five and surviving to
the date of such benefits will qualify for these benefits.
As stated in the Model, policy forms that can never develop nonforfeiture values, such as
certain term coverages, are exempt from the lapse-support test. The Model requires that
these policy forms pass the self-support requirement.
3.7 Illustrations on Policies In Force One Year or More—The illustration actuary is required
to annually certify that the disciplined current scale, for both new business and in force
illustrations, complies with the Model and this standard. The Model requires that the
illustrated scale be no more favorable to the policyholder than the lesser of the currently
payable scale and the disciplined current scale. The disciplined current scale, for a policy
in force one year or more, continues to be in compliance with the Model and this standard,
if any of the following apply:
a. the currently payable scale has not been changed since the last certification and the
illustration actuary determines that experience since the last certification does not
warrant changes in the disciplined current scale that would make it significantly
less favorable to the policyholder; or
b. the currently payable scale has been changed since the development of the
disciplined current scale most recently certified only to the extent that changes are
reasonably consistent with changes in experience assumptions underlying the
disciplined current scale; or
c. the currently payable scale has been made less favorable to the policyholder since
the last certification and the change is more than the change in the current
experience would dictate.
If none of the conditions in (a), (b), or (c) above is met, the illustration actuary should (1)
review the experience factors underlying the disciplined current scale and revise as
necessary, and (2) develop a new disciplined current scale for this policy form.
In the context of in-force illustrations for policies receiving distributions of accumulated

surplus or prior gains (including those resulting from the formation of a closed block), the
actuary should consider including these distributions both in the disciplined current scale
8
and in the illustrated scale, only to the extent that (1) such distributions are currently being
paid to the policyholders by the insurer, and (2) the insurer has indicated its intent and
ability to continue to do so for the foreseeable future. Such accumulated surplus or prior
gains may be used in conducting the tests for self-support and lapse-support.
3.8 Changes in Practice—An insurer may introduce certain changes in the way it conducts its
business, which may have significant positive or negative effects on future experience. If
the action has already occurred, but not enough time has elapsed for it to be reflected in
the insurer’s actual experience, it may nevertheless be reflected in the assumptions
underlying the disciplined current scale. The actuary should consider recognizing actions
such as the following, to the extent known to the actuary:
a. Changing Underwriting Standards—Introducing preferred risk, guaranteed issue,

or simplified underwriting may impact the mortality assumption.
b. Varying Commission Levels—Changing commission levels (either decreasing or

increasing) will have a known effect on policy expenses.
c. Reducing Staff—Staff reductions may have an effect on the expense assumptions.
d. Changing Investment Policies—Changes in investment policies including hedging

activities and changes in asset class allocations may impact the investment
assumption.
e. Reinsurance Agreements—New or revised reinsurance agreements may impact

experience assumptions such as mortality, investment income, and tax.
The changes should have occurred in order to be reflected in the disciplined current scale
and not simply be planned for in the future.

3.10 Documentation—The documentation that supports the actuarial certification described in

section 4.1 with respect to the construction of the disciplined current scale, maintained in
conformance with ASOP No. 41, Actuarial Communications, should include the
following:
a. description of, and rationale for, the investment income, mortality, persistency,
expense, tax, and other assumptions;
b. description of, and rationale for, any other calculation methods and assumptions
used to carry out the tests and demonstrations described herein; and
c. demonstration that the self-support and lapse-support tests have been met.
9
4.1 Prescribed Statement of Actuarial Opinion—The Model 1 requires the illustration actuary
to certify annually that the illustrated scale and the disciplined current scale are in
compliance both with the requirements as set forth in the Model and with the requirements
set forth in this ASOP. Certifications should also be made for newly introduced forms
before a new policy form is illustrated. 2
The certification should disclose the following:
a. for business issued in the last five years and within the scope of the
certification, whether or not the currently payable scale has been reduced
since the last certification for reasons unrelated to experience changes; 3
b. the choice of expense assumptions as discussed in section 3.4.1(e); 4
c. any inconsistencies between the illustrated nonguaranteed elements for new

policies and similar in-force policies; 5 and
d. any inconsistencies between the illustrated nonguaranteed elements for new

and in-force policies and the nonguaranteed element amounts actually paid,
credited or charged to the same or similar forms. 6
As required by the Model, 7 if an illustration actuary is unable to certify the illustrated

scale for any policy form the insurer intends to use, the actuary should notify the board of
directors of the insurer and the commissioner promptly of his or her inability to certify.
4.2 Notice of Error in Certification—As required by the Model, 8 if an error in a previous

certification is discovered, the illustration actuary (or successor illustration actuary) shall
promptly notify the board of directors of the insurer and the commissioner.
The certification should be considered in error if the certification would not have been
issued or would have been materially altered had the error not been made. The
certification should not be considered to be in error solely because of data that become
available, or information concerning events that occurred, subsequent to the certification
date.
1
As stated in Model sections 11.B, C(5)-(6), and D(1)(a).
2
As stated in Model section 11.D(1)(b).
3
As stated in Model section 11.C(5).
4
5
6
See note 5 above.
7
As stated in Model section 11.E.
8
As stated in Model section 11.D(2).
10
4.3 Deviation from Standard—If, in the actuary’s professional judgment, the actuary has
deviated materially from the guidance set forth elsewhere in this standard, the actuary can
still comply with this standard by applying the following sections as appropriate:

forth in this standard, the actuary should disclose that the assignment was prepared
in compliance with applicable law, and the actuary should disclose the specific
purpose of the assignment and indicate that the work product may not be

11
Appendix 1
practice.
Background
Sales illustrations have been of concern to regulators for a century, going back at least to the
Armstrong Commission (1905-1906). Developments prior to 1995 involving insurance products,
illustration technology, and the volatility of financial markets led to heightened concern and to the
adoption of a model regulation on illustrations by the NAIC.
Actuaries have been involved in the process of establishing scales of dividends and other
nonguaranteed elements to be illustrated by insurance companies for decades. Until the 1980s,
nonguaranteed elements were essentially synonymous with participating dividends, and the
sources of scales of illustrated dividends were tables prepared by the respective insurance
companies. Since that time, there has been a proliferation of policies with nonguaranteed elements
other than dividends. Improving technology has also made possible the development of software
that enables insurance agents to produce sales illustrations based on a variety of assumptions,
potentially with little or no direct involvement on the part of the insurer. The Model assigns major
responsibilities regarding compliance to an actuary who is appointed by the insurer.
Illustrations generally have three primary uses:
1. to show the buyer the mechanics of the policy, i.e., how a particular financial
design or concept works, and how policy values or premium payments may change
over time;
2. to compare the cost or performance of different policies; and
3. to show how the policy fits into the policyholder’s financial plan.
A sales illustration simply shows the performance of one particular scale of nonguaranteed
elements into the future. Actual nonguaranteed elements will almost certainly vary from those
illustrated. Different policies will experience different variances from illustrated values.
Current Practices
Since the promulgation of the original standard, product innovation has continued as pricing
structures have been refined, secondary guarantees have been developed, an increasing variety of
equity-indexed and other indexed life insurance products have been developed, and additional
12
new underwriting classes have been added. It has been common practice to illustrate these new
products pursuant to the Model and this standard.
Varying degrees of flexibility are provided by insurers to their agents in customizing sales
illustrations, depending somewhat on whether the producers are brokers or career agents.
Generally, the tools that insurers provide allow flexibility with respect to column selection and
formats, variations on nonguaranteed elements, and different premium patterns. Along with this
flexibility may be the requirement that the buyer also be given a ledger illustration in an insurer-
approved format.
13
Appendix 2
The exposure draft of this revision to ASOP No. 24, Compliance with the NAIC Life Illustrations
Model Regulation (hereafter Model), was issued in April 2006 with a comment deadline of
August 1, 2006. Seven comment letters were received, some of which may have been submitted
appendix, the term “commentator” may refer to more than one person associated with a particular
comment letter. The Task Force to Revise ASOP No. 24 carefully considered all comments
received, and the Life Committee and the ASB reviewed (and modified, where appropriate) the
proposed changes to the ASOP. Summarized below are the significant issues and questions
contained in the comment letters and the responses to each. The term “reviewers” includes the
task force, the Life Committee, and the ASB. Unless otherwise noted, the section numbers and
titles used below refer to those in the final revised ASOP.
Section 2.8, Nonguaranteed Element
Comment One commentator suggested adding “caps” for index life insurance products as an example of a
nonguaranteed element.
Response The reviewers agree and revised the final sentence in section 2.8, Nonguaranteed Element.
New section 2.9, Nonguaranteed Element Framework
Comment One commentator suggested it would be useful to include the definition of dividend framework from
ASOP No. 15, Dividends for Individual Participating Life Insurance, Annuities, and Disability
Insurance, so that it could be referenced in section 3.4, Disciplined Current Scale.
Response The reviewers agree but believe a broader definition applicable to both participating policies with
dividends and policies with other forms of nonguaranteed elements would be appropriate and therefore
added a new section 2.9, Nonguaranteed Element Framework. Use of this defined term in section 3.4,
Disciplined Current Scale, clarified the meaning there.
Section 3.4, Disciplined Current Scale
Comment One commentator pointed to the need for more precise use of language. In particular, the commentator
provided an alternate draft of section 3.4.1 and suggested changing “methodology” to “method,” and
“gender” to “sex.”
Response The reviewers believe the terms “methodology” and “gender” are clear and consistent with current usage
in other ASOPs and made no change.
Comment One commentator raised the issue of whether the S&P 500 Index could be considered an “other source”
used in support of the investment return experience factor developments for indexed life insurance
products.
Response The reviewers agree the S&P 500 Index could be considered an “other source” for an equity-based
investment return assumption but believe sufficient guidance is provided within section 3.4.1 and made
no change.
14
Comment One commentator suggested inserting language that defines “recent” in the determination of investment
return factors.
Response The reviewers do not believe a single time period as a definition of “recent” is appropriate. The context
of “recent” can vary based on the particular investment type and the nonguaranteed element framework.
Comment One commentator suggested that reference to an adjustment for default costs is redundant since actual
investment experience already reflects default costs.
Response The reviewers believe reference to default costs was appropriate to clarify that these costs should be
taken into account in the investment return determination. To the extent that investment experience
already reflects these defaults costs implicitly, no further adjustment for default costs is required. The
reviewers clarified section 3.4.1(a) to state that investment experience is net of default cost.
Comment One commentator suggested that reference to “equity-indexed life insurance products” be changed to
“indexed life insurance products” and that more guidance be given regarding interest rates that may be
illustrated for these types of products.
Response The reviewers agree. The reference to equity-indexed life insurance has been broadened to refer to
indexed life insurance. The guidance has been expanded in section 3.4.1(a) to include considering the
characteristics of the underlying index when setting investment return assumptions based on recent
actual experience.
Section 3.7, Illustrations on Policies In Force One Year or More
Comment One commentator suggested that the ASOP be revised to permit an illustrated scale, for policies in force
one year or more, to be in compliance with the Model if it is not more favorable than the currently
payable scale.
Response The reviewers disagree. The Model requires that the illustrated scale can not be more favorable to the
policyholder than the lesser of the disciplined current scale and the currently payable scale.
Comment Two commentators suggested that the conditions under which the actuary may determine that a
disciplined current scale continues to be in compliance with the Model without revising experience
factors and deriving a new disciplined current scale should in all cases be “since the scale was last
certified.”
Response The reviewers agree that under section 3.7(b), it is acceptable practice for the actuary to compare (1) the
scale changes since the development of the disciplined current scale most recently certified to (2) the
changes in experience assumptions following the development of the disciplined current scale most
recently certified. Therefore, the reviewers modified section 3.7(b).
Comment One commentator suggested that the operation of a closed block pursuant to ASOP No. 33, Actuarial
Responsibilities with Respect to Closed Blocks in Mutual Life Insurance Company Conversions, is
considered self supporting. The illustration for a closed block policy should reflect the operating rules of
the closed block and be considered self supporting.
Response The reviewers recognize the validity of the issue raised in the comment and clarified section 3.7 to
include closed blocks.
Section 3.8, Changes in Practice
Comment One commentator suggested that reinsurance agreements, hedging strategies, and new or revised
investment strategies could impact assumptions and cause them to differ from recent experience.
Response The reviewers agree and added these examples to the ASOP under new subsections 3.8(d) and (e).
15

Section 4.1, Prescribed Statement of Actuarial Opinion
Comment One commentator stated that it was unclear in section 4.1(a) if the certification requires an explicit
statement as to whether—versus whether or not—the currently payable scale has changed for reasons
unrelated to experience change.
Response The reviewers agree and modified the statement in the certification to state “whether or not” in place of
“whether.”
Comment One commentator questioned if the disclosures in section 4.1(c) and (d) with respect to inconsistencies
are required in the certification even if there were no inconsistencies.
Response The reviewers believe that these disclosures are required only if there are inconsistencies. The reviewers
clarified the conditions under which disclosures must be made.
APPENDIX
Comment One commentator suggested that the historical regulatory issues be expanded to include more
information regarding the purpose and dates during which the Armstrong Commission operated.
Response The reviewers agree and added the dates of operation of the Armstrong Commission to appendix 1 but
believe a description of the purpose of the Armstrong Commission is beyond the scope of the ASOP.
16
Actuarial Standard
of Practice
No. 25
Credibility Procedures Applicable to Accident and Health,

Group Term Life, and Property/Casualty Coverages
Developed by the
Casualty and Health Committees of the
Adopted by the
October 1996
(Doc. No. 051)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Credibility 1
2.2 Full Credibility 1
2.3 Ratemaking 1
2.4 Related Experience 1
2.5 Subject Experience 2

3.1 Purpose and Use of Credibility Procedures 2
3.2 Selection of Credibility Procedures 2
3.3 Choice of Related Experience 2
3.4 Informed Actuarial Judgment 2
3.5 Homogeneity of Data 3

4.1 Disclosure 3
APPENDIXES

Background 4
Classical Credibility Procedures 4
Empirical Credibility Procedures 4
Bayesian Credibility Procedures 4
Historical Development 4
Current Practices 4
Historical Bases 4
Credibility Procedures for Ratemaking 5
Credibility Procedures for Prospective Experience Rating 5
Partial Credibility 5
ii
November 1996

Actuarial Standards Board and Other Persons Interested in Credibility Procedures
Credibility Procedures Applicable to Accident and Health, Group Term Life, and
Property/Casualty Coverages.
Background
Credibility procedures are an integral part of ratemaking and prospective experience rating, and
may be used for other purposes. The purpose of this ASOP is to provide guidance to actuaries in
the assignment of credibility values to data.
The Subcommittee on Ratemaking of the Casualty Committee of the ASB named three members
as a task force to prepare an initial draft of a proposed standard on credibility procedures. A task
force of the Health Committee of the ASB was also starting to draft a proposed actuarial standard
of practice on credibility procedures, this one for accident and health (A&H) coverages. The
ASB decided that a single standard of practice on credibility, which would apply to both casualty
and A&H coverages, would be preferable, if it were possible to develop such a text.
The initial casualty draft of this proposed standard was shared with the health task force, which
then collaborated with the casualty task force to extend the draft to encompass A&H coverages.
In the process, the draft was also expanded to apply to group term life and to address applications
of credibility to subjects other than ratemaking. This revised draft was reviewed by the full
Casualty Committee and the full Health Committee, and some changes were indicated. The two
task forces addressed the committee members' comments and made revisions to the document,
which was then sent again to the full operating committees for approval to submit it to the ASB
for exposure. The board approved the exposure draft at its April 1994 meeting.
Adoption
The proposed standard was exposed to the profession in April 1994, with a comment deadline of
August 31, 1994. A total of thirty-three comment letters were received. The comment letters
were reviewed by representatives of the Casualty and Health Committees (a newly formed task
force) and the text was revised in response to these comment letters. Summaries of substantive
issues from the comment letters, and the drafting task force's responses to such issues, are
summarized in appendix 2.
iii
Format Changes
A number of format changes have also been made since publication of the exposure draft. The
ASB voted in May 1996 to change the format of all future actuarial standards of practice. Thus,
sections 3 and 4 of the exposure draft now form an appendix titled, Background and Current
Practices. (Appendix 1 of this standard contains sections 3 and 4 of the exposure draft.) Further,
sections 5 and 6 of the exposure draft have now been renumbered as sections 3 and 4. The new
sections 3 and 4, along with sections 1 and 2, now form the actual standard of practice. The
heading Preamble, which used to apply to the first four sections of the standard, has been
deleted. The board made these format changes to help the reader distinguish between a standard's
substantive requirements and language intended for general information.
The ASB voted in October 1996 to adopt the final standard.
Task Force of the Casualty and Health Committees
Frederick F. Cripe Joe P. Sternfeld

Gary Grant Jonathan White
William H. Odell

Martin Adler Michael A. LaMonica
Douglas J. Collins Stuart N. Lerwick
Frederick F. Cripe Robert J. Lindquist
Edward Ford Robert S. Miccolis
Robert W. Gossrow Marc B. Pearl
David J. Grady Patricia A. Teufel
Gary Grant Margaret W. Tiller
E. LeRoy Heer Jonathan White
Bertram A. Horowitz Mark Whitman
R. Michael Lamb Paul E. Wulterkens
iv
Ted A. Lyle, Chairperson

Robert M. Duncan Jr. Mark D. Peavy
Robert J. Ingram John A. Price
Mary J. Murley Richard J. Shepler
William H. Odell Joe P. Sternfeld
David F. Ogden
Richard S. Robertson, Chairperson

Phillip N. Ben-Zvi Frank S. Irish
Edward E. Burrows Daniel J. McCarthy
Harper L. Garrett Jr. Harry L. Sutton Jr.
v
CREDIBILITY PROCEDURES APPLICABLE

TO ACCIDENT AND HEALTH, GROUP TERM LIFE, AND
PROPERTY/CASUALTY COVERAGES
1.1 Purpose—The purpose of this standard of practice is to provide guidance to actuaries in

the selection of a credibility procedure and the assignment of credibility values to sets of
data including subject experience and related experience.
1.2 Scope—This standard of practice is applicable to accident and health; group term life;
property/casualty coverage; and other forms of non-life coverage. This standard also
applies to other financial security systems, such as self-insurance, that provide similar
coverages. This standard is applicable to ratemaking, prospective experience rating, and
whenever else credibility procedures are used, including but not limited to reserve
analysis, solvency testing, and asset/liability management. This standard does not apply
to annuities and pension plans.
1.3 Effective Date—This standard will be effective with respect to work performed after
March 1, 1997.
2.1 Credibility—A measure of the predictive value in a given application that the actuary
2.2 Full Credibility—The level at which the subject experience is assigned full predictive
value based on a selected confidence interval.
2.3 Ratemaking—The process of determining estimates of the expected value of future costs
per unit of exposure for a group of risks.
2.4 Related Experience—Premiums, losses, exposures, expenses, and other relevant data for
coverage analogous to the coverage under consideration. Other data may include
1
established rate levels or differentials. Such data might also be external to the client or the
insurance industry, such as information on trends in claim costs or patterns of claim
frequencies.
2.5 Subject Experience—Premiums, losses, exposures, expenses, and other data relevant to
the coverage under consideration.
3.1 Purpose and Use of Credibility Procedures—The purpose of credibility procedures is to

blend information from subject experience with information from one or more sets of
related experience when the subject experience does not have full credibility in order to
improve the estimate of expected values, or to determine when the subject experience
should have full credibility and blending is unnecessary. Credibility procedures should be
used in ratemaking and prospective experience rating and may be used for other
purposes. When such procedures are used, this standard applies.
3.2 Selection of Credibility Procedures—The actuary should be familiar with and consider
various methods of determining credibility. The models selected may be different for
different applications. The selection process involves testing the tentatively selected
model and possibly revising the model. The actuary should recognize those instances
where it may not be cost-effective to perform this selection process. Additional
calculations may be made to satisfy applicable regulations and statutes.
The actuary should select credibility procedures that do the following:
a. produce results that are reasonable in the professional judgment of the actuary,
b. do not tend to bias the results in any material way,
c. are practical to implement, and
d. give consideration to the need to balance responsiveness and stability.
3.3 Choice of Related Experience—The actuary should use care in selecting the related
experience that is to be blended with the subject experience. Such related experience
should have frequency, severity, or other determinable characteristics that may
reasonably be expected to be similar to the subject experience. If the proposed related
experience does not or cannot be adjusted to meet such criteria, it should not be used. The
actuary should apply credibility procedures that appropriately reflect the characteristics of
both the subject experience and the related experience.
3.4 Informed Actuarial Judgment—Any credibility procedure requires the actuary to exercise
informed judgment, using relevant information. The use of credibility procedures is not
always a precise mathematical process.
2
3.5 Homogeneity of Data—In carrying out credibility procedures, the actuary should
consider the homogeneity of both the subject experience and the related experience.
Within each set of experience, there may be segments that are not representative of the
experience set as a whole. Credibility can sometimes be enhanced by separate treatment
of these segments.
4.1 Disclosure—Whenever appropriate in the actuary's professional judgment, the actuary

should disclose the credibility procedures used. Any material changes from prior
credibility procedures should be disclosed and supported.
3
Appendix 1
practice.
Background
Classical Credibility Procedures—Classical credibility procedures make assumptions as to the

form of the underlying probability distribution. From this probability distribution function, the
appropriate number of claims, amount of premium, or other measure of volume is calculated
such that the probability that the subject loss experience is within a specified percentage (k) of
the expected value is equal to a specified parameter (P). This measure of volume is the full
credibility standard.
Empirical Credibility Procedures—Empirical credibility procedures measure the statistical

relationships of the subject experience to its mean and to comparable experience of prior
experience periods, without reference to the underlying distribution.
Bayesian Credibility Procedures—Bayesian analysis procedures merge prior distributions

representing the statistical information of the related experience with the statistical information
of the subject experience to produce posterior distributions that reflect both. Bayesian credibility
procedures provide a least squares approximation to the mean of the a posteriori distribution that
would result from a Bayesian analysis.
Historical Development—The concept of credibility has been a fundamental part of actuarial

practice since the beginning of the profession. Applications of credibility procedures have
recognized the traditional concerns regarding the proper balance between responsiveness and
stability. Early discussions of credibility tended to focus on estimating mean claim frequency
using classical and empirical credibility procedures. The earliest recorded paper on this subject,
“How Extensive a Payroll Exposure Is Necessary to Give a Dependable Pure Premium,” was
published by Albert H. Mowbray in Volume I of the Proceedings of the Casualty Actuarial and
Statistical Society (published by the Casualty Actuarial Society in 1914). Later writers have
developed formulas for the credibility of claim severity and for the credibility of total losses
including Bayesian credibility procedures. Credibility concepts have also been used in other
actuarial work.
Current Practices
Historical Bases—The most commonly used bases for determining credibility are numbers or
amounts of claims, losses, premiums, and exposures.
4
Credibility Procedures for Ratemaking—The sample size required for full credibility may be
based on the variance of an assumed underlying probability distribution. If using an assumed
frequency distribution, the actuary usually adjusts the required sample size to recognize variation
in claim size or other factors.
Credibility Procedures for Prospective Experience Rating—Prospective experience rating

formulas assign credibility to actual experience of a single risk or a group of risks (the subject
experience). In some instances, the subject experience may be subdivided into different
components, for example, primary and excess losses, with different credibility levels appropriate
for each piece.
Partial Credibility—Partial credibility is used in a weighting process to combine the subject

experience with relevant related experience when the subject experience is determined to be not
fully credible. Several common practices are used to determine partial credibility. A common
practice is to use a selected fractional exponent of the ratio of the volume of subject
experience—such as claims, expected losses, premiums, or exposures—to the full credibility
standard. Another common practice is to use a ratio N/(N + K), where N is the volume of subject
experience and K is a constant that may be derived from variances in the subject and related
experience. The N/(N + K) formula is sometimes modified for those applications where the
possibility of attaining full credibility is desired.
5
Appendix 2

The proposed standard of practice was exposed for review in April 1994. Thirty-three comment
letters were received. A task force of representatives from the Casualty and Health Committees
reviewed these comments and reached the following conclusions. Summaries of substantive
issues raised in the comment letters are in lightface, and task force responses are in boldface.
Section 1.2, Scope—Concerns were expressed that the scope was too restrictive and should be
expanded to all actuarial practice that relies on experience data. Although the scope was
modified slightly, the substance of the text was not changed since it was found to be
adequately inclusive. In response to other concerns, the text was streamlined.
Section 2.1, Credibility—It was suggested that credibility should be defined such that it is
relative to another body of data. In order to avoid eliminating the use of classical credibility,
the text was changed to include these ideas, but to still permit the use of classical
credibility.
Section 2.2, Experience Period—Since this definition is not used within the standard, the
task force decided to remove it from the definitions section.
Section 2.3, Full Credibility (now section 2.2)—Concerns were expressed that no data will have
sufficient volume to have full credibility. The text was changed to clarify that full credibility
is based on a selected confidence interval.
Section 2.4, Manual Ratemaking (now section 2.3 and titled Ratemaking)—Concerns were
expressed that sections 2.4 and 2.6 were inconsistent. Also, the reference to “subject experience”
was considered unnecessary. The term defined was changed from manual ratemaking to
ratemaking. The reference to “subject experience” was removed, and the definition in
section 2.6 (rate) was incorporated into the definition of ratemaking (see section 2.3 of this
text).
Section 2.5, Process Variance—As noted by several individuals, this term is not used in the
standard. The term was deleted. The remaining sections were renumbered.
Section 2.6, Rate—Since this term is not used in the standard, it was deleted. The
remaining sections were renumbered.
6
Section 2.7, Related Experience (now section 2.4)—Concerns were expressed about the type of
data that could be used as related experience and whether the phrase with predictive value was
necessary. To help clarify the data question, the term relevant was added before data in the
first sentence of the definition. The phrase with predictive value was deleted.
Section 3. Background and Historical Issues (now in Appendix 1 under Background)
Section 3.1, Background—It was suggested that a section describing the goal of the use of
credibility procedures be included. This section was merged with the old section 3.5 into a
new section, Historical Development, which can be found in appendix 1. The purpose of
credibility procedures is discussed in the new section 3.1.
Section 3.2, Classical Credibility Procedures (this section can now be found in appendix 1)—
Suggestions were received recommending that the probability distribution should be identified as
underlying the subject experience. Suggestions were also received that the method of
determining the full credibility standard should be more precisely described. The task force
changed the text in response to these comments.
Section 3.3, Bayesian Credibility Procedures (this section can now be found in appendix 1)—It
was suggested that the terms Bayesian and classical are out-of-date and should be replaced with
least squares and limited fluctuation. The terms Bayesian and classical are more widely
understood, particularly in a historical context.
It was also suggested that the description of Bayesian credibility was actually a description of
Bayesian analysis, and that Bayesian credibility procedures produce a least squares
approximation to the results of a Bayesian analysis. The task force changed the text in
response to this comment.
Section 3.4, Empirical Credibility Procedures (this section can now be found in appendix 1)—
Suggestions were received questioning the need for a discussion of empirical credibility. The
discussion of empirical credibility distinguishes distribution free methods from
nontraditional Bayesian credibility procedures that require assumptions about the
underlying distribution.
Section 3.5, Historical Development (this section can now be found in appendix 1)—Some felt
that this section was biased in favor of Bayesian credibility procedures. The section has been
revised to eliminate any real or apparent bias.
Section 4. Current Practices and Alternatives (now in Appendix 1 under Current Practices)
Section 4.1, Historical Bases (this section can now be found in appendix 1)—Concerns were
expressed that the text implied that other bases are not acceptable. The text was revised to
enumerate the most common bases and to omit any comment about other bases.
7
Section 4.2, Credibility Procedures for Manual Ratemaking (this section can now be found in
appendix 1 under the heading, Credibility Procedures for Ratemaking)—Concerns were
expressed about the paragraph referring to the variance of a cumulative loss distribution. This
paragraph was deleted. The first paragraph was revised to eliminate the differentiation
between frequency and cumulative losses. The term manual was removed from the section
title.
Section 4.3, Credibility Procedures for Experience Rating (this section can now be found in
appendix 1 under the heading, Credibility Procedures for Prospective Experience Rating)—As
noted by several individuals, greater homogeneity of the related experience used in experience
rating does not imply smaller required sample sizes. The sentence referring to this matter was
deleted. The term prospective was added to the section title.
Section 4.4, Partial Credibility (this section can now be found in appendix 1)—Concerns were
expressed regarding the term credibility measure. The text was revised to use the phrase
volume of subject experience.
It was also suggested that generalizations of N/(N + K) be mentioned and that it be specified that
other practices may also be acceptable. The text was revised to clarify that several practices
are common.
Section 4.5, Data Homogeneity—Numerous concerns were expressed that this section was
potentially misleading and unnecessary. The section was deleted.
Section 5. Analysis of Issues and Recommended Practices (now Section 3)
Section 5.1, Estimating Future Costs (now section 3.1)—The consensus of comments received
was that section 5.1 should be deleted and replaced with section 5.3, and that the language
relating to costs and the references to the lines of business should be clarified. Section 5.1 is now
section 3.1, Purpose and Use of Credibility Procedures, and the old section 5.3 was merged
with the former section 5.1. References to costs and lines of business were dropped.
Section 5.2, Selection of Credibility Procedures (now section 3.2)—Several comments referred
to Bayesian credibility and the absence of other methods. Other comments expressed concern
that certain words might make compliance very difficult. The words distort and any known in
section 5.2(b) were of particular concern. Other language changes were also suggested. In
addition to making several wording changes, the task force deleted the reference to
Bayesian credibility. In addition, section 5.2(b) (now section 3.2(b)) has been revised to be
consistent with the suggestions.
Section 5.3, Credibility Procedures Should Reflect Experience Characteristics—This section has
been deleted and the remaining sections renumbered.
8
Section 5.4, Choice of Related Experience (now section 3.3)—The last sentence of the old
section 5.3 was added to the new section 3.3.
Section 5.5, Informed Actuarial Judgement (now section 3.4)—The suggestions indicated that
the first sentence was not clear, especially the phrase beginning with on past insurance. That
portion of the first sentence was deleted, and the type of information required was clarified
to be relevant information.
Section 5.6, Homogeneity of Data (now section 3.5)—There were several suggestions on how to
improve the readability of the first sentence as well as other minor language suggestions for the
remainder of the section. In addition, one individual suggested that the last sentence of this
section confused credibility with classification ratemaking. The section has been rewritten,
incorporating several suggestions. The last sentence was deleted.
Section 6. Communications and Disclosures (now Section 4)
Section 6.1, Other Relevant Standards of Practice—This section was deleted.
Section 6.2, Credibility Selection—Several comments expressed concern that there is no single
“degree of credibility” suggested by subject data. This section was deleted.
Section 6.3, Disclosure (now section 4.1)—Concerns were expressed that this section requires
disclosure beyond the requirements of Actuarial Standard of Practice (ASOP) No. 9. The task
force does not believe that this section creates a disclosure requirement that exceeds that of
ASOP No. 9.
Both the Casualty and Health Committees thank everyone who took the time and made the effort
to write comment letters. All of the letters were helpful in developing the final standard.
9
Actuarial Standard
of Practice
No. 26
Compliance with Statutory and Regulatory

Requirements for the Actuarial Certification of
Small Employer Health Benefit Plans
Developed by the
Adopted by the
October 1996
(Doc. No. 052)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Actuarial Soundness 2
2.2 Carrier 2
2.3 Cost of Capital 2
2.5 Small Employer 2
2.6 Subsequent Events 2
Section 3. Analysis of Issues and Recommended Compliance 3

3.1 Introduction 3
3.2 Testing of Rates for Compliance with Rating Constraints 3
3.3 Analysis of Rates for Actuarial Soundness 3
3.4 Documentation of Compliance 3
3.4.1 Rating Methods and Underwriting Practices 3
3.4.2 Demonstration of Compliance with Rating Constraints 4
3.4.3 Demonstration of Compliance with Actuarial Soundness 4
3.5 Time Period Covered by Certification 4
3.6 Qualified or Limited Opinions 4

4.1 Content of Certification 5
4.2 Additional Required Disclosure 5
APPENDIXES

Background 6
Current Practices 6
ii
November 1996

Actuarial Standards Board and Other Persons Interested in Compliance with
Statutory and Regulatory Requirements for the Actuarial Certification of Small
Employer Health Benefit Plans
Compliance with Statutory and Regulatory Requirements for the Actuarial Certification of Small
Employer Health Benefit Plans.
Background
Recently, statutes and regulations have been enacted by a majority of states that have imposed
various constraints on carriers for small employer health benefit plans. These statutes and
regulations often require an actuarial certification that a small employer carrier is in compliance
with the statutory or regulatory constraints. This is a new area of practice for actuaries; therefore,
this actuarial standard of practice has been developed to provide guidance for actuaries preparing
such certifications.
The first draft of this standard was exposed for review in October 1995, with a comment
deadline of March 29, 1996. Thirty-five letters of comment were received. Additionally, the
Health Committee of the ASB, as the drafting committee of this standard, presented a workshop
on the proposed standard at a Society of Actuaries meeting in June 1996. The committee took
very seriously its responsibility to review all of the comments it received regarding the exposure
draft. Most of the comments exhibited a great deal of thought, and many of the suggestions made
were incorporated into the final standard. However, no substantive positions taken in the
exposure draft were changed. The committee believes that the final standard—like that of the
exposure draft—correctly reflects the ASB's mission to provide guidance relating to the actuarial
certifications of compliance required by state laws and regulations. (For a detailed discussion of
the issues raised in the comment letters, and the committee's responses to such, please see
appendix 2. Note in particular the discussion on p. 11 regarding the fact that this standard
imposes a higher documentation requirement than those required by some states.)
iii
Format Changes
sections 3 and 4 now form an appendix titled, Background and Current Practices. (Appendix 1 of
this standard contains sections 3 and 4 of the exposure draft.) Further, sections 5 and 6 of the
exposure draft have now been renumbered as sections 3 and 4. The “new” sections 3 and 4,
along with sections 1 and 2, now form the actual standard of practice. The heading Preamble,
which used to apply to the first four sections of the standard, has been deleted. The board made
these format changes to help the reader distinguish between a standard's substantive
requirements and language intended for general information.
The Health Committee thanks everyone who provided input during the exposure process. The
comments were helpful in making revisions. The ASB voted in October 1996 to adopt the final
standard.

Robert M. Duncan Jr. Mark D. Peavy
Robert J. Ingram John A. Price
Mary J. Murley Richard J. Shepler
William H. Odell Joe P. Sternfeld
David F. Ogden

Phillip N. Ben-Zvi Frank S. Irish
Edward E. Burrows Daniel J. McCarthy
Harper L. Garrett Jr. Harry L. Sutton Jr.
iv
COMPLIANCE WITH STATUTORY AND REGULATORY

REQUIREMENTS FOR THE ACTUARIAL CERTIFICATION OF
SMALL EMPLOYER HEALTH BENEFIT PLANS
1.1 Purpose—Many states require the filing of an actuarial certification of compliance stating
that the rating methods and other actuarial practices applicable to carriers for small
employer health benefit plans comply with relevant statutes, regulations, or other
mandatory requirements set forth in any applicable, generally distributed interpretative
materials. (Hereafter, the phrase regulatory requirements will refer to such statutes,
regulations, and/or applicable, generally distributed interpretative materials.) The purpose
of this actuarial standard of practice is to guide the preparer of a certification of
compliance by identifying the issues to be addressed and the required documentation
regarding relevant regulatory requirements.
1.2 Scope—This standard applies to actuarial certifications of compliance prescribed by

regulatory requirements that a carrier's rating methods and other actuarial practices
applicable to small employer health benefit plans comply with statutory and regulatory
rating constraints. Since specific regulatory requirements for such certifications vary
between jurisdictions, the actuary must satisfy the specific regulatory requirements of a
jurisdiction in preparing the certification.
This standard applies to rating methods and other actuarial practices only and does not
apply to other market conduct activities (e.g., marketing, enrollment and billing
procedures, and renewal notices) that may be covered under regulatory requirements.
1.3 Effective Date—This standard will be effective for all certifications rendered on or after
January 1, 1997, regardless of the time period covered.
1
2.1 Actuarial Soundness—Small employer health benefit plan premium rates are actuarially
sound if, for business in the state for which the certification is being prepared and for the
period covered by the certification, projected premiums in the aggregate, including
expected reinsurance cash flows, governmental risk adjustment cash flows, and
investment income, are adequate to provide for all expected costs, including health
benefits, health benefit settlement expenses, marketing and administrative expenses, and
the cost of capital.
For either a retrospective or a prospective certification, the determination of actuarial

soundness is based on information available at the time the premium rates were
established.
2.2 Carrier—Any entity subject to state regulation that offers health benefit plan coverage for
sale. Carrier includes an insurance company, a prepaid hospital or medical service plan, a
fraternal benefit society, a health maintenance organization, and any other entity offering
for sale a plan of health insurance or health benefits.
2.3 Cost of Capital—The rate of return that capital could earn in an alternative investment of
equivalent risk. The source of the capital may be internal or external.
2.4 Health Benefit Plan—Any hospital or medical policy or certificate; medical expense
insurance; or subscriber contract or contract of insurance provided by a prepaid hospital,
medical service plan, or health maintenance organization.
2.5 Small Employer—Any person, firm, corporation, partnership, or organization that

employs a number of eligible employees within a statutorily specified range that has an
upper bound and that satisfies any other statutorily defined criteria.
2.6 Subsequent Events—Subsequent events are events (1) that have occurred since the end of
the certification period and before the date of the certification, (2) that could materially
affect current or future certifications rendered, and (3) about which the actuary has
knowledge.
2
Section 3. Analysis of Issues and Recommended Compliance
3.1 Introduction—The purpose of the actuarial certification of compliance is to satisfy

applicable regulatory requirements. This certification should be appropriate to the
circumstances. The actuary should review the applicable regulatory requirements, which
generally contain a statement of purpose that the actuary should keep in mind when
preparing the certification of compliance. The actuary should also consider any other
mandatory requirements set forth in any applicable, generally distributed interpretive
materials issued by regulators in support of the applicable regulatory requirements, and
should satisfy those requirements when preparing the certification.
3.2 Testing of Rates for Compliance with Rating Constraints—The actuary should ensure
that sufficient testing has been done so that he or she is reasonably satisfied that there are
no material violations of the rating constraints. Such testing should be detailed enough to
assure that an appropriate range of health benefit plan designs and demographic
characteristics has been tested.
3.3 Analysis of Rates for Actuarial Soundness—If required, the actuary should perform
sufficient analysis so that he or she is reasonably satisfied the rates are actuarially sound.
For a retrospective certification of actuarial soundness, the certification relates to the
premium rates in effect during the time period to which the certification applies, and the
determination of actuarial soundness should be based on information that was reasonably
available at the point in time when the premium rates were established. For a prospective
certification of actuarial soundness, the certification relates to the premium rates
developed for the time period to which the certification applies.
3.4 Documentation of Compliance—Documentation should be available to support the

actuarial certification, and should include the items listed in sections 3.4.1–3.4.3 below, if
applicable. The state will define what documentation should be submitted, if any.
3.4.1 Rating Methods and Underwriting Practices—Materials that have been reviewed
in order to certify compliance with requirements for rating methods and new
business and renewal underwriting practices, such as the following:
a. a description of the carrier's rating methods and new business and renewal
underwriting practices; this should include any exceptions or variations
that may be used for the business or any subset of the business for which
rates are determined;
b. when actuarial soundness is being certified, experience, reinsurance,

pooling considerations, and other relevant data used in the analysis of the
business for which rating practices are being certified;
c. the health benefit plan contracts and certificates;
d. the sales brochures and other materials for each health benefit plan;
3
e. the rating manual;
f. formulas for calculating any group's rate from the rating manual, including
both new business rates and renewal rates;
g. a sufficient sample of test calculations of the rating formulas to verify that

the rates actually being charged are in accordance with the rating manuals;
h. a description of any material changes to previously reviewed health

benefit plan contracts and certificates that were not mandated by
regulatory requirements;
i. information concerning any policy fees, administrative charges, or

application charges that may apply to any group in any class of business,
regardless of whether such fees or charges are remitted to the carrier; and
j. any other information prescribed by the regulatory requirements.
3.4.2 Demonstration of Compliance with Rating Constraints—A written demonstration

supporting the actuarial certification that the rates are in compliance with
applicable regulatory requirements. The demonstration should include an
explanation as to how items such as classes of business, average rates, rating
bands, and rate increases comply with statutory and regulatory rating constraints.
3.4.3 Demonstration of Compliance with Actuarial Soundness—If a certification of

actuarial soundness is required, a written demonstration supporting the
determination, including documentation of underlying assumptions.
3.5 Time Period Covered by Certification—The actuary's certification that the rates are in
compliance should apply to the time period specified by applicable regulatory
requirements. In the absence of any specification in such regulatory requirements, the
actuary should generally certify to the prior calendar year. In any event, the actuary
should explicitly state the time period to which the certification applies.
3.6 Qualified or Limited Opinions—If the actuary is aware that any rating methods or other
practices are not in compliance with applicable regulatory requirements, such
noncompliance should be reported in a qualified opinion. If the regulatory requirement
requires a certification of actuarial soundness and the actuary does not believe the rates
are actuarially sound, even though they are in compliance with the regulatory
requirements, this should be noted in a qualified opinion. If the actuary is not able to
certify some of the items required in the regulatory requirement, this should be noted in a
limited opinion.
4
4.1 Content of Certification—The content of the certification should include, as a minimum,

the following:
a. certification whether all practices, as required by regulatory requirement to be

included in the certification, are in compliance;
b. a listing of practices that are covered in the certification;
c. identification of the time period covered by the certification;
d. changes in rating methods and other practices that have occurred during the time
period covered by the certification and that affect compliance;
e. a description of any subsequent events;
f. where a qualified certification is given, any actions that are being taken to bring
the carrier into compliance; and
g. where a limited certification is given, any sections of the regulatory requirements

regarding certification that are not addressed.
4.2 Additional Required Disclosure—If the actuary is unable to certify actuarial soundness
based on sections 2.1 and 3.3 of this standard, but certifies actuarial soundness based on
regulatory requirements at variance with those sections, the actuary should so state in the
certification.
5
Appendix 1
practice.
Background
In 1990, the National Association of Insurance Commissioners (NAIC) adopted a model act
relating to small employer health insurance availability titled, Premium Rates and Renewability
Coverage for Health Insurance Sold to Small Employer Groups. Since that time, two additional
model acts have been adopted: Small Employer Health Insurance Availability (Allocation with
or without an Opt-out), and Small Employer Health Insurance Availability (Prospective Rein-
surance with or without an Opt-out); as well as a model regulation, Model Regulation to
Implement the Small Employer Health Insurance Model Act (Prospective Reinsurance with or
without an Opt-out).
Recently, statutes and regulations enacted by a majority of states, often adopting some sections
of the NAIC model regulations, have imposed statutory and regulatory constraints on carriers for
small employer health benefit plans. These constraints may vary substantially from the NAIC
model regulations, but generally have a similar intent. In particular, many of these statutes and
regulations focus on narrowing the differences between premium rates charged to individual
small employers with similar plan designs and case characteristics. The stated goals of these reg-
ulations often include the broad pooling of risks, the avoidance of extreme rate differences
(which have occurred under certain tier and durational rating methods), and the expansion of
access to health insurance coverage.
Current Practices
As noted above, applicable regulatory requirements vary considerably as to the extent of rating
constraints imposed, as well as the specific language describing such constraints. In most
situations, few, if any, restrictions exist as to the number and design of health benefit plans that
can be offered in the marketplace. The current variety of state statutes and regulations renders it
extremely difficult to provide precise rules for determining compliance. These conditions neces-
sitate that the actuary apply a great deal of judgment in completing the certification of
compliance.
6
Appendix 2
deadline of March 29, 1996. Thirty-five letters of comment were received. Additionally, the
Health Committee of the ASB presented a workshop on the proposed standard at a Society of
Actuaries meeting in June 1996 at Colorado Springs, which was attended by thirty-seven
individuals (most responded positively to the proposed standard's text). Summarized below are
the significant issues raised and questions contained in the comment letters, printed in lightface.
The committee’s responses to those issues appear in boldface.
Note also that, as mentioned in the transmittal memorandum to this standard of practice, the ASB
adopted on May 1, 1996, a new format for all actuarial standards of practice. (See p. v for a
detailed explanation of such changes.) Thus, the section numbers below refer to section numbers
in the exposure draft, unless otherwise noted (some section numbers have remained the same).
The nature of the comment letters reflected the divergence of opinion on the subject of the
standard. Many respondents commented that they thought the standard represented a reasonable
effort to assist the actuary in preparing the certification of compliance. Others thought that, given
the “actuarially unsound” nature of the rating constraints prescribed by state law, it is impossible
to produce a reasonable standard. Some respondents requested that the standard make clearer that
it is simply a guide to compliance and does not represent a validation of the rating constraints. A
few respondents suggested that the standard be expanded to go beyond certifications and include
other aspects of rating and financial solvency. Others requested that the standard address issues
unique to individual states. It was also suggested that the title be changed to more accurately
reflect the nature of the standard.
Promulgation of this standard does not imply either approval or disapproval of the nature
of prescribed laws in various states. The purpose of the standard is to provide the actuary
with guidance regarding certifications of compliance with prescribed laws. In the event the
actuary believes the rating constraints prescribed by law are “actuarially unsound,” the
standard allows the actuary to issue a qualified opinion regarding actuarial soundness (if
necessary), while certifying compliance with other aspects of the law as necessary (see
section 3.6). The scope of the standard has not been expanded to go beyond actuarial rating
practices or other aspects of rating and financial solvency. Further, due to the variance in
state laws, as well as the dynamic nature of these laws, it would not be appropriate nor
realistic to address within the standard the compliance requirements for each state. The
title of the standard was not changed. The ASB felt that the nature of the standard is
adequately detailed in the purpose and scope sections (see sections 1.1 and 1.2).
7
In the transmittal memorandum to the exposure draft of this standard, the committee posed four
questions to practitioners to keep in mind while reading the text. The questions are reprinted in
full below:
1. Some regulations require an actuary to certify that market conduct activities, which are
often non-actuarial in nature, are in compliance with the regulations. The proposed
standard does not address these non-actuarial activities. Is this an appropriate approach?
2. Many regulations do not make specific provision for limited or qualified opinions. This
standard provides that the actuary may issue such limited or qualified opinions. Is this
approach satisfactory?
3. Sections 5.4 and 6.1 define minimum requirements for the documentation and content of
certifications, respectively. Given the varying nature of statutes and regulations in effect,
are the requirements in this proposed standard either too restrictive or not comprehensive
enough?
4. Section 2.1 provides a definition of actuarial soundness for purposes of this standard. Is
this definition satisfactory for the purposes of preparing a certification in those states
requiring a certification of actuarial soundness?
Comments on the four issues listed above, and the committee responses to such, follow.
Transmittal Memorandum Issue #1: Non-Actuarial Matters—Several respondents commented

on whether the standard should be expanded to address non-actuarial items. The responses
ranged across the full spectrum of options. Some respondents thought it would be inappropriate
for non-actuarial issues to be addressed in an actuarial standard of practice. Others thought it was
a weakness for the standard not to give detailed guidance regarding all matters relative to which
the actuary is certifying. One respondent pointed out that there is not necessarily a clear
distinction between actuarial and non-actuarial topics, and he suggested that the standard should
address all issues that could be interpreted to be actuarial in nature. Some respondents suggested
that some general guidance would be helpful relative to non-actuarial matters, such as enlisting
an officer of the company to certify those items that are beyond the scope of the actuary’s ex-
pertise. The committee continues to believe that it is not appropriate for this actuarial
standard of practice to set standards for any non-actuarial activities related to actuarial
certification of compliance with statutes or regulations (hereafter referred to as regulatory
requirements) for small employer health benefit plans. Thus, the standard does not address
any such non-actuarial activities.
Transmittal Memorandum Issue #2: Limited or Qualified Opinion—With one exception, the
respondents agreed that it is appropriate for the standard to authorize the issuance of a limited or
qualified opinion. The contrary respondent stated that “the regulation need not mention a partial
or qualified opinion for one to be given by an actuary with integrity.” Several of the respondents
noted that the qualified or limited opinion should include clear statements as to the nature of the
8
qualification or limitation. One respondent asked for more details in the standard regarding the
circumstances that would necessitate such an opinion and its contents. Another respondent noted
that it would be the regulators' decision as to whether to accept that such an opinion satisfied a
state’s regulatory requirements. The committee was pleased with the overwhelming support
for the option of using a limited or qualified opinion, which is contained in section 3.6 of the
standard. However, individual states will still need to determine—on an individual basis—
how to respond to any qualified opinions that may be submitted.
Transmittal Memorandum Issue #3: Minimum Requirements for Documentation and the
Content of the Certification—For this issue, responses varied between those that thought the
standard's requirements are reasonable and those that believed the requirements are excessive.
The most common criticism was that the documentation and certification requirements should
not extend beyond those explicitly mandated by law. One respondent was particularly concerned
that the inclusion of “subsequent events” in the certification went beyond any regulatory
requirement. Another thought that some guidance ought to be given where state law mandated
different requirements than the standard. It was the intention of the committee to set high
standards for required documentation, as evidenced in the exposure draft. Given the
nature of the certification of compliance required and the potential reliance placed upon
such certification, the required documentation was established at a level the committee felt
represented good actuarial practice. The committee felt that supporting documentation at
this level would be to the actuary's advantage if the actuary were ever required to support
the relevant certification. However, note that only documentation specifically required by a
state need actually be submitted. The “subsequent events” test was another area where,
because the committee believes it to be good actuarial practice, the committee deliberately
set a standard that was higher than that specifically required by several states.
Transmittal Memorandum Issue #4: Definition of Actuarial Soundness—Many respondents

voiced the opinion that state laws pertaining to small employer health benefit plan ratemaking
are inherently actuarially unsound. In light of this perception, many argued that not only should
no definition of actuarial soundness be attempted, but that the existence of any standard of
practice at all is, at best, giving undue credibility to unsound laws. Other respondents went even
further and suggested that it is professionally unconscionable to promulgate any standard on this
particular subject. Some felt that a standard could be produced without including a definition of
actuarial soundness, but they argued that the standard should make clear that it was merely a
tool for implementing statutorily mandated certifications. Others argued for producing a standard
without a definition of actuarial soundness because states interpret this phrase in different ways,
thereby making any single definition impossible. One respondent argued that no definition is
needed because the drafters of the model legislation probably did not have a precise concept in
mind when they inserted this phrase.
Many of the respondents suggested changing the definition. Some wanted to include a clearer
statement that this definition only applies to the small group certification, and that other
situations would call for differing definitions. Several respondents asked for clarification as to
whether the definition is prospective or retrospective in nature. Many questioned limiting the
time period to that “covered by the certification,” arguing that actuarial soundness is more long-
term in nature. Several respondents questioned the aggregate nature of the definition, and
9
suggested that actuarial soundness necessitates that each rate is determined using appropriate
methods. Some respondents asked that the definition allow for expenses to be determined on a
marginal basis and that subsidies be permitted between the small group and other lines of
business. One commentator suggested that the definition be made more general so as to allow the
carrier to better respond to competitive forces.
Another respondent suggested that the restriction to a single state is too narrow, and also
requested some recognition of initial losses incurred by start-up companies. One writer suggested
that the phrase “based on information that was reasonably available at the point in time when the
premium rates were established” be added. Another asked for clarification as to how this
definition relates to the standards on risk classification and rate filings [see Actuarial Standard of
Practice (ASOP) Nos. 8 and 12]. Some respondents asked that investment income be added to the
definition, and one asked that the phrase cost of capital be clarified.
The committee carefully considered all of the responses received regarding the definition of
actuarial soundness, but basically reaffirmed the scope of the definition used in the
exposure draft. In developing the definition, the committee grappled with two main issues:
(1) the definition needed to work within the context of the certification of compliance being
prepared, and (2) the definition had to be one such that an actuary addressing a small
group line of business could reasonably certify to. The committee feels the definition in this
standard meets these two defining characteristics.
With regard to the comment that no definition of actuarial soundness should be attempted,
the committee believes that, since the standard relates to actuarial issues, and since many of
the applicable laws, including the NAIC model laws, require the actuary to address
actuarial soundness, it is appropriate to address the issue within this standard. Further, the
committee believes it has created a better standard of practice by doing so.
Although the committee did not alter its position on the scope of the definition or the
necessity of including such a definition within the standard, the committee did make the
following changes to the definition of actuarial soundness, based on the comments received:
(1) combined the original retrospective and prospective definitions into a single definition;
(2) inserted the phrase “including expected reinsurance cash flows, governmental risk
adjustment cash flows, and investment income, . . .”; (3) inserted the word expected before
costs; (4) changed health benefit expenses to health benefits; (5) changed operational to
marketing; and (6) inserted a second paragraph, as follows: “For either a retrospective or a
prospective certification, the determination of actuarial soundness is based on information
available at the time the premium rates were developed.”
The committee notes that the definition of actuarial soundness used is an aggregate
definition. It is based on the premise that actuarial soundness is an aggregate rate
adequacy test. Some commentators suggested a more specific definition be used, based on
the rates having appropriate actuarial balance or equivalence between benefit plans or
demographic risk characteristics. This approach was considered by the committee, but
ultimately rejected.
10
Issues relating to how to address expense allocations were viewed as too narrow to be
considered here. These are valid issues for the pricing actuary to consider in practice.
As noted in section 2, the definitions included in the standard are defined for use in this
standard of practice. Although it might be helpful to develop definitions that would have
more widespread acceptance, the nature of the certification seems to preclude the
development of such definitions. However, the committee did add one definition, that of
cost of capital.
With regard to the request for clarification as to how this definition relates to the standards
of practice on risk classification and rate filings, the committee believes that this standard
does not conflict with these other ASOPs.
Section 1.1, Purpose—Two comments were received on this section. One suggested that the
purpose of the standard be broadened to address more elements of small group reform that may
impact the certification. The other suggested that the phrase “actuarial practices applicable to
carriers for small employer health benefit plans” was too broad, in that there are actuarial
practices, such as setting reserves, that are beyond the scope of the standard. The committee be-
lieves that the language in the Purpose section is appropriate. It is the purpose of this
standard of practice to address actuarial items relative to which the states require a
certification of compliance. It is not appropriate for the standard to go beyond that.
Section 1.2, Scope—One respondent proposed that the standard be expanded to include issues
pertaining to financial solvency. (Comments regarding certification of market conduct
compliance are discussed above under Transmittal Memorandum Issue #1.) As stated in the
committee response to section 1.1 (see above), the committee believes it is not appropriate
to extend the scope beyond the required actuarial aspects of the certification.
Section 1.3, Effective Date—Comments were received asking for clarification as to the meaning
of the January 1, 1997 date. The committee changed the wording in an effort to clarify its
intent.
Section 2.1, Actuarial Soundness—See the comments above (again, the committee's response is
in bold) under Transmittal Memorandum Issue #4.
Section 2.2, Carrier—One respondent suggested changing “Carrier includes an insurance

company, . . .” to “Carrier includes, but is not limited to, an insurance company . . .”. It was also
suggested that the standard clarify that it is the definition of carrier in the state regulation that is
the controlling factor. The committee believes the existing language is suitable and is
sufficiently broad to include any entity regulated by the states.
11
Section 2.3, Health Benefit Plan—Comments included substituting medical for health and
changing the words to read “provided by a small employer carrier.” The committee believes
that the existing language is consistent with common usage in regulatory requirements.
Section 2.4, Small Employer—One respondent suggested that the actuary certify that the small
employers that are insured meet the statutory definition. Others suggested that the definition be
modified to clarify that statutory constraints may exist as to who is considered an eligible
employee, over what time period the number of eligible employees is determined, and the
handling of small employers whose employees are in more than one state. Another suggested
that an example of a specific upper bound be provided, such as 50, in order to list specifically
what size group would typically be subject to this standard. Another respondent suggested that
the phrase For purposes of this standard be added at the beginning of the definition, and another
suggested that the definition be changed to eliminate the reference to association. Based on the
comments received, the committee made the following changes: (1) the word association
was changed to organization; (2) the word eligible was inserted before employees; and (3)
the phrase and that satisfies any other statutorily defined criteria was added. In addition, all
standards of practice now contain the following introductory sentence, which applies to all
definitions listed in section 2: “The definitions below are defined for use in this actuarial
standard of practice.”
Section 2.5, Subsequent Events—One commentator suggested dropping the phrase or future.
The committee considered this suggestion, but decided not to make this change.
Section 3. Background and Historical Issues (now in Appendix 1 under Background)
Suggestions included removing the last sentence, adding the phrase and case characteristics in
the next to last sentence of the second paragraph, and removing the first paragraph entirely on
the grounds that these points are more appropriately included in the Scope and Purpose sections.
The committee added the phrase and case characteristics to more accurately reflect the in-
tent of the regulatory requirements. The committee also decided to leave the first
paragraph in this section, because it believes that this material does address the historical
background pertaining to the subject of the standard.
Section 4. Current Practices and Alternatives (now in Appendix 1 under Current Practices)
The only comment on this section was a suggestion to revise the last paragraph to read, “While
the current variety of state statutes and regulations and the variety of reasonable interpretations
of these statutes and regulations render it extremely difficult to provide precise rules for
determining compliance, . . .”. The committee revised the wording in the paragraph to
improve readability.
Section 5. Analysis of Issues and Recommended Compliance (Now Section 3)
12
Section 5.1, Introduction (now section 3.1)—One respondent suggested adding as a separate item
the interpretive material distributed by the state insurance department to the list of items for
review. Another suggested deleting the last clause of the last sentence. The committee added
the following sentence:
The actuary should also consider any other mandatory requirements set forth in
any applicable, generally distributed interpretive materials issued by regulators in
support of the applicable regulatory requirements, and should satisfy those
requirements when preparing the certification.
Section 5.2, Testing of Rates for Compliance with Rating Constraints (now section 3.2)—One
respondent suggested adding the following text: “Testing of rates in a community rating system
may consist of an examination of the methods and factors used, and audits of their
implementation.” Another suggested adding the sentence, “All known violations of the rating
constraints that result in a rate materially higher than permitted by the statute or regulation must
be addressed in a qualified opinion.” This respondent suggested that material be defined as no
greater than 5%. Another thought the words reasonably, materially, and appropriate were too
general to be consistently interpreted. As for the first comment, the committee believes that
the suggested language represents a specific example, whereas the standard (appropriately)
addresses only the general case. It would be very difficult indeed to create a standard that
could address all specific concerns, and, thus, the change was not made. As for the second
comment, the committee did not provide definitions for the words material, reasonable, or
appropriate, since these words are used frequently in actuarial literature. The definitions of
such words are dependent on the context of their use.
Section 5.3, Testing of Rates for Actuarial Soundness (now section 3.3 and titled Analysis of
Rates for Actuarial Soundness)—A couple of respondents suggested substituting testing for
analysis in the first sentence. Several respondents also questioned whether the description of the
retrospective certification makes sufficiently clear that it is not a test of actual results. One
respondent suggested that adding the word expected before the word costs in the definition of
actuarial soundness might make this point clearer. Two of the respondents suggested that a
retrospective certification is theoretically inappropriate, in that such a certification ignores the
most relevant information available. One respondent suggested that only the first sentence be
retained, or that the remaining sentences be modified to be more general in nature. Another
asked for clarification as to how a certification that is both retrospective and prospective should
be handled, and another suggested that the language more specifically point out that “each rate
certified is clearly subject to certification only once.” Another questioned the value of
prospective certifications, given that rate schedules change so frequently. In response to the
first comment listed above, the committee did change the word testing to analysis (the title
to the section was also changed accordingly). The definition of actuarial soundness was also
revised so that the description of a retrospective certification is more clear. As for the
remainder of the comments regarding this section, they apply to the appropriateness of
state legislation, and, as such, the topic of these comments is outside the scope of the ASOP.
13
Section 5.4, Documentation of Compliance (now section 3.4)—One respondent pointed out that
there was no mention of a requirement within the standard relating to the documentation of the
data used and commentary on the quality of the data. Another wanted the phrase if applicable
added to the end of the first sentence. Another suggested that if the actuary receives information
from a source outside the actuary’s firm, the actuary should obtain signed correspondence from
the source verifying the accuracy and completeness of the information. As for the first
comment, a standard already exists on data quality (see ASOP No. 23), so the committee
did not believe that any additional language on this subject was necessary within this
standard. As for the second comment, the phrase if applicable was added at the end of the
first sentence. The suggestion regarding obtaining signed correspondence may be a good
idea in practice, and the committee notes that such a practice can be used. However, this
practice is not required by the standard.
Section 5.4.1, Rating Methods and Renewal Underwriting Practices (now section 3.4.1 and titled
Rating Methods and Underwriting Practices)—One respondent suggested changing the title to
Rating Methods and New Business and Renewal Underwriting Practices. Others suggested
deleting sections (b), (c), and (g) on the grounds of being overly burdensome on small
companies. Another thought that all of the sections should be eliminated. If the sections were not
eliminated, this respondent suggested combining sections (a), (d), and (e); combining sections
(b) and (g); and eliminating section (c). Another suggested that the list of items should be
expanded to include the basis of the data on which claims were estimated, corporate practices
regarding expense and investment income allocation, pooling/reinsurance mechanisms, and any
subsidizing of the small group line by other lines. A couple of respondents also suggested
removing the parentheses from the parenthetical phrase in section (a). In response to the above
comments, the committee changed the title of this section by removing the word renewal.
The committee also added a new section (b) in response to comments received on
investment income, pooling/reinsurance, and other items. Further, the committee removed
the parentheses in section (a), as was suggested.
Section 5.4.2, Fees and Charges (now section 3.4.1(i))—One respondent welcomed the reference
to fees or charges that may or may not be remitted to the carrier. Another respondent asked for
clarification relative to the treatment of association dues. This section was moved to section
3.4.1, Rating Methods and Underwriting Practices, as being one of several items that are
usually reviewed in order to certify compliance with requirements for rating methods and
new business and renewal underwriting practices. As for the latter comment, the answer is
dependent on regulatory interpretation, and, thus, the material is too specific for this
ASOP.
Section 5.4.3, Demonstration of Compliance with Rating Constraints (now section 3.4.2)—One
respondent asked for clarification as to whether the standard requires that the documentation
supporting the certification be submitted to regulators. The committee believes that regulators
define what documentation they should receive, not the ASOP. Thus, no change was made
to the text.
Section 5.4.4, Demonstration of Compliance with Actuarial Soundness (now section 3.4.3)—
One respondent asked for clarification as to whether the required documentation was similar to
14
the actuarial memorandum regulation required for the statutory annual statement. This
respondent also asked for clarification regarding the extent to which this information would be
considered confidential. One respondent suggested that methods be included as well as
assumptions. Another respondent commented that while this section reflected “common sense,”
it was good to explicitly include it. Two others suggested that this section be eliminated. All of
the items described within this section of the standard (i.e., everything in sections 3.4.1–
3.4.3) are to be available in the file, but not submitted to the regulator unless requested, as
noted in the introductory paragraph of section 3.4.
Section 5.5, Time Period Covered by Certification (now section 3.5)—One respondent suggested
deleting the second sentence. Another suggested that compliance should only be certified
prospectively. The committee did not make any changes to the second sentence, since it
believes that this text provides some flexibility and room for actuarial judgment. The other
comment reflects upon the appropriateness of the regulation, which, again, is outside the
scope of the ASOP.
Section 5.6, Qualified or Limited Opinions (now section 3.6)—One respondent suggested
deleting the second sentence. Another asked for more explanation regarding what circumstances
would warrant a qualified or limited opinion. The committee believes that the section contains
sufficient information regarding the circumstances that necessitate a qualified or limited
opinion.
Section 6. Communications and Disclosures (Now Section 4)
Section 6.1, Content of Certification (now section 4.1)—One respondent stated that the
certification should explicitly include the statement that the plan is actuarially sound for the
period involved, and that the certification should explicitly include the definition of actuarial
soundness that is being utilized. Another asked for clarification of section 6.1(d), and pointed out
that many of the other sections within section 6.1 seem overlapping and redundant. Another
asked that information regarding the name of the actuary and corporate affiliation be required,
and that a description of the data used should be included.
Regarding the first point raised, the committee reaffirmed its decision that a certification
need only address actuarial soundness if required by regulatory requirement. To do
otherwise would significantly expand the scope of such a required certification in states
where such a certification is not required. In practice, the actuary can always include a
certification of actuarial soundness even when not required. If the actuary is using a
definition of actuarial soundness that differs from that contained in the standard of
practice, it must be so noted, either as indicated in the new section 4.2 or in a qualified
opinion, as appropriate. (If the actuary is using the standard's definition of actuarial
soundness, it is not necessary to include such in the certification.) As for the comment that
the sections listed in section 6.1 seem overlapping and redundant, the committee believes
that section 6.1 (now section 4.1) does not contain overlapping material. The committee
decided to leave the items listed in this section unchanged.
15
The committee thanks everyone who took the time and made the effort to write comment letters.
The input was helpful in developing the final standard.
16
Actuarial Standard
of Practice
No. 27
Selection of Economic Assumptions

for Measuring Pension Obligations
Revised Edition
Developed by the
Adopted by the
September 2007
(Doc. No. 109)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Best-Estimate Range 2
2.2 Inflation 2
2.5 Merit Scale 2
2.7 Productivity Growth 2
2.8 Real Return 2
2.9 Real Risk-Free Return 3
2.10 Risk Premium 3

3.1 Overview 3
3.2 Identifying Types of Economic Assumptions 3
3.3 General Considerations 3
3.4 General Selection Process 4
3.5 Selecting an Inflation Assumption 4
3.5.1 Data 4
3.5.2 Select and Ultimate Inflation Rates 4
3.6 Selecting an Investment Return Assumption and a Discount Rate 4
3.6.1 Data 5
3.6.2 Constructing the Investment Return Range 5
3.6.3 Measurement-Specific Factors 7
3.6.4 Multiple Investment Return Rates 8
3.6.5 Form of Benefit 9
3.7 Selecting a Compensation Scale 9
3.7.1 Data 9
3.7.2 Constructing the Compensation Scale Range 10
3.7.3 Measurement-Specific Factors 10
3.7.4 Multiple Compensation Scales 11
3.8 Selecting Other Economic Assumptions 11
ii
3.8.1 Social Security 11

3.8.2 Cost-of-Living Adjustments 11
3.8.3 Growth of Individual Account Balances 12
3.8.4 Variable Conversion Factors 12
3.9 Individual Assumptions 12
3.10 Consistency among Economic Assumptions Selected by the Actuary 12
3.11 Prescribed Assumption(s) 12
3.12 Changing Assumptions 13
3.13 Sources of Economic Data 13
3.14 Other Considerations 13
3.14.1 Materiality 13
3.14.2 Cost Effectiveness 13
3.14.3 Knowledge Base 14
3.14.4 Advice of Experts 14

4.1 Disclosures 14
4.1.3 Changes in Circumstances 14
4.2 Prescribed Assumption(s) 14
4.3 Deviation 15
Appendix 2—Selected References for Economic Data and Analyses 17
iii
September 2007

Actuarial Standards Board and Other Persons Interested in the Selection of
Economic Assumptions for Measuring Pension Obligations
This document contains the final version of the revision of Actuarial Standard of Practice No. 27,
Selection of Economic Assumptions for Measuring Pension Obligations.
Background
The selection of economic and noneconomic assumptions, the actuarial cost method, and the
asset valuation method are all key elements in the valuation of pension obligations. The
evolution of actuarial practice made it necessary to update the guidance in these areas. The
following provide such guidance:
1. This ASOP No. 27, Selection of Economic Assumptions for Measuring Pension
Obligations;
3. ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations; and
4. ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or
Contributions, which ties together the other three standards, provides guidance on
actuarial cost methods, and addresses overall considerations for measuring pension
obligations and determining plan costs or contributions.
iv
ASOP No. 27
The Actuarial Standards Board adopted ASOP No. 27 in 1996 as one of several standards
designed to provide guidance on key elements in measuring pension obligations.
The original ASOP No. 27 contained a statement to the effect that, in case of a conflict between
the guidance in ASOP No. 27 and ASOP No. 4, ASOP No. 27 will govern. However, the ASB
has adopted a revision of ASOP No. 4 and intends that the revision of ASOP No. 4 should
govern in any such conflicts.
The revision of ASOP No. 4 conflicted with the original ASOP No. 27 in one substantive way,
its treatment of prescribed assumptions selected by the plan sponsor. The ASB released an
exposure draft highlighting proposed wording changes that would resolve the conflict regarding
which standard governs.
The original ASOP No. 27, including its Transmittal Memorandum and the appendix that
summarized the significant issues and questions received in response to the final exposure draft
and the Pension Committee’s responses, can be found on the ASB website among the
“Superseded Standards.”
Exposure Draft
The exposure draft of this revision was issued in March 2005 with a comment deadline of
October 31, 2005. The Pension Committee reviewed the three comment letters received and
concluded that they raised no substantive issues. There were no significant changes from the
exposure draft.
suggestions on the exposure draft.

v

vi
SELECTION OF ECONOMIC ASSUMPTIONS

FOR MEASURING PENSION OBLIGATIONS
1.1 Purpose—This standard does the following:
a. provides guidance to actuaries in selecting (including giving advice on selecting)

economic assumptions—primarily investment return, discount rate, and
compensation scale—for measuring obligations under defined benefit pension
plans;
b. amplifies those provisions of Actuarial Standard of Practice (ASOP) No. 4,

Measuring Pension Obligations, that relate to the selection and use of economic
assumptions; and
c. provides information to enhance non-actuaries’ understanding of the process by

which actuaries select economic assumptions for measuring the obligations of
defined benefit pension plans.
1.2 Scope⎯This standard applies to the selection of economic assumptions to measure

obligations under any defined benefit pension plan that is not a social insurance program
(unless ASOPs on social insurance explicitly call for application of this standard).
Measurements of defined benefit pension plan obligations include calculations such as
funding valuations or other assignment of plan costs to time periods, liability
measurements or other actuarial present value calculations, and cash flow projections or
other estimates of the magnitude of future plan obligations. Measurements of pension
obligations do not generally include individual benefit calculations or individual benefit
statement estimates.
To the extent that the guidance in this standard may conflict with ASOP No. 4, ASOP
No. 4 will govern. If a conflict exists between this standard and applicable laws or
regulations, the actuary is obligated to comply with the laws or regulations.
This standard does not apply to the selection of an assumption where the actuary is
precluded from exercising independent judgment by an applicable law, regulation, or
other binding authority (i.e., when a specific assumption is mandated or when only a
specified range of assumptions is deemed to be acceptable). For example, the standard
does not apply to the selection of a current liability interest rate range under Internal
1
Revenue Code (IRC) section 412, because the determination of such a range is governed
by the IRC. In addition, the standard does not apply to the selection of the current liability
interest rate within the specified range if, as is the case at the date this standard was
published, the Internal Revenue Service deems any rate within the range to be acceptable.
Throughout this standard, any reference to selecting economic assumptions also includes
giving advice on selecting economic assumptions. For instance, the actuary may advise
the plan sponsor on selecting economic assumptions for Statement of Financial
Accounting Standards (SFAS) Nos. 87 and 88 or Governmental Accounting Standards
Board (GASB) Statement Nos. 25 and 27, but the plan sponsor is ultimately responsible
for selecting these assumptions. This standard applies to the actuarial advice given in
such situations, within the constraints imposed by the relevant accounting standards.
2.1 Best-Estimate Range—For each economic assumption, the narrowest range within which
the actuary reasonably anticipates that the actual results, compounded over the
measurement period, are more likely than not to fall.
2.2 Inflation—General economic inflation, defined as price changes over the whole of the
economy.
2.3 Measurement Date—The date as of which the value of the pension obligation is
2.4 Measurement Period—The period subsequent to the measurement date during which a
particular economic assumption will apply in a given measurement.
2.5 Merit Scale—The rates of change in an individual’s compensation attributable to

personal performance, promotion, seniority, or other individual factors.
2.6 Prescribed Assumption—A specific assumption that is mandated or that is selected from
a specified range that is deemed to be acceptable by law, regulation, or other binding
authority.
2.7 Productivity Growth—The rates of change in a group’s compensation attributable to the

change in the real value of goods or services per unit of work.
2.8 Real Return—The sum of the risk premium and the real risk-free return. It can also be
expressed as the nominal return less inflation.
2
2.9 Real Risk-Free Return—The return on an investment that is completely secure as to

principal and yield in an environment with no inflation.
2.10 Risk Premium—The portion of real return that reflects uncertainties of future payments
and appreciation.
3.1 Overview—Because no one knows what the future holds with respect to economic and
other contingencies, the best an actuary can do is to use professional judgment to estimate
possible future economic outcomes based on past experience and future expectations, and
to select assumptions based upon that application of professional judgment. Therefore, an
actuary’s best-estimate assumption is generally represented by a range rather than one
specific assumption. The actuary should determine the best-estimate range for each
economic assumption, and select a specific point from within that range. In some
instances, the actuary may present alternative results by selecting different points within
the best-estimate range.
The remainder of section 3 provides guidance for identifying which types of economic
assumptions to use and for selecting the economic assumptions (i.e., the values) that will
be used.
3.2 Identifying Types of Economic Assumptions—The types of economic assumptions used

to measure obligations under a defined benefit pension plan may include the following:
a. inflation;
b. investment return (sometimes referred to as the valuation interest rate);
c. discount rate;
d. compensation scale; and
e. other economic factors (e.g., Social Security, cost-of-living adjustments, growth

of individual account balances, and variable conversion factors).
3.3 General Considerations⎯The actuary should consider the following factors when
identifying which types of economic assumptions to use for a specific measurement and
when selecting those economic assumptions that will be used:
a. the purpose and nature of the measurement;
b. the characteristics of the obligation to be measured (measurement period, pattern

of plan payments over time, open/closed group, materiality, volatility, etc.);
3
c. materiality of the assumption to the measurement (see section 3.14.1); and
d. appropriate recent and long-term historical economic data.
As stated above, the actuary should consider recent economic data. However, the actuary
should not give undue weight to recent experience. For example, if the recent investment
return was largely attributable to a significant change in bond yields or inflation, it may
be unreasonable to assume that such investment returns will continue over the
measurement period.
3.4 General Selection Process—The general process for selecting economic assumptions for
a specific measurement should include the following steps:
a. identify components, if any, of each assumption and evaluate relevant data;
b. develop a best-estimate range for each economic assumption required for the
measurement, reflecting appropriate measurement-specific factors; and
c. further evaluate measurement-specific factors and select a specific point within

the best-estimate range.
With respect to some (or all) of the components of an economic assumption, the actuary
is not required to identify the explicit best-estimate range before selecting the specific
point, provided that the actuary is satisfied that the selected point would be within the
best-estimate range had such range been explicitly identified.
After completing steps (a) through (c) for each economic assumption, the actuary should
review the set of economic assumptions for consistency (see section 3.10).
3.5 Selecting an Inflation Assumption—If the actuary is using an approach that treats
inflation as an explicit component of other economic assumptions, or as an independent
assumption, the actuary should follow the general process set forth in section 3.4 to select
an inflation assumption. The following are two matters for consideration:
3.5.1 Data—The actuary should review appropriate inflation data. These data may
include consumer price indexes, the implicit price deflator, forecasts of inflation,
and yields on government securities of various maturities.
3.5.2 Select and Ultimate Inflation Rates—The actuary may assume select and ultimate
inflation rates in lieu of a single inflation rate. Select and ultimate inflation rates
vary by period from the measurement date (e.g., inflation of 3% for the first 5
years following the measurement date, and 4% thereafter).
3.6 Selecting an Investment Return Assumption and a Discount Rate—The investment return
assumption reflects anticipated returns on the plan’s current and future assets.
4
The discount rate is used to determine the present value of expected future plan
payments. Generally, the appropriate discount rate is the same as the investment return
assumption. But for some purposes, such as SFAS No. 87 or unfunded plan valuations,
the discount rate may be selected independently of the plan’s investment return
assumption, if any. In such cases, the discount rate reflects anticipated returns on a
hypothetical asset portfolio, rather than on the plan’s expected investments.
For brevity, the remainder of section 3.6 refers only to the investment return assumption.
The same selection process applies to the discount rate, except where necessary the
hypothetical portfolio is substituted for the plan’s expected investments.
3.6.1 Data—The actuary should review appropriate investment data. These data may
a. current yields to maturity of fixed income securities such as government

securities and corporate bonds;
b. forecasts of inflation and of total returns for each asset class;
c. historical investment data, including real risk-free returns, the inflation

component of the return, and the real return or risk premium for each asset
class; and
d. historical plan performance.
The actuary may also consider historical statistical data showing standard
deviations, correlations, and other statistical measures related to historical returns
of each asset class and to inflation. Stochastic simulation models may be used to
develop expected investment return ranges from this statistical data.
3.6.2 Constructing the Investment Return Range—The best-estimate investment return

range can be constructed using various methods consistent with the principles set
forth in this standard. Two examples of acceptable methods are provided below:
a. Building-Block Method—Under the building-block method, the expected

future investment return of each asset class is the combination of the
components of investment return. These components include factors such
as inflation and real return for the class.
The best-estimate investment return range is determined as follows: (i)

derive a best-estimate range of expected future real returns (either directly
or as the combination of best-estimate ranges for the components of real
return) for each broad asset class applicable to the plan, such as cash and
cash equivalents, fixed income securities (government and corporate
bonds), and equities; (ii) compute an average, weighted real-return range
5
reflecting the plan’s expected asset class mix; and (iii) combine the range
determined by step (ii) with the expected inflation range.
For purposes of step (iii), it is not generally appropriate to simply combine

the low endpoints and combine the high endpoints of the inflation and
real-return ranges, since this approach is likely to produce an overly broad
best-estimate investment return range. Stochastic simulation models that
take into account correlations among returns of different asset classes and
inflation may be used to develop a best-estimate range with explicit
confidence levels.
b. Cash Flow Matching Method—Under the cash flow matching method, the
expected future investment return range is viewed as the combination of
(i) the internal rate of return on a bond portfolio with interest and principal
payments approximately matching the plan’s expected disbursements, and
(ii) a risk adjustment range.
The best-estimate investment return range is determined as follows: (i)

project the plan’s benefit and expense disbursements to be valued in the
measurement; (ii) identify a highly diversified portfolio available as of the
measurement date of noncallable, high-quality corporate or U.S.
government bonds with interest and principal payments approximately
matching the projected disbursements; (iii) compute the bond portfolio’s
internal rate of return; (iv) establish a risk adjustment range for the plan
that reflects the following: uncertainties in the projected benefits and
expenses, expected returns on future contributions, reinvestment of
interest and principal payments not fully needed to pay current benefits,
any mismatches between the benefit disbursement stream and the high-
quality bond portfolio’s interest and principal payment stream, and current
and expected future plan investments in equities or other asset classes
besides high-quality bonds; and (v) combine the figures derived in steps
(iii) and (iv).
Acceptable variations exist concerning constructing the bond portfolio in

step (ii). For example, the portfolio may be limited to U.S. government
securities, or the portfolio may include callable securities with adjustments
for the value of the call feature. Alternatively, a hypothetical yield curve
may be created based on average yields of high-quality corporate bonds at
numerous maturities; this yield curve may then be used to create a
hypothetical matching bond portfolio, without identifying specific bonds.
It is not generally possible to construct an appropriate portfolio by

choosing those bonds with the highest yield at each maturity, because this
method typically produces a nondiversified portfolio or one with bonds
that are incorrectly classified or have unusual risk characteristics.
6
The cash flow matching method does not identify an explicit inflation
component of investment return. The actuary using this method will
generally need to estimate the inflation rate implicit in the bond portfolio’s
internal rate of return to test for consistency with other economic
assumptions, such as the compensation scale used to project plan
disbursements. If these inflation rates are not consistent, additional
iterations of the cash flow matching method may be required.
3.6.3 Measurement-Specific Factors—There are factors specific to each measurement

that should be considered in constructing the best-estimate investment return
range derived in section 3.6.2 and/or in selecting an investment return assumption
within the range. Examples of such factors are as follows:
a. Purpose of the Measurement—The purpose of the measurement is a

primary factor. For example, an actuary measuring a plan’s termination
liability may use an investment return rate reflecting interest rates implicit
in current or anticipated future annuity purchase rates. This investment
return assumption may differ from an investment return assumption used
to measure the same plan’s present value of accumulated benefits on an
ongoing basis. This latter assumption may reflect a longer time horizon
and a diversified investment portfolio.
b. Investment Policy—The plan’s investment policy may include the

following: (i) the current allocation of the plan’s assets; (ii) types of
securities eligible to be held (diversification, marketability, social
investing philosophy, etc.); (iii) risk tolerance; (iv) a target allocation of
plan assets among different classes of securities; and (v) permissible
ranges for each asset class within which the investment manager is
authorized to make strategic asset allocation decisions.
c. Reinvestment Risk—Two reinvestment risks are associated with

traditional, fixed income securities: (i) reinvestment of interest and
normal maturity values not immediately required to pay plan benefits, and
(ii) reinvestment of the entire proceeds of a security that has been called
by the issuer.
d. Investment Volatility—Plans investing heavily in those asset classes

characterized by high variability of returns may be required to liquidate
those assets at depressed values to meet benefit obligations. Other
investment risks may also be present, such as default risk or the risk of
bankruptcy of the issuer.
e. Investment Manager Performance—Anticipating superior (or inferior)

investment manager performance may be unduly optimistic (or
pessimistic). Few investment managers consistently achieve significant
above-market returns net of expenses over long periods. The plan sponsor
7
may replace managers who consistently underperform market indexes.

However, in some situations an investment manager who consistently
underperforms under varying market conditions is unlikely to be replaced
(e.g., when the plan sponsor is the investment manager), so continued
underperformance may be expected.
f. Investment Expenses—Transaction, custodian, and management fees may

be paid from plan assets. Such investment expenses expected to be paid
from plan assets may be reflected by a reduction in the investment return
assumption.
g. Cash Flow Timing—The timing of expected contributions and benefit

payments may affect the plan’s liquidity needs and investment
opportunities.
h. Benefit Volatility—Benefit volatility may be a primary factor for small

plans with unpredictable benefit payment patterns. It may also be an
important factor for a plan of any size that provides highly subsidized
early-retirement benefits, lump-sum benefits, or supplemental benefits
triggered by corporate restructuring or financial distress. In such plans, the
untimely liquidation of securities at depressed values may be required to
meet benefit obligations.
i. Expected Plan Termination—In some situations, the actuary may expect

the plan to be terminated at a determinable date. For example, the actuary
may expect a plan to terminate when the owner retires, or a frozen plan to
terminate when assets are sufficient to provide all accumulated plan
benefits. In these situations, the investment return assumption may reflect
a shortened measurement period that ends at the expected termination
date. The form of benefit (see section 3.6.5) may reflect anticipated
annuity purchase rates or lump-sum distribution interest rates at the
expected plan termination date, where these forms are payable.
j. Tax Status of the Funding Vehicle—If the plan’s assets are not kept in a
tax-exempt fund, income taxes may reduce the plan’s investment return.
Taxes may be reflected by an explicit reduction in the total investment
return assumption and/or by a separately identified assumption.
3.6.4 Multiple Investment Return Rates—The actuary may assume multiple investment
return rates in lieu of a single investment return rate. Two examples are as
follows:
a. Select and Ultimate Investment Return Rates—Assumed investment

return rates vary by period from the measurement date (e.g., returns of 8%
for the first 10 years following the measurement date, and 6% thereafter).
When assuming select and ultimate investment return rates, the actuary
8
should consider the relationships among inflation, interest rates, and

market appreciation (depreciation).
b. Obligations Covered by Designated Current Assets—One investment

return rate is assumed for obligations covered by designated current plan
assets on the measurement date, and a different investment return rate is
assumed for the balance of the obligations and assets.
3.6.5 Form of Benefit—The amounts of some benefit forms, such as lump-sum benefits
and early-retirement benefits, may be based on interest rates defined by the plan
that are unrelated to the assumed investment return. The actuary should reflect
such required interest rates in determining the amount of benefits expected to be
paid, rather than as an adjustment to the investment return rate used to measure
the obligation. (See section 3.8.4 regarding variable conversion factors.)
Similarly, if the actuary expects the plan to purchase annuities when participants
retire or upon expected plan termination, the interest rates implicit in expected
annuity purchase rates should be reflected in determining the expected annuity
purchase price rather than as an adjustment to the investment return rate.
3.7 Selecting a Compensation Scale—Compensation is a factor in determining participants’

benefits in many pension plans. Also, some actuarial cost methods take into account the
present value of future compensation. Generally, a participant’s compensation will
change over the long term in accordance with inflation, productivity growth, and merit
scale. The assumption used to measure the anticipated year-to-year change in
compensation is referred to as the compensation scale. It may be a single rate;
alternatively, it may vary by age and/or service, consistent with the merit scale
component; or it may vary over future years, consistent with the inflation component.
3.7.1 Data—The actuary should review available compensation data. These data may
a. the plan sponsor’s current compensation practice and any anticipated

changes in this practice;
b. current compensation distributions by age and/or service;
c. historical compensation increases and practices of the plan sponsor and

other plan sponsors in the same industry or geographic area; and
d. historical national wage and productivity increases.
The actuary should consider available plan-sponsor–specific compensation data,

but the actuary must carefully weigh the credibility of these data when selecting
the compensation scale. For small plans or recently formed plan sponsors,
industry or national data may provide a more appropriate basis for developing the
compensation scale.
9
3.7.2 Constructing the Compensation Scale Range—The best-estimate compensation

scale range is generally constructed using a building-block method, which
combines the best-estimate ranges for the components of compensation scale.
These components include factors such as inflation, productivity growth, and
merit scale. When the actuary combines these ranges, it is not generally
appropriate to simply combine the low endpoints and combine the high endpoints
of the ranges, since this is likely to produce an overly broad best-estimate
compensation scale range.
3.7.3 Measurement-Specific Factors—The actuary should consider factors specific to

each measurement in constructing the compensation scale range derived in section
3.7.2 and/or in selecting a specific compensation scale assumption within the
range. Examples of such factors are as follows:
a. Compensation Practice—The plan sponsor’s current compensation

practice and any contemplated changes may affect the compensation scale,
at least in the short term. For example, if pension benefits are a function of
base compensation and the plan sponsor is changing its compensation
practice to put greater emphasis on incentive compensation, future growth
in base compensation may differ from historical patterns.
b. Competitive Factors—The level and pattern of future compensation

changes may be affected by competitive factors, including competition for
employees both within the plan sponsor’s industry and within the
geographical areas in which the plan sponsor operates, and global price
competition. Unless the measurement period is short, the actuary should
not give undue weight to short-term patterns.
c. Collective Bargaining—The collective bargaining process impacts the

level and pattern of compensation changes. However, it may not be
appropriate to assume that future contracts will provide the same level of
compensation changes as the current or recent contracts. For example, if
the current contract provides for a compensation freeze, it would generally
be inappropriate to assume that such a policy would continue indefinitely
after the contract expires.
d. Compensation Volatility—If certain elements of compensation, such as

bonuses and overtime, tend to vary materially from year to year, or if
aberrations exist in recent compensation amounts, then volatility should be
taken into account. This may be accomplished by adjusting the base
amount from which future compensation elements are projected (e.g., the
current bonus might be replaced by the average of bonuses over the last 3
years).
10
e. Expected Plan Termination—In some situations, as stated in section

3.6.3(i), the actuary may expect the plan to be terminated at a
determinable date. In these situations, the compensation scale may reflect
a shortened measurement period that ends at the expected termination
date.
3.7.4 Multiple Compensation Scales—The actuary may use multiple compensation

scales in lieu of a single compensation scale. Three examples are as follows:
a. Select and Ultimate Scale—Assumed compensation increases vary by

period from the measurement date (e.g., 4% increases for the first 5 years
following the measurement date, and 5% thereafter) or by age and/or
service.
b. Separate Scales for Different Employee Groups—Different compensation

scales are assumed for two or more employee groups that are expected to
receive different levels or patterns of compensation increases.
c. Separate Scales for Different Compensation Elements—Different

compensation scales are assumed for two or more compensation elements
that are expected to change at different rates (e.g., 5% bonus increases and
3% increases in other compensation elements).
3.8 Selecting Other Economic Assumptions—In addition to inflation, investment return,

discount rate, and compensation scale assumptions, the following are some of the other
types of economic assumptions that may be required for measuring certain pension
obligations. The actuary should follow the general process described in section 3.4 to
select these assumptions. The selected assumptions should also satisfy the consistency
requirement of section 3.10.
3.8.1 Social Security—Social Security benefits are based on an individual’s covered

earnings, the OASDI contribution and benefit base, and changes in the cost of
living. Changes in the OASDI contribution and benefit base are determined from
changes in national average wages, which reflect the change in national
productivity and inflation.
3.8.2 Cost-of-Living Adjustments—Plan benefits or limits affecting plan benefits

(including the IRC section 401(a)(17) compensation limit and section 415(b)
maximum annuity) may be automatically adjusted for inflation or assumed to be
adjusted for inflation in some manner (e.g., through regular plan amendments).
However, for some purposes (such as qualified pension plan funding valuations),
the actuary may be precluded by applicable laws or regulations from anticipating
future plan amendments or future cost-of-living adjustments in IRC limits.
11
3.8.3 Growth of Individual Account Balances—Certain plan benefits have components

directly related to the accumulation of real or hypothetical individual account
balances (e.g., so-called floor-offset arrangements and cash balance plans).
3.8.4 Variable Conversion Factors—Measuring certain pension plan obligations may

require converting from one payment form to another, such as converting a
projected individual account balance to an annuity, converting an annuity to a
lump sum, or converting from one annuity form to a different annuity form. The
conversion factors may be variable (e.g., recalculated each year based on a stated
mortality table and interest rate equal to the yield on 30-year Treasury bonds).
3.9 Individual Assumptions—Each economic assumption selected by the actuary should

individually satisfy this standard.
3.10 Consistency among Economic Assumptions Selected by the Actuary—With respect to

any particular measurement, each economic assumption selected by the actuary should be
consistent with every other economic assumption selected by the actuary over the
measurement period, unless the assumption, considered individually, is not material, as
provided in section 3.14.1. Often this requirement can be met by using the same inflation
component in each of the economic assumptions selected by the actuary. For example, if
the actuary has chosen to use select and ultimate inflation rates, the actuary should
ordinarily choose select and ultimate investment return rates, discount rates, and
compensation scales, and both the periods and levels of select and ultimate inflation rates
should be consistent within each assumption. If different inflation components are used
(or implicitly included) in two or more economic assumptions selected by the actuary for
a particular measurement, the actuary should be satisfied that such assumptions are
consistent.
Consistency is not necessarily achieved by maintaining a constant difference between one

economic assumption and another. If one particular economic assumption changes from
one measurement to another (e.g., from year to year or from funding to financial
accounting) due to a change in the inflation component, the actuary should review the
impact of inflation on all other economic assumptions and make appropriate adjustments.
But if an assumption change is due to a factor that is unique to that assumption (e.g., a
change in the investment return rate reflecting a change in investment policy), modifying
other economic assumptions merely to maintain constant differences would not be
appropriate.
Assumptions selected by the actuary need not be consistent with prescribed assumptions,
which are discussed in section 3.11 below.
3.11 Prescribed Assumption(s)—When an assumption is prescribed, the actuary is obligated to

use it. Examples of prescribed economic assumptions include the required interest rate
for determining the present value of vested benefits for Pension Benefit Guaranty
Corporation (PBGC) variable-rate premiums, the current liability interest rate, and
economic assumptions selected by the plan sponsor for purposes of compliance with
12
SFAS No. 87. As indicated in section 1.2, Scope, this standard does not apply to the
selection of prescribed economic assumptions, although it does apply to advice given to
the party responsible for selecting the prescribed assumption.
All nonprescribed economic assumptions should nonetheless satisfy this standard. That
is, each economic assumption selected by the actuary should be within the actuary’s best-
estimate range, should reflect relevant measurement-specific factors, and should be
consistent with every other economic assumption selected by the actuary for the
measurement. Selection of economic assumptions that do not satisfy this standard in
order to accommodate the prescribed assumption(s) is a deviation subject to the
3.12 Changing Assumptions—An actuary’s best-estimate range with respect to a particular

measurement of pension obligations may change from time to time due to changing
conditions or emerging plan experience. The actuary might change one or more economic
assumptions frequently in certain situations (e.g., annually), even if the best-estimate
range has not changed materially. The actuary might change assumptions infrequently in
other situations (e.g., only when the best-estimate range changes materially or when the
specific assumption is no longer within the updated best-estimate range). Even if
assumptions are not changed, the actuary should be satisfied that each of the economic
assumptions selected for a particular measurement complies with this standard.
3.13 Sources of Economic Data—Appendix 2 lists some generally available sources of

economic data and analyses the actuary may wish to consider in selecting economic
assumptions. The actuary should consider the possibility that some historical economic
data may not be applicable for the future because of changes in the underlying
environment.
3.14 Other Considerations—The following issues may also be considered when selecting
economic assumptions:
3.14.1 Materiality—The actuary needs to establish a balance between refined

methodology and materiality. The actuary is not required to use a type of
economic assumption or to select a more refined economic assumption when it is
not expected to produce materially different results. For example, the actuary is
not required to use an assumption regarding future compensation increases in an
ERISA funding valuation when such an assumption is immaterial because the
bulk of the obligation relates to participants whose current compensation exceeds
the IRC section 401(a)(17) limit.
3.14.2 Cost Effectiveness—The actuary also needs to establish a balance between

refined methodology and cost effectiveness. While all material economic
assumptions must be reflected, more refined methodology is not required when it
is not expected to produce materially different results. For example, actuaries
working with small plans may prefer to emphasize the results of general research
13
to comply with this standard. However, they are not precluded from using
relevant plan-specific facts.
3.14.3 Knowledge Base—The economic assumptions selected to measure pension

obligations should reflect the actuary’s knowledge base as of the measurement
date. However, the actuary may learn of an event that is unique to a plan or plan
sponsor (e.g., plan termination or death of the principal owner) occurring after the
measurement date that would change the economic assumption selected. If
appropriate, the actuary may reflect this change as of the measurement date.
3.14.4 Advice of Experts—Economic data and analyses are available from a variety of
sources, including representatives of the plan sponsor and administrator,
investment managers, economists, accountants, and other professionals. When the
actuary is responsible for selecting or giving advice on selecting economic
assumptions within the scope of this standard, external expert advice may be
considered, but the selection or advice must reflect the actuary’s professional
judgment.
4.1 Disclosures—Pension actuarial communications should contain the following:
4.1.1 Economic Assumptions⎯Describe each economic assumption used in the

measurement. When a single rate is assumed, the rate should be stated (e.g.,
investment return: 8% per year, net of investment expenses). When multiple rates
are assumed, sufficient detail should be shown to assess the level and pattern of
the rates (e.g., a table showing age-related merit scale rates for every fifth age).
Depending on a particular measurement’s circumstances, the actuary may give

information about specific interrelationships among the assumptions (e.g.,
investment return: 8% per year, net of investment expenses and including
inflation at 3%).
4.1.2 Changes in Assumptions—Describe any changes in the economic assumptions

from those previously used for the same type of measurement. The general effects
of the changes should be disclosed in words or by numerical data, as appropriate.
4.1.3 Changes in Circumstances—Describe any significant event that has occurred

since the measurement date that would change the economic assumption selected
and about which the actuary has knowledge. The likely effect of any such change
should be described.
4.2 Prescribed Assumption(s)—The actuary’s communication should state the source of any
prescribed assumption(s).
14
4.3 Deviation—An actuary must be prepared to justify the use of any procedures that depart
materially from those set forth in this standard and must include, in any actuarial
15
Appendix 1
practice.
Actuaries have historically used various practices for selecting the economic assumptions they
use to measure pension obligations. For example, some actuaries looked to surveys of economic
assumptions used by other actuaries, some relied on detailed research by experts, some used
highly sophisticated projection techniques, and many actuaries used a combination of these.
Before computer technology was widely available, actuaries commonly used economic
assumptions that were not necessarily individually reasonable, but that in aggregate produced
results the actuary believed to be reasonable. As technological developments made the use of
individually reasonable assumptions feasible, many actuaries began selecting economic
assumptions that were individually reasonable. This trend was accelerated by IRC amendments
effective for plan years beginning after 1987. These amendments require actuaries to determine
the minimum required contribution for a qualified pension plan (other than a multiemployer
plan) using individually reasonable assumptions or using assumptions that produce the same total
contribution that would have been determined if each assumption had been individually
reasonable.
As for current practices, many actuaries change economic assumptions infrequently when
measuring obligations of ongoing pension plans. Other actuaries reevaluate the assumptions as of
each measurement date and change economic assumptions more frequently.
Many actuaries maintain a long-term conservative view, especially when selecting economic
assumptions for funding purposes where adverse economic experience could jeopardize the
delivery of plan benefits. Conservative assumptions require higher contributions initially,
increasing the security of promised benefits and reducing the likelihood that future contributions
will increase to unaffordable levels.
For some purposes, such as funding public employee pension plans, complying with financial
accounting rules, or adhering to other requirements, the actuary may advise the plan sponsor
about the selection of economic assumptions. But these assumptions—particularly the
investment return assumption or the discount rate—may be prescribed by others. In some of
these cases, actuaries have adjusted other assumptions to maintain consistency with the
mandated assumption.
In preparing calculations for purposes other than ongoing plan valuations, actuaries often use
economic assumptions that are different from those used for the ongoing plan valuation.
16
Appendix 2
Selected References for Economic Data and Analyses
The following list of references is a representative sample of available sources. It is not intended
to be an exhaustive list.
1. General Comprehensive Sources
a. Kellison, Stephen G. The Theory of Interest. 2d ed. Homewood, IL: Irwin, 1991.
b. Statistics for Employee Benefits Actuaries. Committee on Retirement Systems

Practice Education, and the Pension and Health Sections, Society of Actuaries.
Updated annually.
c. Stocks, Bonds, Bills, and Inflation (SBBI). Chicago, IL: Ibbotson Associates.
Annual Yearbook, market results 1926 through previous year.
2. Recent Data, Various Indexes, and Some Historical Data
a. Barron’s National Business and Financial Weekly. Dow Jones and Co., Inc.
Available on newsstands and by subscription.
b. U.S. Bureau of the Census. Statistical Abstract of the United States. Published
annually.
c. U.S. Department of Labor, Bureau of Labor Statistics. Consumer Price Index.

Monthly updates of CPI-U and CPI-W by expenditure category and commodity
and service group. Available by subscription from the U.S. Government Printing
Office, Washington, DC 20402.
d. U.S. Federal Reserve Monthly Statistical Release G.13. Interest rate information
for selected Treasury securities. Federal Reserve Board, Publications Services,
Washington, DC 20551. Available by subscription.
e. U.S. Federal Reserve Weekly Statistical Release H.15. Interest rate information
for selected Treasury securities. Available as above.
f. U.S. House of Representatives, Committee on Ways and Means. Green Book:

Background Material and Data on Programs within the Jurisdiction of the
Committee. Washington, DC: Government Printing Office. Published annually.
g. U.S. Social Security Administration. Social Security Bulletin. Annual Statistical

Supplements, Trustee Reports, and quarterly Bulletin. Available by subscription
from the U.S. Government Printing Office, Washington, DC 20402.
17
h. The Wall Street Journal. Daily periodical. Money and Investing (section 3); and
stocks (6 indexes), bonds (4 indexes), and interest (4 indexes). Available on
newsstands and by subscription.
3. Forecasts
a. Blue Chip Financial Forecasts. Published by Capital Publications, Inc., P.O. Box
1453, Alexandria, VA 22313-2053. March and October issues contain long-range
forecasts for interest rates and inflation.
b. Congressional Budget Office’s 5-year economic forecast. The forecast projects

three-month Treasury Bill rates, 10-year Treasury Note rates, CPI-U, gross
domestic product, and unemployment rates. Prepared annually. Washington, DC:
Government Printing Office.
18
Actuarial Standard
of Practice
No. 28
Compliance with Statutory Statement of

Actuarial Opinion Requirements for
Hospital, Medical, and Dental Service or Indemnity Corporations,
and for Health Maintenance Organizations
Developed by the
Adopted by the
April 1997
(Doc. No. 054)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Health Service Corporation 2
Section 3. Analysis of Issues and Recommended Compliance 2

3.1 Technical Requirements and Professional Qualifications 2
3.1.1 NAIC Blank 2
3.1.2 State Valuation Requirements 2
3.1.3 NAIC Actuarial Guidelines 2
3.2 Qualification Standards 2
3.3.1 Statutory Reserve Requirements 2
3.3.2 Provision for All Actuarial Items That Ought to Be Established 3
3.3.3 Change in Assumptions or Methods 3
3.3.4 Items Covered by the Opinion 3
3.4 Other Applicable Standards 4

4.1 Format and Content of Statement 4
4.2 Reliance on Others for Data and Supporting Analysis 4
4.3 Opinions of Other Actuaries 4
APPENDIXES

Background 5
Current Practices 6
ii
May 1997

Actuarial Standards Board and Other Persons Interested in Statutory Statement of
Actuarial Opinion Requirements for Hospital, Medical, and Dental Service or
Indemnity Corporations, and for Health Maintenance Organizations
Compliance with Statutory Statement of Actuarial Opinion Requirements for Hospital, Medical,
and Dental Service or Indemnity Corporations, and for Health Maintenance Organizations.
Background
This standard is a revised and reformatted version of Financial Reporting Recommendation

(FRR) 10, Statement of Actuarial Opinion for Health Service Corporation Statutory Annual
Statements. The reformatting was done to conform to the revised uniform format for actuarial
standards of practice adopted by the ASB in 1996. FRR 10 offered guidance to actuaries
providing statutory statements of actuarial opinion for health service corporations. FRR 10
followed the Instructions to the 1983 National Association of Insurance Commissioners (NAIC)
Blank for Hospital, Medical, and Dental Service or Indemnity Corporations and the NAIC Blank
for Health Maintenance Organizations.
This standard is based on the current versions of the above two Blanks, and it provides more
detailed and comprehensive guidance than that provided in FRR 10. Note, as well, that this
standard entirely replaces FRR 10.
Exposure Draft
The revising and reformatting of FRR 10 were completed by the Health Committee of the ASB,
which also approved the proposed standard for submission to the ASB. The ASB reviewed the
draft at the July 1996 meeting and approved its exposure. The standard was exposed for review
in August 1996. Two comment letters were received. The committee considered the comments
carefully. For a detailed discussion of the issues raised in the comment letters, and the commit-
tee’s responses to such, please see appendix 2.
The Health Committee thanks those who provided input during the exposure process. The ASB
voted in April 1997 to adopt the final standard.
iii

Janet M. Carstens Robert J. Ingram
Robert M. Duncan Jr. Mary J. Murley
Paul R. Fleischacker William H. Odell
Alan D. Ford David F. Ogden
John M. Friesen Richard J. Shepler

Harper L. Garrett Jr. Daniel J. McCarthy
David G. Hartman Alan J. Stonewall
iv
ACTUARIAL STANDARD
OF PRACTICE
NO. 28
COMPLIANCE WITH STATUTORY

STATEMENT OF ACTUARIAL OPINION
REQUIREMENTS FOR HOSPITAL, MEDICAL, AND
DENTAL SERVICE OR INDEMNITY CORPORATIONS,
AND FOR HEALTH MAINTENANCE ORGANIZATIONS
1.1 Purpose—This actuarial standard of practice delineates the responsibility of the actuary
in signing the type of statement of actuarial opinion that is described in the Instructions to
the National Association of Insurance Commissioners (NAIC) Blank for Hospital,
Medical, and Dental Service or Indemnity Corporations (HMDI Blank), and the NAIC
Blank for Health Maintenance Organizations (HMO Blank). Such opinion relates to the
actuarial items contained in an annual statement of such health service corporations to a
state regulatory authority, i.e., the statutory statement.
1.2 Scope—This standard applies to actuaries providing statements of actuarial opinion on

reserves and related actuarial items contained in the statutory statements of health service
corporations, as specified in the Instructions to the NAIC Blanks. This standard also
applies to actuaries providing statements as required by individual state regulations to the
extent that such regulations are consistent with the NAIC Blanks. It does not apply to
state laws and regulations that differ substantively from the NAIC Blanks.
1.3 Effective Date—This standard is effective for all applicable statements of actuarial
opinion provided for annual statements prepared for fiscal periods ending after
September 15, 1997.
1
2.1 Health Service Corporation—A hospital, medical, or dental service or indemnity

corporation, or a health maintenance organization.
2.2 Statement of Actuarial Opinion—A formal statement of an actuary’s professional opinion

on a defined subject. It outlines the scope of the work but normally does not include
descriptive details.
Section 3. Analysis of Issues and Recommended Compliance
3.1 Technical Requirements and Professional Qualifications—The Instructions to the NAIC

Blanks each contain explicitly detailed instructions and technical requirements regarding
many aspects of the statement of actuarial opinion.
3.1.1 NAIC Blank—The actuary preparing the opinion should be familiar with the
NAIC Blanks and the Instructions thereto applicable to the type of statement of
actuarial opinion being prepared, and any other applicable NAIC model laws and
regulations that bear on valuation.
3.1.2 State Valuation Requirements—The actuary preparing the opinion should be

aware of the valuation requirements of the regulatory authorities to whom the
opinion is to be expressed and should be satisfied that the requirements of
applicable duly adopted laws and regulations have been met.
3.1.3 NAIC Actuarial Guidelines—The actuary preparing the opinion should be aware
of applicable NAIC “Actuarial Guidelines” published in the NAIC Examiners
Handbook, if any, and make reasonable effort to be aware of generally distributed
applicable interpretations of each regulatory authority.
3.2 Qualification Standards—Before accepting an assignment to issue a statutory statement

of actuarial opinion, the actuary should determine that he or she meets the qualifications
described in the Qualification Standards for Public Statements of Actuarial Opinion,
promulgated by the American Academy of Actuaries.
3.3 Statement of Actuarial Opinion—The form, content, and recommended language of the
statement of actuarial opinion are specified in the Instructions to the NAIC Blanks.
3.3.1 Statutory Reserve Requirements—The statement of actuarial opinion does include

a statement that the amounts carried on the balance sheet on account of identified
actuarial items “meet the requirements of the laws of (state of domicile)” and
“make good and sufficient provision for all unpaid claims and other actuarial
2
liabilities of the corporation [organization for HMOs] under the terms of its
contracts and agreements.”
The actuary preparing the statement of actuarial opinion should be familiar with
the requirements of the applicable laws and regulations of each state in which the
opinion is filed. It is important to note that the actuary is expressing an opinion of
the adequacy of the aggregate liabilities and that possible deficiencies for
individual components may be offset by margins in other items. Documentation
concerning compliance with the requirements of the state of domicile and the
minimum aggregate amounts required by each state in which the opinion is filed
should be maintained by the actuary.
In forming an opinion as to whether the actuarial items “make good and sufficient
provision for all unpaid claims and other actuarial liabilities,” the actuary should
be satisfied that the actuarial judgments made give recognition to any relevant
factors, including the time periods over which the liabilities will extend. The
actuary should be satisfied that the reserves and related items opined on are
adequate to cover obligations under moderately adverse conditions. To hold
liabilities so great that a company could withstand any conceivable adverse
circumstances, no matter how improbable, would be excessive, and good actuarial
practice does not encompass such a degree of conservatism.
3.3.2 Provision for All Actuarial Items That Ought to Be Established—The actuary
should ensure that provision has been made for all actuarial items that ought to be
established. A significant element in the examination of actuarial assumptions and
methods is consideration of the policy and contract provisions affecting the
reserves or other actuarial items. The actuary’s judgment in developing actuarial
assumptions and methods should take into account the specific characteristics of
the policy and contract provisions with respect to which the actuary is expressing
an opinion.
3.3.3 Change in Assumptions or Methods—If there is a material change in the actuarial

assumptions or methods from those previously employed, the change should be
described in the statement of actuarial opinion. The introduction of new coverages
requiring underlying assumptions that differ from assumptions used for prior
coverages is not a change in assumptions or methods within the meaning of this
paragraph. Similarly, when the determination of reserves or unpaid claim
liabilities is based on periodic updating of experience data, such periodic updating
is not a change in actuarial assumptions or methods within the meaning of this
paragraph.
3.3.4 Items Covered by the Opinion—The statement of actuarial opinion should list the
items and amounts on which the actuary expresses an opinion.
3
3.4 Other Applicable Standards—The actuary should note that other actuarial standards of
practice may apply in the reserving process and impose requirements beyond the NAIC
Instructions.
4.1 Format and Content of Statement—Detailed specifications for the statement of actuarial
opinion are contained in the Instructions to the NAIC Blanks. If the actuary departs
significantly from the recommended language or gives an adverse opinion, such
departure or adverse opinion should be clearly disclosed in the opinion.
4.2 Reliance on Others for Data and Supporting Analysis—Reliance on another person or
firm for any aspect of the data or analysis supporting the actuary’s opinion should be
disclosed. Such disclosure should be in the manner prescribed in the Instructions to the
NAIC Blanks. The actuary should refer to ASOP No. 23, Data Quality, for guidance on
the subject.
4.3 Opinions of Other Actuaries—When more than one actuary contributes to forming an
opinion, statements of actuarial opinion from the contributing actuaries should be
maintained by the actuary preparing the opinion as part of the documentation of
compliance with this actuarial standard of practice. The actuary preparing the statement
of actuarial opinion should review and evaluate the contributions of the other actuaries,
and then form an overall opinion.
4
Appendix 1
practice.
Background
In the early 1980s, the NAIC developed standards for a statement of actuarial opinion as to
reserves and related actuarial items that was to be included in the annual statement filed by
health service corporations. In response to this requirement, the American Academy of Actuaries
promulgated Financial Reporting Recommendation 10, Statement of Actuarial Opinion for
Health Service Corporation Statutory Annual Statements, setting forth the actuary’s professional
responsibilities in providing such an opinion.
The form and content of these actuarial opinions, as specified in the instructions to the statutory
statements, deal specifically with reserves and related actuarial items. Prior to the development
of professional standards, some actuaries began to address other issues in forming their opinions,
including asset adequacy analysis, claim settlement expense reserves, and the financial condition
of capitated providers under health maintenance organization contracts.
The type of asset adequacy analysis most widely used by actuaries is multiscenario cash flow
testing. To guide actuaries choosing to use this technique, the Actuarial Standards Board (ASB)
adopted Actuarial Standard of Practice (ASOP) No. 7, Performing Cash Flow Testing for
Insurers, in October 1988 (revised July 1991). In July 1990, the ASB adopted ASOP No. 14,
When to Do Cash Flow Testing for Life and Health Insurance Companies, to provide guidance in
determining whether or not to do cash flow testing in forming a professional opinion or
recommendation.
To guide actuaries in the development of incurred health claim liabilities, the Interim Actuarial
Standards Board approved an actuarial standard of practice, Incurred Health Claim Liabilities, in
April 1988, which was subsequently reformatted and adopted by the ASB as ASOP No. 5 in
January 1991. Among other things, ASOP No. 5 requires that provision be made for claim
settlement expenses.
To guide actuaries in several important areas requiring special consideration for health mainten-
ance organizations (HMOs) and other managed-care health plans in several areas, including
establishing actuarial reserves relating to the transfer of risk to providers and the financial condi-
tion of capitated providers, the ASB adopted ASOP No. 16, Actuarial Practice Concerning
Health Maintenance Organizations and Other Managed-Care Health Plans, in July 1990.
5
Current Practices
Statements of actuarial opinion as to reserves and related items have been generally required
since 1975 for life and health insurance companies, and since 1983 for health service corpora-
tions, and practice regarding the basic elements of the opinion is well established. Financial
Reporting Recommendation 10, which was issued in 1984, together with the additional require-
ments of ASOP Nos. 5, 14, 16, and 23 (Data Quality), embody current practice.
6
Appendix 2

The proposed standard of practice was exposed for review in August 1996. The comment period
ended December 2, 1996. Two comment letters were received. Summaries of substantive issues
raised in the comment letters are in lightface, and the committee’s responses to such are in
boldface. The general comment received is addressed first, followed by comments relating to
specific sections of the exposure draft.
General Comments
A concern was expressed that a number of areas of guidance included in Financial Reporting
Recommendation 10, which this standard of practice replaces, have been omitted. Financial
Reporting Recommendation 10 offered guidance to actuaries providing statutory state-
ments of actuarial opinion for health service corporations. FRR 10 followed the Instruc-
tions to the 1983 National Association of Insurance Commissioners (NAIC) Blank for
Hospital, Medical, and Dental Service or Indemnity Corporations, and the NAIC Blank for
Health Maintenance Organizations. This standard of practice is based on the current
versions of the above two Blanks and, the committee believes, provides more detailed and
comprehensive guidance than that provided in FRR 10. It does not, however, duplicate the
NAIC Instructions with regard to the content of the opinion.
Section 4.2, Reliance on Others for Data and Supporting Analysis—It was suggested that it is
inappropriate to refer to the actuary signing the opinion as the appointed actuary. The word
appointed was removed from section 4.2.
Section 4.3, Opinions of Other Actuaries—A concern was expressed that the standard of practice
precludes multiple actuaries from signing an opinion or any one actuary from expressing reliance
on another actuary. It was also pointed out that the previous financial reporting recommendation
specifically allowed for such a contingency. Financial Reporting Recommendation 10 did
make provision for multiple opinions for a single entity. However, in light of current
requirements, including the implications of the good and sufficient reserves provision (see
section 3.3.1, Statutory Reserve Requirements, of this standard) and cash flow testing
requirements, the committee believes it is appropriate to require a single opinion for each
entity. But note that the ASOP was revised from the exposure draft to eliminate the
prohibition on the signing actuary from claiming reliance on the opinions of other
actuaries, when the signing actuary reaches an overall opinion.
7
Actuarial Standard
of Practice
No. 29
Expense Provisions in
Property/Casualty Insurance Ratemaking
Developed by the
Adopted by the
July 1997
(Doc. No. 056)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Commission and Brokerage Fees 1
2.2 Expense Limitations 1
2.3 General Administrative Expenses 1
2.4 Loss Adjustment Expenses 1
2.5 Other Acquisition Expenses 1
2.6 Policyholder Dividends 1
2.7 Premium-Related Expenses 2
2.8 Rate 2
2.9 Residual Market Provision 2
2.10 Statutory Assessment Provision 2
2.11 Taxes, Licenses, and Fees 2

3.1 Categorizing Expenses 2
3.2 Determining Expense Provisions 2
3.3 Start-Up Costs 2
3.4 Expense Trending 2
3.5 Policyholder Dividends 3
3.6 Residual Market and Statutory Assessment Provisions 3
3.7 Provision for Reinsurance 3

4.1 Conflict with Law or Regulation 3
4.2 Documentation 3
ii
APPENDIXES

Background 4
Inflation 4
Expense Flattening 4
Expense Trending 4
Actuarial Literature 4
Regulation 4
Current Practices 5
Categories 5
Loss Adjustment Expenses 5
Commissions and Premium Taxes 5
General Administrative Expenses and Other Acquisition Expenses 5
Current Information 5
Budgeted versus Historical Expenses 5
Expense Trending 5
Residual Market and Statutory Assessment Provisions 5
Appendix 2Comments on the Exposure Draft and Subcommittee Responses 6
iii
August 1997

Actuarial Standards Board and Other Persons Interested in Expense Provisions in
This booklet contains the final version of actuarial standard of practice (ASOP) No. 29, Expense
Provisions in Property/Casualty Insurance Ratemaking.
Background
This standard was developed by the Subcommittee on Ratemaking of the ASB’s Casualty
Committee. The Casualty Actuarial Society's Statement of Principles Regarding Property and
Casualty Insurance Ratemaking identifies and describes principles applicable to the
determination and review of property/casualty insurance rates. These principles are limited to
that portion of the ratemaking process involving the estimation of costs associated with the
transfer of risk. For most lines of business, the expense component is a significant portion of the
rate. For some lines of business, the expense component can actually exceed the loss component.
For this reason, it is necessary to have a standard of practice to provide guidance to actuaries in
the determination of a proper expense component.
Exposure Draft
This standard was exposed for review in October 1994, with a comment deadline of March 15,
1995. Thirty-one comment letters were received. The Subcommittee on Ratemaking reviewed all
the comments carefully, and many of the suggestions were incorporated into the final standard.
In particular, the subcommittee expanded the discussions concerning (1) residual market and
statutory assessment provisions, (2) the provision for reinsurance, and (3) policyholder
dividends. (For a detailed discussion of the issues raised in the comment letters, and the subcom-
mittee’s responses to such, please see appendix 2.)
Format Changes
sections 3 and 4 now form an appendix titled, Background and Current Practices. (Appendix 1 of
this standard contains sections 3 and 4 of the exposure draft.) Further, sections 5 and 6 of the
exposure draft have now been renumbered as sections 3 and 4. The “new” sections 3 and 4,
iv
along with sections 1 and 2, now form the actual standard of practice. The heading Preamble,
which used to apply to the first four sections of the standard, has been deleted. The board made
these format changes to help the reader distinguish between a standard's substantive
requirements and language intended for general information.
The Subcommittee on Ratemaking and the Casualty Committee thank everyone who provided
input during the exposure process. The comments were helpful in making revisions. The
Casualty Committee also thanks the following former subcommittee members, who made
significant contributions to this work: Daniel J. Flaherty, Gary Grant, and Robert Lindquist. The
ASB voted in July 1997 to adopt the final standard.
Subcommittee on Ratemaking of the Casualty Committee
Steven G. Lehmann, Chairperson

Frederick F. Cripe Marc B. Pearl
Robert W. Gossrow Jonathan White
R. Michael Lamb Paul E. Wulterkens

Christopher S. Carlson Karen F. Terry
Douglas J. Collins Margaret W. Tiller
Anne Kelly William J. VonSeggern
Steven G. Lehmann Mark Whitman
Robert S. Miccolis

v
EXPENSE PROVISIONS IN
PROPERTY/CASUALTY INSURANCE RATEMAKING
1.1 Purpose—The purpose of this standard of practice is to provide guidance to actuaries in

estimating costs for property/casualty insurance ratemaking other than (1) incurred
losses, (2) the provision for profit and contingencies, (3) investment expenses, and (4)
federal and foreign income taxes.
1.2 Scope—This standard of practice applies to all property/casualty insurance coverages.

This standard also applies to property/casualty risk financing systems, such as self-
insurance, that provide similar coverages. References in the standard to risk transfer
should be interpreted to include risk financing systems that provide for risk retention in
lieu of risk transfer.
December 1, 1997.
2.1 Commission and Brokerage Fees—Compensation to agents and brokers.
2.2 Expense Limitations—Legislative or regulatory rules that disallow or limit certain

categories of expenses in determining rates.
2.3 General Administrative Expenses—All operational and administrative expenses (other

than investment expenses) not specifically defined elsewhere in this section.
2.4 Loss Adjustment Expenses (LAE)—All expenses incurred in investigating and settling
claims.
2.5 Other Acquisition Expenses—All costs, other than commission and brokerage fees,
associated with the acquisition of business.
2.6 Policyholder Dividends—Nonguaranteed returns of premium or distributions of surplus.
1
2.7 Premium-Related Expenses—Those expenses that vary in direct proportion to premium,
e.g., premium taxes. These expenses are sometimes referred to as variable expenses.
2.8 Rate—An estimate of the expected value of future costs.
2.9 Residual Market Provision—A provision for the entity's costs that represents its share of
residual market profits or losses.
2.10 Statutory Assessment Provision—A provision for the entity's costs stemming from any
mandated assessment.
2.11 Taxes, Licenses, and Fees—All taxes and miscellaneous fees except federal and foreign
income taxes.
3.1 Categorizing Expenses—The actuary should be familiar with the pertinent requirements
for defining expenses, such as those prescribed in the Instructions for Uniform
Classification of Expenses, published by the National Association of Insurance
Commissioners (NAIC), or Regulation 30 of the New York State Insurance Department.
The actuary should also be familiar with the entity's own methods of classifying and
assigning expenses.
3.2 Determining Expense Provisions—The actuary should determine the provisions for loss
adjustment expenses; commission and brokerage fees; other acquisition expenses; general
administrative expenses; and taxes, licenses, and fees that are appropriate for the policies
to be written or coverages provided during the time the rates are expected to be in effect.
In addition, where appropriate, the actuary should consider subdividing the expense
categories. Expense provisions should reflect the conditions expected during the time
these policies or coverages are expected to be in effect and should include all expenses
expected to be incurred in connection with the transfer of risk.
For expenses other than premium-related expenses, the actuary should consider
estimating these expenses on a basis that is not directly proportional to premium, such as
per policy, per coverage, a percentage of claim losses, or per unit of exposure. Studies or
actuarial judgment may support such estimates.
3.3 Start-Up Costs—The actuary may amortize start-up or development costs using an
appropriate amortization period.
3.4 Expense Trending—In determining the future expense components of the rate, the
actuary should be guided by Actuarial Standard of Practice (ASOP) No. 13, Trending
Procedures in Property/Casualty Insurance Ratemaking.
2
3.5 Policyholder Dividends—The Statement of Principles Regarding Property and Casualty
Insurance Ratemaking of the Casualty Actuarial Society (CAS) classifies policyholder
dividends as an expense to operations. When the actuary determines that policyholder
dividends are a reasonably expected expense and are associated with the risk transfer, the
actuary may include a provision in the rate for the expected amount of policyholder
dividends. In making this determination, the actuary should consider the following: the
company's dividend payment history, its current dividend policy or practice, whether
dividends are related to loss experience, the capitalization of the company, and other
considerations affecting the payment of dividends.
3.6 Residual Market and Statutory Assessment Provisions—The actuary should include a
provision in the rate for any residual market costs or statutory assessments expected to
occur during the period of time the rates are expected to be in effect. If these costs are
assessed retrospectively, it may be appropriate to include a provision to recover these
costs to the extent they were not included in previous rates.
3.7 Provision for Reinsurance—The actuary may elect whether to include the cost of
reinsurance as an expense provision. If a provision for reinsurance is included, the
actuary should consider the amount to be paid to the reinsurer; ceding commissions or
allowances; expected reinsurance recoveries; and other relevant information specifically
relating to cost, such as a retrospective profit-sharing agreement and reinstatement
premiums between the reinsured and the reinsurer.
4.1 Conflict with Law or Regulation—The rate filed with a regulator may differ from an
actuarially determined rate because of expense limitations. If a law or regulation conflicts
with the provisions of this standard, the actuary should develop a rate in accordance with
the law or regulation, and disclose any material difference between the rate so developed
and the actuarially determined rate to the client or employer.
4.2 Documentation—The actuary should be guided by the provisions of ASOP No. 9,

Documentation and Disclosure in Property and Casualty Insurance Ratemaking, Loss
Reserving, and Valuations.
3
Appendix 1
practice.
Background
Inflation—Prior to the relatively high inflation of the 1970s, a predominant ratemaking technique
involved including expenses, other than loss adjustment expenses, as a percentage of premium.
In doing so, it was assumed that the expense portion of the rate was subject to the same trend
(usually very low) to which the loss and loss adjustment expense portions were subjected. How-
ever, higher levels of inflation had a rather significant impact on the expected change in the
various components of the rate. By the 1970s, the assumption that the trend in expenses would
approximate the trend in losses was being questioned. Although the actuarially determined loss
trend may have been applied to the loss and loss adjustment expenses as usual, a separate analy-
sis and trend may have been necessary to properly reflect the anticipated change in certain other
expenses.
Expense Flattening—Expense flattening techniques assign expenses to policies or other units of

exposure rather than in proportion to premium or losses. Thus, expense flattening is a procedure
sometimes used to determine that portion of the rate that does not vary in direct proportion to
premium or losses.
Expense Trending—Expense trending reflects how changes over time affect expenses. Over the
years, separate trending of expenses has become a more common ratemaking technique.
However, including expenses as a proportion of premium is still used.
Actuarial Literature—Although the property/casualty actuarial literature is relatively sparse on

the topic of expense provisions in ratemaking, techniques for separately trending losses and ex-
penses and alternatives to premium-related ex-pense provisions have been included in such
literature. Also included are discussions about the inappropriateness, in some cases, of assuming
proportional expenses for administrative ease when, in fact, some expense categories do not vary
in direct proportion to premium.
Regulation—Beginning in the late 1970s, some regulators have applied expense limitations in
either limiting or disallowing certain expenses and in requiring expense flattening.
4
Current Practices
Categories—Expenses other than investment expenses are generally divided into five broad cat-
egories to determine the expense component of the rate. These expenses are (1) loss adjustment
expenses, (2) commission and brokerage fees, (3) other acquisition expenses, (4) general admin-
istrative expenses, and (5) taxes, licenses, and fees. Studies may be conducted to determine
which expenses vary in direct proportion to premium, losses, number of policies, or other units
of exposure, and which expenses may be independent.
Loss Adjustment Expenses—Loss adjustment expenses are generally of two types: allocated and
unallocated. Allocated loss adjustment expenses (ALAE) are sometimes combined with and,
thus, treated the same as, incurred losses (IL). ALAE are combined with unallocated loss
adjustment expenses (ULAE) for some lines of business. ULAE may be expressed as a function
of IL plus ALAE, but may also be expressed as a function of premium. For lines of business in
which all loss adjustment expenses are combined, the loss adjustment expenses are generally
expressed as a function of either IL or premium.
Commissions and Premium Taxes—Commissions and premium taxes are typically paid as a
percentage of direct written premium. Such expenses are generally treated as premium-related
expenses.
General Administrative Expenses and Other Acquisition Expenses—General administrative ex-

penses and other acquisition expenses may be expressed as a function of premium; or may be
partially related to premium, partially related to the number of policies, and partially related to
the number of exposures.
Current Information—Historical expenses are generally analyzed in light of current relevant

information to determine whether they will be representative of future costs.
Budgeted versus Historical Expenses—Because of the prospective nature of ratemaking, certain

expenses, such as commissions, are generally based on budgets rather than determined from
historical data.
Expense Trending—Historical expenses may be adjusted to reflect changes over time.
Residual Market and Statutory Assessment Provisions—Residual market costs and statutory
assessments are often included as expenses. For those classes of business written in the voluntary
market that caused the insurer to receive a share of the residual market, the residual market
provision may be separately identified or embedded in the rate.
5
Appendix 2
Comments on the Exposure Draft and Subcommittee Responses
The proposed standard of practice was approved for release as an exposure draft in October
1994, with a comment deadline of March 15, 1995. Thirty-one comment letters were received
and reviewed by the Subcommittee on Ratemaking of the ASB’s Casualty Committee. Sum-
marized below are the substantive issues raised and questions contained in the comment letters,
printed in lightface. The subcommittee's responses to those issues appear in boldface.
Note also that, as mentioned in the transmittal memorandum to this standard of practice (see
page vi), the ASB adopted on May 1, 1996, a new format for all actuarial standards of practice.
Thus, the section numbers below refer to section numbers in the exposure draft, unless otherwise
noted (some section numbers have remained the same).
Section 1.1, Purpose—Several comments were received asking for clarification of the issues
covered by the standard. The subcommittee added the phrase for property/casualty insurance
ratemaking to clarify that the standard is limited to ratemaking. Further, the section was
revised to note that the subject of federal and foreign income taxes is clearly excluded by
the standard. The subject of investment expenses was also specifically excluded since the
subcommittee agreed that the subject should not be considered in this standard. One
commentator questioned whether allocated loss adjustment expenses were included in the
standard. The subcommittee revised the section to make it clear that all loss adjustment
expenses are included in this standard.
Section 1.2, Scope—A few commentators noted that this section is ambiguous in its use of
examples. The subcommittee modified the text to clearly note that the standard applies to
all property/casualty coverages.
Section 2.1, Allocated Loss Adjustment Expenses—This definition was deleted since it is not
used in the standard.
Section 2.4, General Administrative Expenses (now section 2.3)—Several comments were
received regarding reinsurance expenses. The subcommittee added a new section, Provision
for Reinsurance (see section 3.7), to discuss the treatment of reinsurance expenses. No
changes were made to the definition of general administrative expenses.
Section 2.5, Guaranty Fund Assessments (now section 2.10 and titled, Statutory Assessment
Provision)—The subcommittee developed a broader definition that refers to all statutory
assessments in order to reflect guaranty fund assessments, and emerging statutory
insurance and reinsurance mechanisms, such as the Florida Hurricane Catastrophe Fund,
the Florida Windstorm Underwriting Association, and the California Earthquake
6
Authority, as well as various administrative and special fund expenses for which entities
are assessed. The subcommittee also replaced the word insurer with entity to further
broaden the application.
Section 2.8, Policyholder Dividends (now section 2.6)—One comment letter noted that this was
a weak definition. Although the definition was slightly modified, the subcommittee believes
that the revised definition is the most descriptive and definitive one available. The
subcommittee deleted the phrase charged to operations at the end of the definition and
added the phrase or distributions of surplus.
Section 2.9, Rate (now section 2.8)—No change was made. This definition is the same as the
one found in the CAS Statement of Principles Regarding Property and Casualty Insurance
Ratemaking.
Section 2.10, Residual Market Provision (now section 2.9)—Per comments received, the entire
second sentence of the section was moved to section 4.9 of the exposure draft, which can
now be found in appendix 1 under the title, Residual Market and Statutory Assessment
Provisions.
Section 2.11, Taxes, Licenses, and Fees—Based on comments received and on an analysis of
the insurance expense exhibit breakout, the subcommittee inserted the words federal and
foreign before income taxes to make clear that state income, municipal, police department,
fire department, etc., premium taxes should be considered.
Section 2.12, Unallocated Loss Adjustment Expenses—Some commentators noted that since
some companies contract claim handling as a percentage of each claim cost, some types of claim
costs could be classified as “allocated” for one company and “unallocated” for another. This
definition was deleted since it is not used in the standard.
Section 2.13, Variable Expenses (now section 2.7 and titled Premium-Related Expenses)—One
commentator suggested that this section be titled, Premium Variable Expenses. The
subcommittee agreed in concept and changed the title to, Premium-Related Expenses.
Other commentators suggested that the standard define nonvariable expenses, since the term is
used in section 4.8 (this section can now be found in appendix 1, Current Practices, with the title,
Expense Trending) and section 5.4, Measurement Base. The subcommittee deleted use of this
term. Thus, no definition is necessary. Expenses that are not related to premiums are
treated in the second paragraph of section 3.2, Determining Expense Provisions, in this
standard.
Section 3. Background and Historical Issues (Now in Appendix 1 under Background)
Section 3.1, Inflation and Price Controls (this section can now be found in appendix 1 under the
title, Inflation)—It was noted that price controls are not mentioned elsewhere in the section. This
phrase was deleted. The subcommittee also modified the wording in the last sentence of the
paragraph to make the application of the loss trend less restrictive.
7
Section 3.2, Expense Flattening (this section can now be found in appendix 1)—It was suggested
that the word policies be expanded to policies or other units of exposure. The subcommittee
agreed and made the modification. In addition, the wording in the last sentence was
changed to make the definition of expense flattening more explicit.
Section 3.3, Expense Trending (this section can now be found in appendix 1 under
Background)—It was noted that the phrase expense trending does not need to be italicized. The
subcommittee deleted the italics and replaced measures with reflects, since expense trending
is not a true measure of changes.
Section 3.4, Actuarial Literature (this section can now be found in appendix 1)— In the first
sentence, the subcommittee replaced the word expenses with the phrase expense provisions
in ratemaking to make it consistent with the subject of the standard of practice. In the last
sentence, the wording was modified to be consistent with the section, Expense Flattening.
Section 3.5, Regulation (this section can now be found in appendix 1)—It was suggested that the
second sentence (These expense limitations should be taken into account when establishing the
premium rate filed with the regulator.) reflects procedure rather than background. The
subcommittee deleted this sentence from the section, and modified the wording in section
4.1 of the standard to reflect this change.
Section 4. Current Practices and Alternatives (Now in Appendix 1 under Current Practices)
Section 4.1, Categories (this section can now be found in appendix 1)—Suggestions included
rearranging this section to remove the reference to specific loss adjustment expenses and
inserting this reference into section 4.2. It was also suggested that the draft may be too limiting
regarding current practice. The subcommittee moved a portion of this section to the section
directly below it (i.e., the old section 4.2, Loss Adjustment Expenses), and rewrote the
remaining text to broaden the scope of current practice. Also, the word special, describing
the studies that could be conducted, was deleted.
Section 4.2, Loss Adjustment Expenses (this section can now be found in appendix 1)—It was
suggested that the third and fourth sentences were inconsistent. The subcommittee revised the
third and fourth sentences of this section to clarify that unallocated expenses may be
expressed as a function of premium.
Section 4.3, Commissions and Premium Taxes (this section can now be found in appendix 1)—A
concern was expressed that this section did not mention “truly variable commissions, e.g., ones
that include profit-sharing based on loss ratios.” In addition, minor editorial changes were
recommended. The subcommittee is satisfied that this section is broad enough to allow the
actuary to work with variable commissions. The editorial suggestions were adopted.
Section 4.4, General Administrative Expenses and Other Acquisition Expenses (this section can
now be found in appendix 1)—One commentator suggested that this section is inconsistent with
sections 4.1 and 5.1 of the exposure draft. In addition, minor editorial suggestions were offered.
8
The subcommittee does not agree that an inconsistency exists among the sections, but it did
incorporate the suggested editorial changes.
Section 4.5, Specific Jurisdiction versus Nationwide—Minor editorial changes were suggested.
After further consideration, the subcommittee concluded that this section was not
necessary and deleted it.
Section 4.8, Nonvariable Expenses (this section can now be found in appendix 1, Current
Practices, with the title, Expense Trending)—Concern was expressed that this section restricts
expense trending to only nonvariable expenses. It was also suggested that this section be
broadened to include a discussion of the prospective treatment of expenses. The subcommittee
renamed this section Expense Trending, modifying the text to acknowledge that expenses
may need to be adjusted to reflect changes over time.
Section 4.9, Residual Market Provisions and Guaranty Fund Assessments (this section can now
be found in appendix 1 with the title, Residual Market and Statutory Assessment Provisions)—A
few comment letters requested making this section more general by removing references to
guaranty funds and removing the reference to state-specific residual market costs. The phrase
guaranty fund was replaced with the term statutory in the title, and the phrase state-specific
was eliminated from the section. The subcommittee also added language to identify an
appropriate treatment of a residual market provision.
Section 5. Analysis of Issues and Recommended Practices (Now Section 3)
Section 5.1, Categorizing Expenses (now section 3.1)—Concerns were expressed that requiring
the actuary to be familiar with the Instructions for Uniform Classification of Expenses and with
the entity’s own methods of classifying expenses is too onerous. This information (i.e., that
contained in the NAIC publication and the entity's own methods) is important to the
selection of an appropriate expense methodology. The section was left unchanged. It was
also suggested that the National Council on Compensation Insurance statistical plan be added to
the list of expense definitions. The subcommittee believes that the requirement to be
“familiar with the entity’s own methods” covers this issue.
Section 5.2, Determining Expense Components (now section 3.2 and titled Determining Expense
Provisions)—Several concerns were expressed about the discussion of ULAE and ALAE. Also,
several comments requested that residual market costs be discussed in a separate section. The
discussion of ULAE and ALAE was deleted. Also, the subcommittee added a new section,
Residual Market and Statutory Assessment Provisions (see section 3.6), and a new
paragraph providing direction for handling expenses that do not vary directly with pre-
mium. This new paragraph replaces section 5.4 of the exposure draft.
Section 5.3, Start-Up Costs (now section 3.3)—Comments were received that start-up costs
should be more precisely defined. The subcommittee believes that the determination of which
costs are start-up costs and which are not should be made by the actuary in each unique
situation. The subcommittee changed the language to include development costs, and made
9
other editorial changes, but did not think it appropriate to more explicitly define these
costs.
Section 5.4, Measurement Base—Several comment letters stated that the term nonvariable
expenses needs to be defined. It was also suggested that the reference to premium discounts or
expense constants be deleted. As noted earlier regarding comments on section 5.2, the
subcommittee deleted this section and moved the discussion of expenses that do not vary
directly with premium to the second paragraph of section 3.2 of this standard.
Section 5.5, Expense Trending (now section 3.4)—It was suggested that this section specifically
identify the pertinent sections of ASOP No. 13, so that actuaries would not need to review the
other standard of practice. ASOP No. 13, Trending Procedures in Property/Casualty Insurance
Ratemaking, should be reviewed whenever an actuary is engaged in ratemaking. No
changes were made to this section.
Section 5.6, Policyholder Dividends (now section 3.5)—Concerns were expressed that this
section is unclear as to when policyholder dividends are (or are not) associated with the transfer
of risk. The subcommittee rewrote this section for clarification and to provide additional
guidance.
Note, as well, that two new sections have been added: section 3.6, Residual Market and
Statutory Assessment Provisions (see the comments above regarding section 5.2 of the exposure
draft), and section 3.7, Provision for Reinsurance (see the comments above regarding section 2.4
of the exposure draft).
Section 6. Communications and Disclosure (Now Section 4)
Section 6.1, Conflict with Law or Regulation (now section 4.1)—It was suggested that the actu-
ary should quantify the economic impact of any limitations or exclusions. It was also suggested
that conflicts should be disclosed to the regulator, in addition to the client or employer. The
subcommittee revised this section to note that, if a law or regulation conflicts with the
provisions of this standard, the actuary should develop a rate in accordance with the law or
regulation, and disclose any material difference between the rate so developed and the
actuarially determined rate to the client or employer. In those situations where the
regulator is neither a client nor an employer, it could be inappropriate for an actuary to
disclose information directly to the regulator. Thus, the section was modified accordingly.
Section 6.2, Documentation—One comment letter suggested that this section should simply
reference ASOP No. 9, Documentation and Disclosure in Property and Casualty Insurance
Ratemaking, Loss Reserving, and Valuations. The subcommittee made the suggested change.
The Subcommittee on Ratemaking of the Casualty Committee thanks everyone who took the
time and made the effort to write comment letters. The input was helpful in developing the final
standard.
10
Actuarial Standard
of Practice
No. 30
Treatment of Profit and Contingency Provisions and the Cost of

Capital in Property/Casualty Insurance Ratemaking
Developed by the
Task Force on Rate of Return of the
Adopted by the
July 1997
(Doc. No. 057)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Capital 1
2.2 Contingency Provision 1
2.4 Insurance Cash Flows 2
2.5 Insurance Risk 2
2.7 Investment Income from Insurance Operations 2
2.8 Investment Risk 2
2.9 Leverage 2
2.10 Operating Profit 2
2.11 Rate 2
2.12 Total Return 2
2.13 Underwriting Expenses 2
2.14 Underwriting Profit 2
2.15 Underwriting Profit Provision 2

3.1 Estimating the Cost of Capital and the Underwriting Profit Provision 3
3.2 Basis for Cost of Capital Estimates 3
3.3 Estimates of Future Costs 3
3.4 Parameters of the Risk Transfer 3
3.6 Income Taxes 4
3.7 Contingency Provision 4
3.8 Use of Different Bases 5
3.9 Accounting Rules for Comparing the Cost of Capital 5

4.1 Conflict with Law or Regulation 5
4.2 Documentation 5
ii
APPENDIXES

Background 6
Historical Procedures 6
Historical Issues 6
Role of Capital 6
Role of the Underwriting Profit Provision 6
Role of the Contingency Provision 6
Current Practices 7
Estimating the Cost of Capital 7
Relating the Cost of Capital to the Underwriting Profit Provision 7
Developing and Evaluating a Contingency Provision 9
Appendix 2Comments on the 1996 Second Exposure Draft and Task Force Responses 10
iii
August 1997

Actuarial Standards Board and Other Persons Interested in Profit and Contingency
Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking
Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty
Insurance Ratemaking.
First and Second Exposure Drafts
deadline of March 15, 1995. Thirty-one comment letters were received. The second draft of this
standard was exposed for review in August 1996, with a comment deadline of December 2,
1996. Ten comment letters were received on the second exposure draft. (For a copy of either
exposure draft, please contact the ASB office.) The Task Force on Rate of Return of the ASB's
Casualty Committee reviewed and carefully considered all comments received on both exposure
drafts. As was the case after the first exposure, the task force revised the second exposure draft
after participating in many conference calls and listening to comments made during question-
and-answer sessions held at various Casualty Actuarial Society (CAS) meetings.
Substantive Issues
Following the first exposure draft, the task force received a number of comment letters regarding
the discussion of rates versus prices. Although several changes were made in the second
exposure draft to more clearly indicate that the proposed standard intended only to address the
evaluation of costs (i.e., rates), some of the commentators’ letters on the second exposure draft
still expressed confusion on this point. In response, the task force further revised several sections
to make clear that the standard does not address considerations such as marketing goals, compe-
tition, and legal restrictions that may affect price.
In addition to the “rates versus prices” issue, several commentators questioned whether the cost
of capital is truly equivalent for stock, mutual, and other insurance organizations. After extensive
discussion, the task force changed the language of the standard to focus the practitioner on
assessing the cost of capital as an opportunity cost and to recognize that all risk transfers have an
opportunity cost. The task force also combined section 3.8 with section 3.2 to indicate that the
cost of capital may differ for various capital providers due to their differing risk characteristics,
iv
and that such differences play a role in assessing the cost of capital for a specific capital
provider. (For a detailed discussion of the comments and the task force's responses to such,
please see appendix 2 of this standard.)
The task force is grateful to the many individuals who contributed written comments or parti-
cipated in the numerous discussions of the proposed standard at CAS meetings. The task force
believes that the final standard benefitted significantly from this professional debate.
The ASB voted in July 1997 to adopt the final standard.
Task Force on Rate of Return of the Casualty Committee
Mark Whitman, Chairperson

David Appel Claus S. Metzner
Robert A. Bailey Michael J. Miller
Robert P. Butsic Richard G. Woll
Steven G. Lehmann

Douglas J. Collins Margaret W. Tiller
Steven G. Lehmann Mark Whitman
Robert S. Miccolis

v
TREATMENT OF PROFIT AND CONTINGENCY

PROVISIONS AND THE COST OF CAPITAL
IN PROPERTY/CASUALTY INSURANCE RATEMAKING
1.1 Purpose—According to the Statement of Principles Regarding Property and Casualty

Insurance Ratemaking (hereafter the Statement of Principles) of the Casualty Actuarial
Society, insurance rates should provide for the cost of capital through underwriting profit
and contingency provisions. This standard of practice provides guidance to actuaries in
estimating the cost of capital and evaluating underwriting profit and contingency
provisions.
1.2 Scope—This standard of practice applies to all property/casualty insurance coverages.

This standard also applies to property/casualty risk financing systems, such as self-
insurance, that provide similar coverages. References in the standard to risk transfer
should be interpreted to include risk financing systems that provide for risk retention in
lieu of risk transfer. Further, as is true of the Statement of Principles, this standard is
limited to defining a rate as the estimation of future costs and does not address other
considerations that may affect a price, such as marketing goals, competition, and legal
restrictions.
December 1, 1997.
2.1 Capital—The funds intended to assure payment of obligations from insurance contracts,
over and above those funds backing the liabilities.
2.2 Contingency Provision—A provision for the expected differences, if any, between the
estimated costs and the average actual costs, that cannot be eliminated by changes in
other components of the ratemaking process.
2.3 Cost of Capital—The rate of return that capital could be expected to earn in alternative
investments of equivalent risk; also known as opportunity cost.
1
2.4 Insurance Cash Flows—Funds from premiums and miscellaneous (non-investment)
income from insurance operations, and payments for losses, expenses, and policyholder
dividends. Associated income taxes are recognized when the analysis is on a post-tax
basis.
2.5 Insurance Risk—The extent to which the level or timing of actual insurance cash flows is
likely to differ from expected insurance cash flows.
2.6 Investment Income—Proceeds (other than the return of principal) derived from the
investment of assets, minus investment expenses. Associated income taxes are recognized
when the analysis is on a post-tax basis.
2.7 Investment Income from Insurance Operations—The income associated with the
investment of insurance cash flows. (This is sometimes referred to as investment income
on policyholder-supplied funds.)
2.8 Investment Risk—The extent to which the level or timing of actual investment proceeds
is likely to differ from what is expected.
2.9 Leverage—A measure of the relative amount of risk to which capital is exposed, typically
expressed as the ratio of an exposure measure (such as premium or liabilities) to the
capital amount.
2.10 Operating Profit—The sum of underwriting profit, miscellaneous (non-investment)

income from insurance operations, and investment income from insurance operations.
Associated income taxes are recognized when the analysis is on a post-tax basis.
2.11 Rate—An estimate of the expected value of future costs.
2.12 Total Return—The sum of operating profit and investment income on capital, usually
after income taxes, often expressed in percentage terms.
2.13 Underwriting Expenses—All expenses except losses, loss adjustment expenses,

investment expenses, policyholder dividends, and income taxes.
2.14 Underwriting Profit—Premiums less losses, loss adjustment expenses, underwriting

expenses, and policyholder dividends.
2.15 Underwriting Profit Provision—The provision for underwriting profit in the actuarially
developed rate, typically expressed as a percentage of the rate.
2
3.1 Estimating the Cost of Capital and the Underwriting Profit Provision—Property/casualty
insurance rates should provide for all expected costs, including an appropriate cost of
capital associated with the specific risk transfer. This cost of capital can be provided for
by estimating that cost and translating it into an underwriting profit provision, after taking
leverage and investment income into account. Alternatively, the actuary may develop an
underwriting profit provision and test that profit provision for consistency with the cost
of capital. The actuary may use any appropriate method, as long as such method is
consistent with the considerations in this standard.
For historical and practical reasons, this standard separately discusses the underwriting
profit provision, investment income from insurance operations, and investment income
on capital. The actuary should keep in mind that evaluation of whether the cost of capital
is appropriately recognized does not necessarily require these distinctions.
3.2 Basis for Cost of Capital Estimates—In estimating the cost of capital, the actuary should
consider the relationship between risk and return. The methods used for estimating the
cost of capital should reflect the risks involved in the risk transfer under consideration.
These risks may include insurance, investment, inflation, and regulatory risks, as well as
diversification, debt structure, leverage, reinsurance, market structure, and other
appropriate aspects of the social, economic, and legal environments.
Thus, the cost of capital is likely to vary from one insurer to another. The actuary should
recognize that the capital which is needed to support any risk transfer has an opportunity
cost regardless of the source of capital or the structure of the insurer.
3.3 Estimates of Future Costs—Since all components of a rate should be estimates of future
costs relating to the risk transfer during the prospective period of time to which the rate
applies, capital costs, investment income, income taxes, cash flows, and leverage factors
used in calculating the profit provision should all be based on expected future values.
3.4 Parameters of the Risk Transfer —The actuary should recognize that the cost of capital
associated with an individual risk transfer may vary, based on the specific parameters of
the transfer. To the extent that deductibles, dividend or return of premium plans,
reinsurance, etc., affect the risk of the insurer, the cost of capital and the amount of
capital needed to support the transaction may be affected.
3.5 Investment Income—There are two elements of investment income that the actuary
should consider: investment income from insurance operations and investment income
on capital.
3
The actuary should assess the investment risk, since the amount and cost of capital should
reflect investment risk as well as the risk associated with the insurance cash flows.
Investment risk addresses the cost of default, reinvestment risk, and other investment
uncertainties. Such risks can result in a significantly different yield than the stated yield
rate.
Any of several general approaches may be used by the actuary to estimate investment
income, as long as the assumptions are reasonable and appropriate. The investment yield
rates used should be appropriate for the cash flow patterns associated with the coverages
under consideration. If historical balance sheet and cash flow data are used to project
investment income, the data should be adjusted to represent future investment income
from the associated coverages.
The actuary may use any of a number of methods for recognizing investment income
from insurance operations. Two such approaches are as follows:
a. Methods that estimate investment income based on projected insurance cash

flows. The insurance cash flows are projected for each future period, and the
expected investment yield rate appropriate for each future period is applied to the
insurance cash flow for that period. The investment yield rates should be
appropriate for the cash flow patterns associated with the coverages under
consideration.
b. Methods that apply an expected investment yield rate to assets representing the
liabilities for losses, loss adjustment expenses, and unearned premium net of
agents' balances and prepaid expenses. If historic liability-to-premium relation-
ships are used, they should be adjusted to reflect expected future relationships
between liabilities and premiums. The actuary should also consider, for example,
the effects of growth, changes in expected loss or expense patterns, and the effect
of the delayed receipt of investment income. The investment yield rate selected
should represent the expected investment yield for the insurer during the period
the rates are expected to be in effect.
3.6 Income Taxes—To the extent income taxes are not included in the expense provision, the
actuary should use provisions for expected income taxes that are consistent with the
earnings expected from the insurance transaction being evaluated.
3.7 Contingency Provision—The actuary should include a contingency provision if the

assumptions used in the ratemaking process produce cost estimates that are not expected
to equal average actual costs, and if this difference cannot be eliminated by changes in
other components of the ratemaking process.
While the estimated costs are intended to equal the average actual costs over time,
differences between the estimated and actual costs of the risk transfer are to be expected
in any given year. If a difference persists, the difference should be reflected in the
ratemaking calculations as a contingency provision. The contingency provision is not
4
intended to measure the variability of results and, as such, is not expected to be earned as
profit.
3.8 Use of Different Bases—The cost of capital can be expressed as a percentage of capital, a
percentage of assets, a percentage of premium, or other appropriate base. The actuary
may choose any such appropriate base. Actuaries may use different bases, which can be
converted from one to another. Regardless of which base is used to reflect the cost of
capital, the actuary should clearly identify the base used and should document the
relevant assumptions.
3.9 Accounting Rules for Comparing the Cost of Capital—The accounting rules employed
within any model should be internally consistent. When comparing one industry with
another, the actuary should make any necessary adjustments so that costs of capital of
industries with different accounting methods can be properly compared.
4.1 Conflict with Law or Regulation—If a law or regulation conflicts with the provisions of
this standard, the actuary should develop a rate in accordance with the law or regulation,
and disclose any material difference between the rate so developed and the actuarially
determined rate to the client or employer.

5
Appendix 1
practice.
Background
Historical Procedures—Until the 1970s, it was common practice to include in rate calculations a
standard underwriting profit and contingency provision of 2.5% for workers compensation
insurance and 5% for other property/casualty lines of insurance (6% for some property lines).
These provisions did not explicitly reflect investment income, since there was general agreement
at the time that these standard provisions implicitly reflected investment income and insurance
risk in a reasonable fashion. However, economic and structural changes in the insurance industry
over time began to lead to the explicit recognition of investment income in calculating insurance
rates.
Historical Issues—A number of issues have historically accompanied the development and
evaluation of the underwriting profit and contingency provisions: (1) how to measure risk and
reflect it in the underwriting profit provision, (2) how or whether to measure any systematic
variation from expected costs and reflect it in the contingency provision, (3) which accounting
rules should be used to measure insurance returns and to compare them with returns in other
industries, (4) how or whether to allocate investment income and capital, and (5) how to relate
underwriting profit provisions in rates to the cost of capital.
Role of Capital—Capital plays several roles in an insurance transaction, including providing the
initial investment in physical plant and equipment and providing working capital. However, the
primary role is to assure payment of obligations from insurance contracts, over and above those
funds backing the liabilities.
Capital has a value and its use entails a cost. The cost is the expected return the capital could
earn in alternative investments of equivalent risk. Judicial decisions dealing with the cost of
capital and profit provisions (see, e.g., Federal Power Commission v. Hope Natural Gas, 320
U.S. 591 (1944)) provide background and definitions for the determination of the cost of capital
in a regulatory setting.
Role of the Underwriting Profit Provision—The underwriting profit provision, together with all
other cost and revenue components as defined in section 2.12, provides the risk taker with an
expected total return to cover the cost of capital.
Role of the Contingency Provision—A common assumption underlying property/casualty

insurance ratemaking is that the expected costs included in the rate calculations will equal the
actual costs over the long run. If not, and the expected difference cannot be explicitly attributed
6
to a specific component of the rate (and thereby eliminated), then this difference is incorporated
in the ratemaking process by including a contingency provision.
Current Practices
A method commonly used to develop or test the underwriting profit provision in insurance rates
is to estimate the cost of capital and translate that cost into an underwriting profit provision.
Some methods currently used to estimate the cost of capital, and financial models to relate that
cost to the underwriting profit provision, are described below.
Underwriting profit provisions can also be developed using models that do not directly relate the
cost of capital to the underwriting profit provision. Some of these models are also described
below.
Inclusion of a particular model in this appendix should not be interpreted as an endorsement, but
rather a recognition that such a model is used. Some applications of these models may not be
consistent with section 3 of this standard.
Estimating the Cost of Capital—Several techniques are used to estimate the cost of capital.
These include, but are not limited to, the following:
1. Comparable Earnings Model—The comparable earnings model is used to analyze

historical returns on equity for entities or industries of comparable risk. The cost of
capital is related to the average rate of return over a historical period.
2. Discounted Cash Flow Model—One form of the discounted cash flow (DCF) model, the
dividend discount model, is used to analyze the current prices and dividend levels of
publicly traded securities that pay dividends. The cost of capital is calculated as the sum
of the expected first-year dividend yield plus the expected annual growth rate in divi-
dends.
3. Risk Premium Model—The risk premium model is used to analyze the spread in returns
for investments of different risk. The cost of capital is estimated as the sum of the
expected return on a reference investment plus a margin to reflect relative risk. One
widely used form of risk premium analysis is known as the capital asset pricing model
(CAPM), in which the reference security is a risk free Treasury security, and the risk
margin is determined using a measure of risk known as beta, defined as the covariance of
an investment's return with returns in capital markets as a whole.
Relating the Cost of Capital to the Underwriting Profit Provision—This section describes various
models currently used regarding the relation of the cost of capital to the underwriting profit
provision.
1. Models that directly develop an underwriting profit provision are as follows:
7
a. Net Present Value Model—The net present value (NPV) model is used to
discount the estimated net cash flow to the capital provider at a rate equal to the
cost of capital. For the purpose of these calculations, net cash flow is defined as
the residual amounts of cash that flow to and from the equity account, after all
policy obligations are met. The net cash flow reflects the timing of each of the
individual cash flows, including the commitment and release of capital in support
of the insurance transaction. The internal rate of return (IRR) model, a specific
application of the general NPV model, uses an iteration technique to calculate the
rate(s) of return that will set the net present value of a risk transfer's cash inflows
and outflows equal to zero.
b. Other Discounting Models—Other discounting models can be used to estimate the

present value of the individual cash flows from the insurance transaction. The
present value of the premium and miscellaneous (non-investment) income, before
profit, is set equal to the present value of the associated losses, expenses, policy-
holder dividends, and income taxes. The present values are estimated using
appropriate prospective investment yield rates. A margin can be added to the
present value of the premium so that the margin plus the expected investment
income on capital generate a post-tax return that, when divided by the required
capital, equals the cost of capital.
c. Total Financial Needs Model—Total financial needs models are used to develop
the underwriting profit provision such that the sum of underwriting profit,
miscellaneous (non-investment) income, investment income from insurance
operations, and investment income on capital, after income taxes, will equal the
cost of capital. Each of these components is explicitly quantified.
2. Models that do not directly relate the cost of capital to the underwriting profit provision
are as follows:
a. State X Model—The State X model (originally appearing in some Insurance

Services Office, Inc. rate filings as the State X method) is used to estimate the
investment income from insurance operations. The method does not, in itself,
allow for development of the total return or of a profit provision; it is used merely
to develop one component of the total rate of return—the estimated investment
income from insurance operations.
b. Risk Adjusted Net Present Value Model—The risk adjusted net present value
(RANPV) model is used to estimate the risk adjusted present value of the
insurance cash flows. Each of the flows is analyzed for its specific risk, and the
otherwise attainable prospective investment yield rate is adjusted by the risk
component prior to calculating the present value. Using the RANPV model, one
calculates the premium directly, so that the risk adjusted present value of the
premium and miscellaneous (non-investment) income equals the risk adjusted
present value of the losses, expenses, policyholder dividends, and associated in-
8
come taxes. The expected underwriting profit in the premium can be derived from
the RANPV model by summing all components using their undiscounted values.
c. Growth Requirement Model—The growth requirement model is used to set the

level of retained earnings based on the expected future growth rate of the entity or
industry.
d. Additional Models—Other models that do not directly relate the cost of capital to
the underwriting profit provision include options pricing models, arbitrage pricing
models, models based on ruin theory, models based on utility theory, and
shareholder value models.
Developing and Evaluating a Contingency Provision—Contingency provisions have been

developed in practice using methods that measure differences between expected and actual costs.
9
Appendix 2
Comments on the 1996 Second Exposure Draft

The second draft of this standard was exposed for review in August 1996, with a comment
deadline of December 2, 1996. Ten comment letters were received and reviewed carefully by the
Task Force on Rate of Return of the ASB’s Casualty Committee. Summarized below are the
significant issues and questions contained in the comment letters, printed in lightface. The task
force's responses appear in boldface.
Of the ten comment letters received on the second exposure draft, most of the comments were
favorable. Even those commentators who provided suggestions for changes seemed pleased with
the overall direction the task force took in developing the second exposure draft. Samples of such
satisfaction were found in comments such as follows: “I think this is an example of the type of
standards that the profession should be developing,” “[t]his draft represents an overall improve-
ment over the initial exposure draft,” and “the [task force] has taken great pains in carefully
defining many critical concepts that our standards omit today.” Most of the suggestions for
revising text were to further clarify concepts already present within the second exposure draft.
However, it was also evident from the comments that some confusion still exists surrounding the
“rate versus price” issue. For example, one commentator believes that the standard should not
limit actuarial practice in setting profit margins that are either explicit or implicit in actual prices
in the marketplace. The commentator further raises potential legal issues were the actuarial
profession to engage in limiting actuarial practice in this area. The task force agrees with the
commentator that the standard does not apply to final (market) prices— the standard is
entirely focused on the evaluation of costs. In fact, the task force has consistently and
consciously focused on costs (not on prices) in its deliberations in consideration of the legal
environment and has obtained competent legal advice as appropriate.
The commentator also questions whether a consensus on acceptable actuarial practice currently
exists in this area. The task force believes such consensus exists and is embodied in the
standard. The current syllabus upon which actuarial examinations are based is one
indicator that a consensus exists. The extensive presentations and discussions of the pro-
posed standard at Casualty Actuarial Society (CAS) meetings and seminars is another indi-
cation that such a consensus exists.
Section 1.1, Purpose—One commentator thought that the use of the phrase include the cost of
capital in the first sentence of this section implied that the Statement of Principles Regarding
10
Property and Casualty Insurance Ratemaking of the CAS requires that an explicit provision for
the cost of capital be included in rates. The task force revised the text by replacing include
with provide for to more closely match its understanding of the Statement of Principles.
Section 1.2, Scope—The task force revised this section to more clearly distinguish between
rate and price. In addition, the task force added language to clarify that the standard
applies to property/casualty risk financing systems, such as self-insurance.
Section 2.2, Contingency Provision—One commentator suggested clarifying the language in this
section to note that, in addition to quantification, a contingency provision might be provided for
in other ways. The task force reworded the section, making it more consistent with section
3.7. Another commentator questioned the definition's lack of consideration of the potential
variance in results. The task force did not expand the definition, since it believes that the
profit provision more appropriately should reflect variance in results.
Section 2.3, Cost of Capital—Two commentators suggested changes. One suggested inclusion of
specific components in the definition; the second suggested that cost of capital be defined as the
cost of capital desired by the capital provider. The task force did not modify the definition, as
section 3.2 references a number of influences on the cost of capital. The task force did,
however, revise section 3.2 by including additional explanatory language and believes these
revisions to section 3.2 address the concerns raised by the second commentator.
Section 2.4, Insurance Cash Flows—One commentator suggested changing the title of this
section to Net Insurance Cash Flows, while another suggested referencing the treatment of taxes
directly rather than indirectly. The task force modified the language to clarify that miscella-
neous (non-investment) income is from insurance operations. The revised section 2.4 also
presents the components of insurance cash flow as items in a list to avoid the appearance of
a calculation and directly references the treatment of income taxes.
Section 2.6, Investment Income—Two commentators suggested clarifying the language with
respect to the treatment of income taxes. The task force adopted the suggestions and also
adopted consistent language in sections 2.4 and 2.10.
Section 2.8, Investment Risk—Two commentators pointed out an inconsistency in the usage of
the terms proceeds and income in other definitions. The task force clarified the text by using
the term proceeds consistently.
Section 2.10, Operating Profit, and Section 2.13, Underwriting Profit (now sections 2.10,
Operating Profit; 2.13, Underwriting Expenses; and 2.14, Underwriting Profit)—Three
commentators questioned the usage of the terms included (or excluded) in these definitions.
There also appeared to be some confusion as to which expense items were included in the term
expenses. After careful review and discussion of the comments, the task force made changes
in these definitions and added a new section (2.13, Underwriting Expenses). The intent of
11
the commentators was incorporated in the three definitions, and the task force believes the
revisions achieve the clarity and consistency suggested. These definitions are consistent
with the categories used in the underwriting and investment exhibit statement of income in
the National Association of Insurers Commissioners (NAIC) annual statement blank for
property and casualty insurers. Specifically, the definition of underwriting profit is
consistent with the definition of net underwriting gain (or loss) from the NAIC statement
blank.
Section 2.12, Total Return—One commentator suggested that the definition include some ex-
amples of commonly used bases of total return. The task force did not make any changes,
since it believes the definition is clear as stated.
Section 3.1, Estimating the Cost of Capital and the Underwriting Profit Provision—One
commentator wanted to change the beginning of the third sentence of this section from Similarly
to Alternatively. The task force made the change.
Section 3.2, Basis for Cost of Capital Estimates—One commentator suggested that in the second
sentence, the phrase business activity be changed to risk transfer. The task force made this
change. Another commentator suggested adding currency to the list of risks included and noted
that the list could be construed as “limiting or as a checklist of specific requirements.” The task
force disagrees. Since the types of risk to consider are many and diverse, the task force
believes that it is necessary to provide a reasonable set of examples. The language of the
standard (i.e., These risks may include) clearly indicates that the list is not exhaustive.
Another commentator suggested that the reference to the Hope Natural Gas case be placed in the
background section, i.e., in appendix 1. The task force agrees and moved the reference
accordingly (see the section titled, Role of Capital).
Note as well that a new paragraph was added to section 3.2 (see the discussion below
regarding comments received on section 3.8).
Section 3.3, Estimates of Future Costs—Several commentators disagreed that capital costs
should be based upon expected future values, since the cost is dependent on the risk or variability
to which it is exposed. The task force agrees that risk or variability is an element of capital
costs. Risk or variability is appropriately considered in deriving the expected value;
therefore, no change in the language used is necessary.
Section 3.4, Risk Sharing (now titled Parameters of the Risk Transfer)—One commentator
suggested that the title of this section should be changed, noting that insurance is a risk transfer
device, and not a risk sharing device. This commentator also suggested alternative wording to
clarify the roles of the two main parties to the insurance transaction: the insured and the insurer.
The task force agrees with the commentator and rewrote the section to indicate that the
cost of capital may vary with the specific parameters of the risk transfer.
12
Another commentator noted that deductibles, limits, etc., affect the structure of the risk transfer
rather than the parties involved. The task force agrees that these factors affect the structure
of the risk transfer and believes that the revised language addresses this concern.
Section 3.5, Investment Income—One commentator suggested a revised second sentence in

paragraph two as follows: Investment risk includes the estimated cost of default and reinvest-
ment risk on the assets associated with the proposed transaction, since such costs can result in a
significantly different yield than the stated yield rate. The task force agrees with the
commentator and changed the text to be substantially similar to the suggested revision.
This commentator also suggested revising paragraph (b) to add retention of business as a subject
for the actuary's consideration. The task force agrees that retention of business may be a
consideration, but the standard is not intended to provide an exhaustive list of consider-
ations. The phrase for example was added to clarify that the section does not provide a
complete list.
Section 3.6, Income Taxes—One commentator suggested adding the following sentence: The
income tax position of the risk assuming entity, such as tax loss carry forwards, and alternative
minimum taxes, may also be relevant to accepting or rejecting the proposed risk transfer. The
task force disagrees with this suggestion, because it believes this suggestion addresses
considerations that are not relevant to the cash flows for the risks being transferred.
Therefore, no change was made.
Section 3.7, Contingency Provision—One commentator suggested adding a sentence which

would state that the actuary need not explicitly identify the contingency provision separate from
the profit provision, and that the contingency provision is not intended as a risk margin for
catastrophic events. The task force believes the definition of contingency provision makes it
clear that it is not a risk margin for catastrophic events. The task force disagrees that a
contingency provision can implicitly be combined with a profit provision, because the two
provisions are distinctly different, both subject to explicit determination.
Another commentator suggested that the use and meaning of a contingency provision was
unclear and needed to be clarified in the standard. The task force believes that, with the
clarifying changes made to the second paragraph of this section, the standard adequately
explains the use of the contingency provision as a correction factor when the ratemaking
process has produced in the past, and is expected to produce in the future, cost estimates
not equal to average actual costs.
Section 3.8, Structure of Insurer—This section of the second exposure draft addressed the
structure of the insurer, such as stock, mutual, etc. Several commentators expressed concern that
the requirements of the capital providers should be taken into account when considering the cost
of the insurance product, and that non-stock organizations might have different requirements
than stock companies. One commentator specifically suggested making a greater distinction
between the cost of capital and the desired return on capital. The task force rewrote the text of
this section to place greater emphasis on the economic concept of opportunity cost, which
13
refers specifically to the value of capital in its next best alternative use. Under this
definition, the proper cost of capital is the return that the capital could earn in an
alternative investment of equivalent risk. The task force does not believe that this differs
depending on the ownership structure (i.e., stock, mutual, or other) of the insurer per se.
However, as discussed in section 3.4, the actuary's estimate of the cost of capital should
reflect characteristics of the risk transfer that may arise due to ownership structure (such
as, for example, the availability of policyholder dividends). Note, in addition, that the text
of this section was moved to section 3.2 in order to enhance clarity.
One commentator who questioned section 3.8 also wished to add to the standard a new section,
which would read as follows:
Several of the models used for estimating the underwriting profit provision also permit
the actuary to rank potential risk transfer undertakings. An actuary should be prepared
to rank the risk versus the reward (the total return, from underwriting and from
investment income) for various scenarios involving the allocation of capital towards a
certain line of insurance or a specific product.
The commentator's rationale for this suggestion is that “the actuary of the future may often be
called upon to estimate not only the reward (the total return from allocating capital towards a
certain line of insurance or a specific product), and not only the associated risk, but also to rank
several risk/reward scenarios for a client or employer.” The task force agrees that an actuary
can be asked to estimate and rank various risk/reward scenarios for a client or an employ-
er. However, the task force thinks that while this is implicit in the role an actuary plays, the
matter is beyond the scope of the standard.
Appendix 1—Background and Current Practices
Role of the Underwriting Profit Provision—One commentator found the references to all other
cost and revenue components too vague. The task force agrees that the reference is not
precise, but the next clause of the sentence refers to total [rate of] return, which is precisely
defined in section 2.12. Hence, no change was made.
Estimating the Cost of Capital—One commentator suggested adding a parenthetical phrase,

(generally a risk free investment), to the description of the risk premium model (in the second
sentence of item (3), after the phrase, reference investment). The task force disagrees with this
change. In the typical (perhaps the most common) implementation of the risk premium
method, the reference security is a long-term utility bond, which is not risk free. Thus, the
second sentence was left unchanged. However, the task force did modify the next sentence
as follows: One widely used form of risk premium analysis is known as the capital asset
pricing model (CAPM), in which the reference security is a risk free Treasury security, and
the risk margin is determined…. This correctly identifies that in the CAPM variant of risk
premium analysis, the reference security is risk free.
14
Relating the Cost of Capital to the Underwriting Profit Provision—One commentator expressed
concern about the use of the singular rate in the last sentence of the section that discusses the net
present value model, and another suggested alternative wording for clarity, in the definition of
the IRR model. The task force changed rate to rate(s), and adopted the proposed wording to
note that the IRR calculates the rate(s) of return by setting the net present value of a risk
transfer's cash inflows and outflows equal to zero.
The task force thanks everyone who took the time and made the effort to write comment letters.
The input was helpful in developing the final standard.
15
Actuarial Standard
of Practice
No. 31
Documentation in Health Benefit Plan Ratemaking
Developed by the
Adopted by the
October 1997
(Doc. No. 060)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.3 Experience Period 2
2.4 Exposure Unit 2
2.6 Rate 2
2.7 Rating Period 2
2.8 Risk Classification 2
2.9 Risk Provision 2
2.10 Trend 2
2.11 Trending Period 2
2.12 Trending Procedure 2

3.1 Introduction 2
3.2 Extent of Documentation 3
3.3 Documentation Issues Related to Risk 3
3.3.1 Reinsurance 3
3.3.2 Operational Changes 3
3.3.3 External Influences 3
3.3.4 Risk Classification Plan 3
3.3.5 Ratemaking Process and Exposure Distribution 3
3.3.6 Experience Rating Process 3
3.3.7 Investment Income 3
3.3.8 Risk Provision 3
3.3.9 Cost of Capital 4
3.4 Documentation Issues Related to Data 4
3.4.1 Experience Period 4
3.4.2 Experience Data 4
3.4.3 Credibility 4
3.4.4 External Data 4
3.5 Documentation Issues Related to the Determination of Experience Period Costs 4
ii
3.5.1 Exposure Units 4
3.5.2 Claim Administration Expenses 4
3.5.3 Large Claims (Shock Loss Claims) 4
3.5.4 Policy and Provider Contract Provisions 4
3.5.5 Mix of Business 4
3.6 Documentation Issues Related to Expenses 4
3.6.1 Categorization of Expenses 5
3.6.2 Start-Up Costs 5
3.7 Documentation Issues Related to Trending Procedures 5
3.7.1 Trend Measurement 5
3.7.2 Claim Cost Trend Factors 5
3.7.3 Other Trend Factors 5
3.7.4 Trend Selection 5
4.1 Availability of Documentation 5
APPENDIXES

Background 6
Current Practices 6
iii
November 1997

Actuarial Standards Board and Other Persons Interested in Documentation in
Health Benefit Plan Ratemaking
Documentation in Health Benefit Plan Ratemaking.
Purpose of Standard
The purpose of this standard is to provide guidance on documentation in the process of health
benefit plan ratemaking. It is not a standard on ratemaking itself, but rather on the documentation
of the ratemaking process. However, since a discussion of the documentation process requires a
discussion of the elements of the ratemaking process, the standard lists many of the actual
components of ratemaking.
The standard does not apply to work done in connection with Statement of Financial Accounting
Standards (SFAS) 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions,
unless ASOPs pertaining to SFAS 106 specifically call for application of this standard. A task
force is being created to address issues related to SFAS 106.
Background
The health benefit plan ratemaking process is subject to review from many sources—both within
an organization and from external sources. Thus, the actuary should document the process used
to develop rates. This documentation needs to be available for both the organization for which
the rates are developed and for regulators, if appropriate.
A standard already exists on documentation and disclosure in property/casualty insurance rate-

making, loss reserving, and valuation (ASOP No. 9). There are also standards of practice in the
areas of profit and contingency provisions and the cost of capital (ASOP No. 30), and expense
provisions in property/casualty insurance ratemaking (ASOP No. 29). The Health Committee
decided that a single standard encompassing documentation in all three of these areas would be
appropriate for health benefit plan ratemaking.
iv
Exposure Draft
This standard was exposed for review in November 1996, with a comment deadline of March 3,
1997. Fourteen letters of comment were received. All of the comments received were thoroughly
reviewed. Many of the comment letters showed thoughtful perception of the issues involved, and
many of the suggestions made were incorporated into the final standard.
One of the questions frequently raised in the comment letters was why the standard deals with
ratemaking (as defined in the standard) rather than pricing. Ratemaking is the estimation of the
expected value of future costs, and does not address other considerations that may affect a price,
such as marketing goals, competition, and legal restrictions. The reason the committee has
developed a standard on ratemaking instead of pricing is that ratemaking is a particularly
actuarial function, whereas pricing includes consideration of a variety of factors, some of which
may be outside the actuary’s scope of authority.
The comment letters also indicated some confusion created by the way terms such as rate-
making, profit provision, cost of capital, etc., were used in the exposure draft. The final standard
incorporates modified definitions and clarifies the meaning of these and other terms.
Finally, there were a number of comments relating to requirements arising out of an engagement
or out of law. Three sets of standards or requirements have generally been recognized that affect
a professional’s work: professional standards, standards and requirements arising out of the
terms of an engagement (either through an employer or client), and legal requirements. Actuarial
standards of practice address professional requirements and do not address directly standards and
requirements arising out of an engagement or out of law. However, professional standards may
indirectly impact the other two sets of standards and requirements. For example, an employer or
client has a right to expect that work be done in accordance with professional standards.
For a detailed discussion of how these general issues noted above were addressed by the Health
Committee, and for a discussion of the specific issues raised in the comment letters, please see
appendix 2.
The Health Committee thanks those who provided input during the exposure process. The ASB
voted in October 1997 to adopt the final standard.

Janet M. Carstens Robert J. Ingram
Robert M. Duncan Jr. Mary J. Murley
Paul R. Fleischacker W. H. Odell
Alan D. Ford David F. Ogden
John M. Friesen Richard J. Shepler
v

vi
DOCUMENTATION IN
HEALTH BENEFIT PLAN
RATEMAKING
1.1 Purpose—The purpose of this standard is to define the documentation responsibilities of

an actuary in health benefit plan ratemaking.
1.2 Scope—This standard applies to the documentation of the ratemaking process for health
benefit plans. Health benefit plans include all contracts providing medical, prescription,
dental, vision, disability income, accidental death and dismemberment, long-term care,
and similar benefits, whether on a reimbursement, indemnity, or service benefit basis,
regardless of the form of the risk-bearing organization, including benefits provided by
self-insured plan sponsors.
This standard does not apply to the establishment or documentation of prices, i.e., the
amounts charged to the purchaser. Rather, it is limited to documentation related to the
development of rates, i.e., the estimates of the expected value of future costs. This
standard does not address other considerations that may affect price, such as marketing
goals, competition, and legal restrictions.
This standard does not apply to work performed in connection with Statement of
Financial Accounting Standards (SFAS) 106 (Employers’ Accounting for Postretirement
Benefits Other Than Pensions) determinations, unless ASOPs pertaining to SFAS 106
specifically call for application of this standard.
1.3 Effective Date—This standard will be effective for work performed after April 1, 1998.
2.1 Actuarial Work Product—The result of an actuary’s work. The term applies to the fol-
lowing actuarial communications, whether written or oral: statements of actuarial
documents.
1
2.2 Cost of Capital—The rate of return that capital could be expected to earn in an alternative
investment of equivalent risk.
2.3 Experience Period—The period of time to which the historical data used for an actuarial
analysis pertain.
2.4 Exposure Unit—A unit by which the cost for a health benefit plan is measured. For
example, an exposure unit may be a contract, an individual covered, $100 of weekly
salary, or $100 of monthly benefit.
2.5 Health Benefit Plan—A contract providing medical, prescription, dental, vision,
disability income, accidental death and dismemberment, long-term care, and similar
benefits, whether on a reimbursement, indemnity, or service benefit basis, regardless of
the form of the risk-bearing organization, including a benefit plan provided by self-
insured plan sponsors.
2.6 Rate—An estimate of the expected value of future costs over the rating period. The
process of determining a rate is called ratemaking.
2.7 Rating Period—The period during which the rates are to apply.
2.8 Risk Classification—The process of grouping risks with similar risk characteristics so
that differences in expected costs may be appropriately recognized.
2.9 Risk Provision—A provision for adverse deviation added to the estimate of other future
costs.
2.10 Trend—A measure of a rate of change, over time, of the elements affecting costs.
2.11 Trending Period—The time between the average date of the experience period and the
corresponding projected date in the forecast period.
2.12 Trending Procedure—A process by which the actuary evaluates how changes over time
affect such items as claim costs, claim frequencies, expenses, and exposures; and inte-
grates the trend assumptions into the ratemaking process.
3.1 Introduction—In the ratemaking process, the actuary normally determines rates for the
rating period by procedures that include using the experience period data (claim costs and
other relevant data), taking into account credibility considerations and other relevant ex-
perience or information, and using trending procedures. These procedures and
considerations should be documented.
2
The documentation should address the actuary’s consideration of and conclusions
regarding the issues listed in sections 3.3–3.7 and others that might be pertinent to the
particular situation. Any significant actuarial judgments applied throughout the
ratemaking process should be documented.
3.2 Extent of Documentation—It is the actuary’s responsibility to develop documentation in

support of the actuarial work product. The extent of the documentation should be appro-
priate to the circumstances and to the materiality of the rates being determined. Appro-
priate records, worksheets, and other documentation of the actuary’s work should be
retained by the actuary for a reasonable period of time. The documentation should
describe the relevant data, sources of data, material assumptions, methods, and process by
which the rates were developed with sufficient clarity that another actuary practicing in
the same field could make an objective evaluation of the reasonableness of the work
product. The actuary should explain the reason(s) for and describe the effect of any
material changes in sources of data, assumptions, or methods from the last analysis.
Details regarding availability of documentation are listed in section 4.1.
3.3 Documentation Issues Related to Risk—The actuary should document how the following
issues related to risk are addressed in the ratemaking process, to the extent that they are
relevant and material:
3.3.1 Reinsurance—The effect of reinsurance arrangements, including assessments for

pooling arrangements, such as uninsurable pools or those required under small
group and individual health insurance reform legislation.
3.3.2 Operational Changes—Operational changes, such as changes in the underwriting

process, claims handling, medical cost management, provider contracting, and
marketing practices that affect the continuity of the experience.
3.3.3 External Influences—External influences on the expected future experience, such

as the judicial environment, regulatory and legislative changes, guaranty funds,
economic variables, and high risk mechanisms, including subsidies of high risk
pools and rate deficiencies.
3.3.4 Risk Classification Plan—The effect of the risk classification plan.
3.3.5 Ratemaking Process and Exposure Distribution—The result of the ratemaking

process when applied to the distribution of exposure units in effect for the
experience period.
3.3.6 Experience Rating Process—The effect of the experience rating process.
3.3.7 Investment Income—The effect of net investment income.
3.3.8 Risk Provision—The process by which the provision for the risk of adverse
deviation was determined and how this was reflected in the rates.
3
3.3.9 Cost of Capital—The process by which the cost of capital was determined and
how this cost was provided for in the rates.
3.4 Documentation Issues Related to Data—The actuary should document how the following
issues related to data are addressed in the ratemaking process, to the extent that they are
relevant and material:
3.4.1 Experience Period—The basis by which the experience period was selected.
3.4.2 Experience Data—The relevance of the experience data utilized in the ratemaking
process to the particular ratemaking task.
3.4.3 Credibility—The process by which the actuary determined the credibility of the
experience data.
3.4.4 External Data—The source and relevance of any external data used in the
ratemaking process.
3.5 Documentation Issues Related to the Determination of Experience Period Costs—The

actuary should document how the following issues related to the determination of
experience period costs are addressed in the ratemaking process, to the extent that they
are relevant and material:
3.5.1 Exposure Units—The exposure units used and how they were determined.
3.5.2 Claim Administration Expenses—The extent to which any claim administration

expenses are included in claim costs.
3.5.3 Large Claims (Shock Loss Claims)—The effect of large claims, including the
effect of the large claims on the experience period data and on the projection of
historical data to the rating period, and how the cost of large claims is
incorporated in the ratemaking process.
3.5.4 Policy and Provider Contract Provisions—The effect of deductibles, coinsurance,

copays, coverage limitations, coordination of benefits, subrogation and other
third-party liability offsets, and other policy provisions on the experience period
data and on the projection of historical data to the rating period. The effect of
provider contracting arrangements should also be documented.
3.5.5 Mix of Business—Distributional changes in deductibles, coverage limitations, or

types of risks that may affect the frequency or severity of claims.
3.6 Documentation Issues Related to Expenses—The actuary should document how the fol-
lowing issues related to expenses are addressed in the ratemaking process, to the extent
that they are relevant and material:
4
3.6.1 Categorization of Expenses—The way in which the expenses are categorized and
used in the ratemaking process. The actuary should document among other
matters the provision for each category of expenses, the measurement bases of the
expenses used, and the way in which expense provisions reflect the conditions
expected during the rating period.
3.6.2 Start-Up Costs—The effect of amortization of start-up costs for a new policy or
product.
3.7 Documentation Issues Related to Trending Procedures—The actuary should document

how the following issues related to trending procedures are addressed in the ratemaking
process, to the extent that they are relevant and material:
3.7.1 Trend Measurement—The basis by which trend is measured.
3.7.2 Claim Cost Trend Factors—The factors affecting the change of claim costs over
time. Unless otherwise accounted for, these factors include, but are not limited to,
general price inflation; leveraging; changes in provider contracting; medical cost
inflation; changes in medical practice; demographics; changes in policy
provisions; and utilization.
3.7.3 Other Trend Factors—The factors affecting the change of other ratemaking
parameters over time.
3.7.4 Trend Selection—The basis by which trend is selected, including the selection of
the rating period.
4.1 Availability of Documentation—Documentation should be available to the actuary’s

client or employer, and it should be made available to other persons when the client or
employer so requests and provided such availability is not otherwise improper.
4.2 Deviation from Standard—An actuary must be prepared to justify the use of any pro-
cedures that depart materially from those set forth in this standard and must include, in
any actuarial communication disclosing the results of the procedures, an appropriate
5
Appendix 1
practice.
Background
Documentation is an essential component of actuarial practice. In the absence of specific stan-

dards of practice, the amount of documentation has varied. As the nature of health actuarial work
has become more complex and more open to and available for public review, the need to formal-
ize standards for documentation has increased. This standard of practice states that the
methodology and material assumptions utilized in health benefit plan ratemaking should be
documented and, in some cases, available for disclosure. This standard addresses the extent to
which an actuarial work product should be documented and the persons to whom that docu-
mentation should be available.
Current Practices
Practices have been governed by the former Guides and Interpretative Opinions as to Profes-
sional Conduct, and their successor document, the Code of Professional Conduct. Practices have
varied according to individual interpretations of the Guides and the Code.
6
Appendix 2
The proposed standard was exposed for review in November 1996, with a comment deadline of
March 3, 1997. Fourteen comment letters were received. The Health Committee of the ASB
questions contained in the comment letters, printed in lightface. The committee’s responses to
these issues and questions appear in boldface.
Many helpful ideas and comments were offered in the comment letters and are reflected in this
standard as appropriate.
A few commentators queried the relation between this standard and ASOP No. 23, Data Quality;
ASOP No. 25, Credibility Procedures Applicable to Accident and Health, Group Term Life, and
Property/Casualty Coverages; and other ASOPs. The committee believes that this standard
neither supersedes nor contradicts but rather complements these other standards.
Three commentators queried whether one standard of practice on documentation embracing all
areas of practice would be preferable to separate standards on documentation for each practice
area. The committee continues to believe that the most practical approach is a standard on
documentation for each area of practice where the need for such a standard is indicated.
Some concern was expressed that the standard does not allow the actuary to determine for him-
or herself whether documentation is necessary. The committee believes that the standard does
not impede actuarial judgment. For example, the standard requires the actuary to
document issues if they are relevant and material.
One comment was received to the effect that the standard might be misinterpreted to mean that
the criteria of adequacy, equity, and reasonableness are no longer criteria that apply to
ratemaking (the commentator noted that actuarial and related literature on pricing health benefit
plans state that pricing “not [be] inadequate, [should be] reasonable, and not [be] excessive or
unfairly discriminatory”). The ASB believes that the commentator is addressing pricing,
which, as noted in section 1.2, is outside the scope of the standard.
The question was raised whether the terms relevant and material should be defined, as seen in
the phrase, to the extent that they are relevant and material, used in sections 3.3, 3.4, 3.5, 3.6,
and 3.7. The committee believes it best not to specifically define these terms in each
standard; actuarial judgment should be used as needed in each particular situation.
Some commentators queried whether or not additional product lines, such as travel accident and
hospital indemnity coverages, dread disease coverages, Medicare supplement insurance, etc.,
7
should be mentioned in section 1.2, Scope. The committee believes that the wording of section
1.2 is (and should be) broad and that the lines of business mentioned therein are
representative rather than all inclusive. Note, however, that the standard does not apply to
work performed in connection with SFAS 106, unless ASOPs pertaining to SFAS 106
specifically call for application of this standard.
Finally, a query was raised as to whether disclosure is covered in the ASOP, as stated in the
exposure draft’s title. The committee has changed the standard’s title and text to clarify that
the standard applies primarily to documentation. The subject of disclosure is addressed in
section 4.
In the transmittal memorandum to the exposure draft of this standard, the committee posed the
following two questions:
1. Is it clear from reading the text that the standard only addresses documentation and
disclosure, and is not a standard on the ratemaking process itself?
2. Is the standard not specific enough about the details that need to be documented, or is it
too specific?
Comments on the two questions listed above, and the committee’s responses to such, follow.
Transmittal Memorandum Question #1: Two comments were received. Both indicated
satisfaction that the text addresses only documentation and not the ratemaking process. Note,
however, that the standard’s title and text were modified to clarify that the standard
applies primarily to documentation, as stated above.
Transmittal Memorandum Question #2: Five comments were received. Two indicated that the
standard is not too specific, two indicated it is too specific, and one indicated that the standard is
too specific in the context of certain applications. No change was made to the standard in this
regard. The committee believes that the concerns raised by those commentators who felt
that the standard is too specific are already addressed, since documentation of detailed
issues is required only if such issues are “relevant and material.”
Section 1.2, Scope—Comments were offered requesting more clarity with respect to the terms
prices and rates. Clarifying wording was added to the section. A question was also raised as to
whether the standard applies to cost determinations with respect to each future year. The
committee believes the standard is sufficiently clear in its scope. The standard applies to
documentation of the ratemaking process at the time that the process is performed.
8
One commentator noted that the words rate and ratemaking are used differently than the usage
found in the Glossary of Actuarial Terms. Where appropriate, the committee used definitions
consistent with those in the Glossary. However, the words rate and ratemaking are used
differently in this ASOP, since the Glossary definitions did not fit well within this standard.
Section 2.1, Actuarial Work Product—One commentator requested definitions of actuarial

reports and statements of actuarial review. Since these terms are not used in the ASOP itself,
there is no need to define them. These terms are defined in Interpretative Opinion 3,
Professional Communications of Actuaries, and in the Glossary of Actuarial Terms.
Section 2.2, Cost of Capital—Two commentators offered suggestions to clarify the definition.
The committee shortened the definition and added a new section 3.3.9, Cost of Capital, to
reflect the comments.
Section 2.3, Experience Period—One commentator suggested clarifying the definition to note
that the experience period refers to each ratemaking parameter. The definition was made
consistent with the Glossary of Actuarial Terms. The commentator’s ratemaking parameter
concerns are addressed in section 3.5, Documentation Issues Related to the Determination
of Experience Period Costs.
Section 2.4, Exposure Unit—Two commentators suggested that the exposure units listed should
be regarded as examples rather than an all-inclusive list. The definition was changed to include
the phrase for example.
Section 2.6, Profit Provision (now section 2.9 and titled Risk Provision)—Several commentators
questioned the use of a “profit provision” to pertain only to the cost of capital and whether the
risk of adverse deviation should be promulgated as “profit.” In response to the comments
made, the definition itself was changed to Risk Provision and the references to cost of
capital and profit were removed because they are not necessary to the definition.
Section 2.7, Rate (now section 2.6)—Several commentators questioned the distinction between
rate and price. One commentator suggested adding the word all before future costs. The
distinction between rate and price is addressed with revised wording in section 1.2. The
inclusion of the word all was not felt to be necessary.
Section 2.8, Rating Period (now section 2.7)—One commentator raised the question whether the
rating period considers renewal periods. The committee believes that if a renewal period has
an effect on the rates during the rating period, such effect should be included in the
ratemaking process. No further clarification was made to the definition.
Section 2.10, Trending Period (now section 2.11)—One commentator found the definition
confusing. The committee modified the definition to make it clearer.
9
Section 3.1, Introduction—Although no specific comments were received on this section, at least
one reviewer noted that there is no mention of claim costs. The committee modified the first
sentence of the section to read,
In the ratemaking process, the actuary normally determines rates for the rating period
by procedures that include using the experience period data (claim costs and other
relevant data), taking into account credibility considerations and other relevant
experience or information, and using trending procedures.
Section 3.2, Extent of Documentation—It was suggested that there be more useful guidance
regarding the requirement that the actuary keep certain records of his or her work for a
reasonable period of time. Another commentator suggested that this entire sentence be removed
because there may be circumstances, such as an employment agreement, where the actuary does
not have control over the retention of documents. The committee made no change to the text
in response to these comments since the phrase, a reasonable period of time, is sufficiently
broad to encompass circumstances beyond the actuary’s control (for example, where the
time period might be established by the actuary’s employer, by the length of the actuary’s
employment, or by the statute of limitations in the actuary’s jurisdiction).
A question was also raised about this section concerning the meaning of the phrase “. . .
documentation of the actuary’s work should be retained by the actuary for a reasonable period
of time” (emphasis supplied). What is reasonable depends on the circumstances, including
the terms of engagement. What is reasonable in a particular case may well be a subject
upon which the actuary would be well advised to seek legal advice. For example, an actuary
may enter into employment under an employment agreement which provides that the work
product and documentation of work done for the employer shall be left with the employer
upon termination of employment. The actuary retains such documentation during
employment and, upon termination of employment in accordance with the agreement,
leaves the documentation with the employer. This might well be held to meet the
“reasonable time” requirement, because the governing contract of employment specifies
that such documentation be left with the employer.
Finally, it was also suggested that an inconsistency exists between section 3.2, Extent of
Documentation, and sections 3.3 through 3.7, since these latter sections would allow the actuary
to document how the issues related to the items required by sections 3.3–3.7 are addressed
without providing documentation as to the actual assumptions, adjustments, amounts, etc., that
were used. Therefore, according to this commentator, it would not be possible that “another
actuary practicing in the same field could make an objective appraisal of the reasonableness and
validity of the work product” as required in section 3.2, Extent of Documentation, since the other
actuary would not know the actual assumptions that were used. To address these concerns, the
commentator suggested that the wording be changed to state “. . . with sufficient clarity that
another actuary practicing in the same field could make an objective appraisal that all ratemaking
issues were reasonably considered.” The committee changed the text in section 3.2 to read as
10
follows: . . . with sufficient clarity that another actuary practicing in the same field could
make an objective evaluation of the reasonableness of the work product. The committee
believes the phrase “with sufficient clarity” is sufficiently broad to include providing
documentation of actual assumptions, if necessary and appropriate, so that another
actuary practicing in the same field could make an objective evaluation of the work
product.
Section 3.3.2, Operational Changes—It was suggested that the section be modified to include
past and assumed future changes. The committee made no change to the text since opera-
tional changes that affect the continuity of the experience would include past and assumed
future changes.
Section 3.3.4, Risk Classification Plan—One commentator suggested that the discussion of risk
classification plans be expanded and questioned whether such plans are a component of
“pricing.” The committee made no change to the text since the potential effect of the risk
classification plan is a component to be considered in ratemaking, not just pricing. The
committee did, however, expand the discussion of risk classification by adding a definition
of such from the Glossary of Actuarial Terms (see section 2.8).
Section 3.3.5, Ratemaking Method and Factors (now titled Ratemaking Process and Exposure
Distribution)—It was suggested that this section be modified to refer to any change in the
ratemaking method and the reason for making the change. The committee did not modify the
text since section 3.2, Extent of Documentation, states that the actuary should explain the
reason(s) for and describe the effect of any material changes in sources of data, assumptions,
or methods from the last analysis.
Comments were also received that this section is unclear and not understandable in the context of
issues related to risk. One reviewer asked, “What are ‘factors’ in effect during the studied past
experience period?” Another reviewer asked, “What is the ‘result’ that needs documentation that
would not already be included in the ratemaking process documentation?” The committee
changed the title of the section (as noted above) and modified the text to read as follows:
The result of the ratemaking process when applied to the distribution of exposure units in
effect for the experience period.
Section 3.3.6, Experience Rating (now titled Experience Rating Process)—One commentator
asked to modify the section to refer to “the effect of experience rating processes on the overall
risk level” (emphasis added), since section 3.3, Documentation Issues Related to Risk, covers
risk-related issues. Alternatively, the commentator suggested rephrasing section 3.3 to cover
documentation issues related to risk and costs. The committee decided to eliminate the phrase
on the overall rate, since the entire effect of the experience rating process should be
documented. The committee changed the title of the section to, Experience Rating Process,
for purposes of consistency with terminology used throughout the standard.
There was also some confusion with respect to how experience rating relates to pricing. One
commentator suggested that the word rate be replaced with price. Another stated that the
management of the overall rate level is a company decision and should not be addressed in an
11
actuarial standard of practice. The committee agrees that the wording may have created some
confusion with respect to how experience rating relates to prices. Since section 1.2, Scope,
makes clear that [t]his standard does not apply to the establishment or documentation of
prices, and since the use of the word level could imply a premium level, the committee
changed the text by deleting the word level.
Section 3.3.8, Profit Provision (now section 3.3.9 and titled Cost of Capital)—It was suggested
that the word rates be replaced with the word prices. Since section 1.2, Scope, makes clear that
[t]his standard does not apply to the establishment or documentation of prices, the committee
did not change the text. See the second paragraph of section 1.2 for a discussion of rates vs.
prices.
It was also suggested that the word determined be replaced with the word estimated. The
committee considered this suggestion but made no change to the text.
Finally, one commentator suggested that a discrepancy exists among sections 2.2, Cost of
Capital; 2.6, Profit Provision (now section 2.9 and titled Risk Provision); and 3.3.8, Profit
Provision (now section 3.3.9 and titled Cost of Capital). The committee has addressed this
concern through changes to these three sections and through the addition of section 3.3.8,
Risk Provision. The terms cost of capital and risk provision (the latter of which is defined as
a provision for adverse deviation) are defined and specified separately. Profit is not defined
nor specifically included since there is no consensus on the precise relationship of profit to
the risk and cost of capital provisions, though many individuals believe all three items are
related.
Section 3.4, Documentation Issues Related to Data—One commentator questioned how to

address a situation where there are no data available and no time to search for data. The
committee refers the commentator to ASOP No. 23, Data Quality.
Section 3.4.2, Selection of Experience Data (now titled Experience Data)—It was suggested that
the second sentence is superfluous. The committee agrees that the second sentence in the
exposure draft did not apply to experience data and created a new section 3.4.4, External
Data, to define documentation requirements applicable to external data.
Section 3.5, Documentation Issues Related to the Determination of Experience Period Costs—It
was suggested that the wording be changed from referring to experience period costs to
experience period morbidity costs to clearly differentiate this section from section 3.6. The
committee made no change to the text since it does not believe a differentiation is required.
Section 3.6.1, Categorization of Expenses—It was suggested that the section be modified to
include information regarding the experience period. The committee believes that no change to
the text is necessary because the items listed are not meant to be exhaustive.
Section 3.7.3, Claim Cost Trend Factors (now section 3.7.2)—It was suggested that an item be
added after this section to address trend factors for non-claim costs. The committee agrees with
this suggestion and added section 3.7.3, Other Trend Factors.
12
For reasons indicated under the section, General Observations (see above), the standard
has been retitled as, Documentation of Health Benefit Plan Ratemaking. For similar
reasons, the title of section 4.1 has been changed to Availability of Documentation. Section
4 still refers to disclosure requirements, as the matter relates to disclosure of deviations
from the standard, noted under section 4.2.
Section 4.1, Availability and Disclosure of Documentation (now titled Availability of

Documentation)—A number of comments were received noting that the documentation to be
made available may not reflect the needs or circumstances of each user. Also, there was concern
that the documentation would have to be customized for each situation. Other comments were
received noting that the documentation may not reflect the knowledge of each user. The
committee agrees. The documentation should be developed to meet the requirements of
section 3.2. Specifically, the documentation should be appropriate to the circumstances and
to the materiality of the rates being determined. Also, the documentation should be
sufficient in clarity such that another actuary practicing in the same field could make an
objective evaluation of the reasonableness of the work product.
Questions were also raised concerning how long documentation should be maintained and the
ownership of documentation. The committee agrees this is an important issue. The language
used in the standard is similar to the language used in other standards, as well as that used
in Interpretative Opinion 3.
One commentator thought that section 4.1 would require an actuary to turn over documentation
to any third party when requested by a client or employer, if not illegal, even if there were some
other legitimate reason for not doing so. Another commentator was concerned that the standard
would be misused if it requires the actuary to explicitly state actual assumptions in the
ratemaking process. Of particular concern was the fact that some of these items would be
proprietary in nature. As stated above, the documentation should be developed to meet the
requirements listed in section 3.2. Further, the standard does not require the actuary to
disclose documentation to a third party if such disclosure would be improper.
Section 4.2, Deviation from Standard—Two commentators pointed out that since the standard
refers to documentation and not to procedures, this section should not use the word procedures.
The ASB has standardized the text of this section, which has appeared in all ASOPs since
the standardization. This section is intended to accommodate future advances in actuarial
practice as well as unusual circumstances that may not have been anticipated in
formulating the ASOP.
The committee believes that procedures is an inclusive term that incorporates application of
all the provisions of the standard. No change was made to this section.
The Health Committee thanks those who took the time and made the effort to send in comment
letters. The input was helpful in developing the standard.
13
Actuarial Standard
of Practice
No. 32
Social Insurance
Developed by the
Committee on Social Insurance of the
American Academy of Actuaries
Adopted by the
January 1998
(Doc. No. 062)

T A B L E O F CO N T E N T S

1.1 Purpose 1
1.2 Scope 1
2.1 Actuarial Assumption 2
2.3 Actuarial Status 2
2.4 Financial Adequacy 2
2.5 Long-Range Period 2
2.6 Program 3
2.7 Program Assets 3
2.8 Program Cost 3
2.9 Program Income 3
2.10 Required Actuarial Document 3
2.11 Scenario 3
2.12 Short-Range Period 3
2.14 Trust Fund 3

3.2 Coverage and Program Features 3
3.3 Financing Method 3
3.3.1 Sources of Income 4
3.3.2 Mechanism for Setting the Level of Income 4
3.4 Actuarial Assumptions 4
3.4.1 Demographic Assumptions 4
3.4.3 Other Factors 5
3.6 Actuarial Methods 5
3.6.1 Consistency with Financing Method 5
3.6.2 Participants 6
3.6.3 Inclusion of All Material Financial Operations 6
3.6.4 Period-by-Period Estimates 6
3.6.5 Summarized Values 6
ii
3.6.6 Tests of Financial Adequacy 6
3.7 Valuation Period 6

4.1.1 Scope of Assignment 7
4.1.2 Intended Purpose 7
4.1.3 Reliances 7
4.1.4 Limitations 7
4.1.5 Program Description 7
4.1.6 Calculation Results 7
4.1.7 Actuarial Methodology 8
4.1.8 Assumptions 8
4.2 Changes 8
4.3 Users of the Report 8
APPENDIXES

Background 10
Characteristics of Social Insurance 10
Importance of Actuarial Opinion on Financial Adequacy 10
Importance of Projecting the Costs of Social Insurance Programs 11
Tests of Financial Adequacy 11
Appendix 2—Comments on the 1997 Third Exposure Draft and Committee Responses 12
iii
January 1998

Actuarial Standards Board and Other Persons Interested in Social Insurance
Programs
This booklet contains the final version of Actuarial Standard of Practice No. 32, Social
Insurance.
Background
This standard was developed by the Committee on Social Insurance of the American Academy
of Actuaries, acting as a task force of the ASB. The ASB initiated the project several years ago,
after taking note that no formal guidance existed on generally accepted actuarial practice for
social insurance programs. Social insurance programs are important for the financial security of
most citizens, and important public interests are involved in the actuarial aspects of these
programs.
First and Second Exposure Drafts
The first draft of the standard was exposed for review in a document dated July 1994, with a
comment deadline of December 15, 1994. Seventeen comment letters were received. Based on
the significant issues and questions contained in these letters, the committee made various
changes, which included clarifying the scope; revising a number of the definitions, in particular
the definitions of financial adequacy, assets, and summarized income rates; expanding the sum-
mary of methods for setting the level of financing; amplifying the description of open versus
closed group valuation; and providing a more detailed discussion of the tests of financial
adequacy.
The second draft of the standard was exposed for review in August 1995, with a comment dead-
line of December 15, 1995. As with the first exposure draft, the second exposure draft did not
recommend a particular method, but emphasized that accepted actuarial practice includes the
testing of financial adequacy for most social insurance programs. In general, the changes to the
second exposure draft made the standard less specific about the actuary’s choice of methods and
required that specific testing for financial adequacy be done in fewer cases, but the changes also
made clear that the standard was intended to apply to a broad range of programs that fit the defi-
nition of social insurance.
iv
The third exposure draft was released in May 1997, with a comment deadline of September 2,
1997 (which was subsequently extended to October 1, 1997). There were three major areas of
change in this draft: (1) the definition of social insurance was further refined; (2) much of the
language and terminology that was specific to the Social Security and Medicare programs was
removed, allowing for tests of financial adequacy to more accurately reflect the nature of the
underlying program; and (3) the committee clarified that the standard does not mandate a test of
financial adequacy, but rather provides guidance to those actuaries who do perform them.
(Copies of the first, second, and third exposure drafts are available from the ASB office.)
Substantive Issues in the Final Drafting
Four letters of comment were received on the third exposure draft and carefully reviewed by the
committee. The committee had requested comments in this third draft especially regarding sec-
tion 1.2, Scope, and the definition of financial adequacy. In developing the final standard, the
committee examined again the features of what it considers to be a social insurance program
(which are listed in section 1.2), and, based on a lack of comments, the text of this section
remains the same. The committee also decided (again, based on a lack of comments) to include
within the final standard the definition of financial adequacy (see section 2.4) found in the third
exposure draft. A broader discussion of the significant issues contained in the comment letters, as
well as the committee’s responses to such, is noted in appendix 2 of this standard.
The Committee on Social Insurance thanks all those who provided input on each of the three
exposure drafts. These comments were helpful in developing the final standard. The ASB voted
in January 1998 to adopt the final standard.
Committee on Social Insurance of the

American Academy of Actuaries
Jerald L. Bogart, Chairperson

Joseph A. Applebaum Julie Pope
Edward E. Burrows Bruce D. Schobel
Richard S. Foster Ronald L. Solomon
Stephen C. Goss Eric Stallard
C. David Gustafson Kenneth A. Steiner
Krzysztof M. Ostaszewski John A. Wandishin

Heidi R. Dexter Daniel J. McCarthy
Frank S. Irish Alan J. Stonewall
v
SOCIAL INSURANCE
1.1 Purpose—This standard provides the actuary practicing in the field of social insurance
with guidance concerning the nature of social insurance and a description of
recommended practices.
1.2 Scope—This standard applies to the actuarial analysis of social insurance programs,
which, for purposes of this standard, are considered to be government-sponsored
programs with all of the following characteristics:
a. The program, including benefits and financing method, is prescribed by statute.
b. The program provides for explicit accountability of benefit payments and income,
usually in the form of a trust fund.
c. The program is financed by contributions (e.g., taxes or premiums) from or on

behalf of participants, which in some programs are supplemented by government
income from other sources. Investment income on program assets may also be
used to finance the program.
d. The program 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 actually participate.
For programs that provide protection directly to the population, such as Social Security or
Medicare, participant or individual refers to a person. For programs that provide
protection through a guaranty or insurance-type arrangement, such as the Pension Benefit
Guaranty Corporation (PBGC) program, participant or individual may also refer to a plan
or other entity.
The standard applies, but is not limited to, the Federal Old-Age and Survivors Insurance
(OASI) program, the Federal Disability Insurance (DI) program, the Federal Hospital
Insurance (HI) program, the Federal Supplementary Medical Insurance (SMI) program,
the PBGC program, the Railroad Retirement program, and state-sponsored
unemployment insurance programs. The standard does not apply to programs established
solely or primarily for government employees, to workers compensation programs, or to
1
programs that primarily provide property/casualty insurance except for the programs
specifically identified above.
The actuary’s responsibility is to apply this standard while taking into account other
applicable actuarial standards of practice, legal requirements, and sound actuarial
principles. This standard is not intended to inhibit the development of new and
appropriate actuarial practices. In addition, it does not address every circumstance that
can arise because of variations in benefits, financing method, the number of program
participants, investment media and policies, measures of actuarial status, or other relevant
factors.
This standard recognizes that appropriate actuarial practice differs significantly

depending upon the nature of the benefit and the degree of predictability of the risk
insured by the program. 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 the PBGC’s program, on the other hand, benefit
amounts vary widely, the incidence of claims is highly unpredictable, and the experience
of a relatively small number of participants can dramatically affect any forecast of the
future.
1.3 Effective Date—This standard will become effective for the first valuation period
beginning on or after July 1, 1998.
2.1 Actuarial Assumption—The value of a parameter, or other choice, having an impact on

an estimate of a future cost, income, or other actuarial item of a program under
evaluation.
2.2 Actuarial Report—A document, or other written presentation, prepared as a formal means
of conveying an actuary’s professional conclusions and recommendations; recording and
communicating the methods, procedures, and assumptions; and providing the parties
addressed with the actuary’s opinion or findings.
2.3 Actuarial Status—A measure of the relative value of program income and program assets
to program costs over a specified period of time.
2.4 Financial Adequacy—A condition in which program costs are projected not to exceed
program income and assets over a specified period of time.
2.5 Long-Range Period—A period long enough to discern the general pattern and level of
future costs.
2
2.6 Program—A system for collecting income, maintaining trust funds, and paying benefits
as prescribed by law or regulation.
2.7 Program Assets—The investments held by the trust fund, including any cash balance,
available to meet program costs.
2.8 Program Cost—The program’s expenditures for benefits and administrative or general
expenses. The expenditures for benefits are sometimes referred to as claim costs. The
amount required to attain and maintain a target trust fund level may also be included.
2.9 Program Income—The program’s tax income, investment income, premiums, and any
other receipts and income, other than loan proceeds.
2.10 Required Actuarial Document—An actuarial communication of which the formal content
is prescribed by law or regulation.
2.11 Scenario—A set of economic, demographic, and operating assumptions on the basis of
which projections are made.
2.12 Short-Range Period—A period long enough to encompass a complete economic cycle or
planning cycle, whichever is appropriate.

opinion on a defined subject.
2.14 Trust Fund—An account to which income is credited and from which benefits and often
administrative expenses are deducted for a specified program.
3.1 General Considerations—This standard applies to the actuary who is (1) projecting the
cost or measuring the actuarial status of a social insurance program; (2) presenting a
statement of actuarial opinion, an actuarial report, or a required actuarial document
regarding the cost or adequacy of a social insurance program’s financing; or (3)
estimating the cost, or the impact on the actuarial status, of a proposed change to a social
insurance program.
3.2 Coverage and Program Features—The actuary should take into consideration all 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,
consideration should be given to the ongoing nature of the program, based on current
legislation and regulations.
3.3 Financing Method—The financing method is defined by (1) the sources of income and
(2) the mechanism for setting the level of income.
3
3.3.1 Sources of Income—The sources of income typically include one or more of the
following: (1) earmarked taxes, (2) premiums, (3) general fund revenues, and (4)
investment income.
3.3.2 Mechanism for Setting the Level of Income—The actuary should consider the
mechanism for setting the level of income. Four primary mechanisms follow:
a. Statutory—The income (tax rates or premium levels) and the benefit levels
are specified by law for all future years and changed only through
legislative action. Under this mechanism, the actuary should consider
whether testing financial adequacy is appropriate, and, if so, establish a
test.
b. Administrative—The income (tax rates or premium levels) or the benefit

levels may be changed periodically through administrative action. The
actuary should project the program cost and relate that cost to the source
of income.
c. Automatic—The income (tax rates or premium levels) or the benefit levels

are adjusted automatically as specified by law to maintain financial
adequacy. The actuary should project the program cost, the program
income, and the automatic adjustments that are likely to occur.
d. Government Guarantee—The government guarantees that an excess of

program cost over program income other than government subsidies will
be paid out of general income. The actuary should project the program
cost, the program income, and the amount of government subsidies that
are likely to occur.
3.4 Actuarial Assumptions—The actuarial assumptions, both individually and in

combination, should reflect the actuary’s best judgment, taking into account anticipated
future events affecting the related social insurance program. The actuary should consider
the actual past experience of the social insurance program, over both short- and
long-range periods, also taking 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 Actuarial Standard of Practice (ASOP) No. 4,
Measuring Pension Obligations, and ASOP No. 27, Selection of Economic Assumptions
for Measuring Pension Obligations.
In performing actuarial calculations regarding the cost or financing method of social

insurance programs, the actuary should consider the applicability of the demographic and
economic assumptions described below.
3.4.1 Demographic Assumptions—Demographic assumptions are those that relate to

the projections of the numbers and characteristics of individuals that are covered
4
or potentially covered by the program, contribute to the program, or receive
benefits from the program. The actuary should pay particular attention to the rates
of entry into and withdrawal from the covered population, as well as the
beneficiary population, assuring that assumed future rates are reasonable. Where
the numbers of covered individuals and beneficiaries are projected using current
participant data only, the actuary should consider using data from the broader
population in order to check reasonableness.
3.4.2 Economic Assumptions—Economic assumptions are those that relate to the

projections of the level of income to the program and the level of benefit
payments by the program. In many cases, the relative differences between rates of
increase for items that affect income versus those that affect benefits have a more
direct impact on the actuarial status of the program than do the level of such rates.
In such cases, the actuary should give special attention to the relationship among
the rates. Nevertheless, the assumptions should be reasonable individually as
provided for in ASOP No. 27.
3.4.3 Other Factors—In choosing assumptions, the actuary should take into
consideration the actual operation of the program. For example, the rates of actual
retirement may differ from the rates of receipt of the retirement benefit. The
actuary should take care that assumptions include the effects of behavioral
changes induced by the availability and level of benefits. The administrative costs
of the program should also be considered in cases where program income finances
the program’s administration.
3.5 Sensitivity Testing—In addition to using actuarial judgment in selecting assumptions, the
actuary should state in an actuarial report that the results depend on the assumptions used
and that actual experience is likely to differ from expected. The actuary should perform
an analysis of the sensitivity of the program’s cost or financing method under reasonable,
alternative scenarios that are different from expected experience.
When the data used in setting actuarial assumptions have limited credibility or appli-
cability, or when the projected costs or the program’s actuarial status is particularly sen-
sitive to the assumptions, greater sensitivity testing is indicated. The intended use of the
report, or the sensitivity of the program cost or financing method to the choice of the
assumptions, may be considered in determining the amount of sensitivity testing to be
performed.
3.6 Actuarial Methods—Many differences exist between social insurance and private
insurance that may require the actuary to adapt, modify, or replace actuarial methods that
are generally accepted for the valuation of private insurance and pensions. The actuary
should take the following into consideration when working with social insurance
programs:
3.6.1 Consistency with Financing Method—The actuarial methods for computing and
summarizing estimates of the program’s financing methods should be consistent
5
with the financing method that has been adopted. If alternative financing methods
are valued, the actuarial methods should be flexible enough to permit these
valuations and provide consistent comparison of the alternative financing
methods.
3.6.2 Participants—Generally, data regarding current participants and individuals ex-

pected to become participants in the future should be reflected in the actuary’s
calculations. Because program termination is usually not an important
consideration for social insurance programs, the projections should generally be
made on an open-group basis.
3.6.3 Inclusion of All Material Financial Operations—The actuary should include all
material aspects of expected future program income and costs under current law
and regulation, within the time frame of the valuation.
3.6.4 Period-by-Period Estimates—The actuary should produce period-by-period

projections of program operations, particularly when danger exists of the program
being unable to make benefit payments when due at any time during the valuation
period. Period-by-period estimates also provide the basis for calculating
summarized values. Normally, the valuation period would be one year.
3.6.5 Summarized Values—Summarized values of the period-by-period estimates may

be useful in communicating the actuarial status of the program. The actuary
should choose a summarization method that is consistent with the program’s
design and structure and its financing and investment structure. The choice of
summarization method should include the consideration of investment income.
3.6.6 Tests of Financial Adequacy—An actuarial report on the financial adequacy of a

program with a statutory mechanism for setting the level of financing should state
whether the program financing is sufficient as determined by a test of financial
adequacy that the actuary deems appropriate. Tests of financial adequacy may be
based on criteria such as the following: (1) required trust fund levels under best
estimate assumptions, (2) positive trust fund levels under pessimistic assumptions,
or (3) a sufficiently low probability of ruin or an acceptable range of possible
outcomes 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 normally should apply

such a test to both short- and long-range periods.
3.7 Valuation Period—The actuary should note any significant differences between program
income and cost toward the end of the valuation period. Further, the actuary should
6
disclose the expected impact of such differences on the actuarial status in future
valuations.
4.1 Actuarial Report—An actuarial report should summarize and place in context the
actuary’s conclusions from the calculations performed. The report should identify the
actuary as the source of the actuarial calculations, and should indicate the extent to which
the actuary or other source(s) are available to provide supplementary information and
explanation. The actuary should, where relevant, consider including the following items
in the report:
4.1.1 Scope of Assignment—The report should discuss the nature of the assignment
and any limitations, including any conditions or restrictions imposed by the
requestor, time constraints, or data availability. The scope of the assignment
should be consistent with the intended purpose of the report, as discussed in the
following paragraph.
4.1.2 Intended Purpose—There should be a clear description of the report’s intended

purpose, and, if necessary, a statement of how or why it might be inappropriate
for purposes other than the one for which it was intended. The description should
be consistent with the scope of the work done, and it should contain any
limitations on distribution of, or reference to, the report.
4.1.3 Reliances—The report should identify the information, documents, and data used,
including their source(s), and whether the actuary undertook any independent
verification.
4.1.4 Limitations—The report should identify limitations relevant to the values

developed and their application to specific situations that result from the
methodology or assumptions used. The report should also identify items excluded
from or not reflected in the calculations, a lack of reliable data, recent or pending
changes, time constraints, or other considerations.
4.1.5 Program Description—The report should describe the program benefits, the
financing method, and the population covered.
4.1.6 Calculation Results—The report should state the results of the calculations
performed. Possible results include a point estimate, a range, and a table of
values. The report should also include a description of the extent and depth of
testing that underlie the calculations, including a description of any sensitivity
tests that have been made, the time period to which the calculations refer, and the
date as of which the calculations were performed.
7
4.1.7 Actuarial Methodology—The report should describe the methodology or meth-
odologies used. If someone other than the actuary selected the methodology, the
actuary should disclose that fact and the source of the methodology. In addition,
the actuary should characterize the methodology in terms of its reasonableness
and its consistency with the financing methods, eligibility requirements, and
benefit provisions of the program.
4.1.8 Assumptions—The actuary should characterize the reasonableness of the assump-

tions, both individually and in combination. The report should describe the
assumptions in detail and the basis for their determination. Where appropriate,
these requirements may be met by reference to other actuarial reports. The
description should include the following, where relevant:
a. If any assumption was prescribed by someone other than the actuary, the
actuary should disclose that fact and the source of the assumption.
b. If assumptions are based on judgment or historical experience, the report

should describe any relevant factors that led to the choice of assumptions.
c. If assumptions differ from recent experience because of trends, changes in

the environment, or anticipated changes in the program or its operation,
the report should discuss the trends or anticipated changes that led to the
choice of the assumptions used.
d. If assumptions are set using input or expertise from outside sources, the
report should disclose the sources of such information and the reasons for
reliance on them.
e. When the actuary knows of any significant event that has occurred since
the date as of which calculations were performed that would materially
affect the value of any assumption, the actuary should describe that event
and its likely effect.
4.2 Changes—If any changes have occurred since the previous calculations with respect to
the program, the report should quantify any material changes in the results attributable to
changes in program experience, program provisions, methods or assumptions used, and
the date as of which the previous calculations were performed.
4.3 Users of the Report—Reasonably foreseeable direct and indirect users should be taken
into account when communicating actuarial information and opinions, as, for example, in
the case of social insurance programs that are subject to scrutiny by legislators and others
who may not have experience with technical terminology and concepts.
8
9
Appendix 1
practice.
Background
Characteristics of Social Insurance—Three characteristics of social insurance programs are of

fundamental importance to the analysis of their actuarial status. First, because participation is
essentially mandatory, social insurance programs can be assured of new entrants. Second,
because such programs are operated by governments, program termination is usually not an
important consideration when determining the program’s actuarial status. Third, social insurance
is based on laws and regulations that can be changed (e.g., taxes or premiums may be increased
or benefits decreased) without the consent of the participants.
Social insurance may include some or all of the following features:
1. a minimum level of participation is required to establish coverage;
2. a minimum or maximum level of protection is provided based on a concern to provide

adequate benefits to most participants, i.e., based on the concept of social adequacy;
3. individual benefits need not bear a direct relationship to individual contributions,

although benefits may increase somewhat with increased contributions or with increased
participation to introduce some individual equity into the benefit formula; or
4. receipt of benefits is not restricted based on overall financial need.
Note, as well, another important characteristic of social insurance: the laws and regulations
governing private insurance and pensions do not apply. Therefore, in most cases, the actuary
practicing in the social insurance field must develop tests of financial adequacy for the program
being evaluated.
The above points regarding social insurance make some of the actuarial methods developed for
private insurance not appropriate for social insurance. For example, the cost of a social insurance
program is usually projected on an open-group basis, unlike private programs. Further, another
important aspect of social insurance programs is the manner in which inflation is taken into
account. Key program parameters are often indexed or adjusted frequently for inflation.
Importance of Actuarial Opinion on Financial Adequacy—An actuarial report may present a

statement of actuarial opinion as to whether the program’s financing method is adequate to
10
provide for the program’s costs. The projection of financial adequacy depends on the financing
method.
Importance of Projecting the Costs of Social Insurance Programs—Another purpose of an

actuarial report is to inform policymakers and the general public of the program’s cost.
Regardless of the financing method, the social insurance program’s costs are typically projected
far enough into the future to indicate their general pattern and ultimate level. The cost is often
presented in relation to an appropriate revenue base. For example, when program financing is
based on taxes on earnings, expressing the cost as a percentage of the aggregate earnings subject
to taxation produces a rate that can be compared directly with the tax rate. Then the difference
can be used for developing a test of financial adequacy.
Current Practices
Tests of Financial Adequacy—There are several well-established methods currently being used
to test the financial adequacy of social insurance programs, as well as methods to measure the
actuarial status of such programs. Many social insurance programs, however, operate without
any formal test. In such cases, a projection of program operations during the next one to five
years is often made. The implication is that the financing should be sufficient to keep the
program solvent, but a formal statement of financial adequacy is not always made, especially if
the program has borrowing authority.
For some programs, tests of financial adequacy use a method comparable to that used for
one-year renewable term insurance whereby the current tax rate or premium level is compared to
the expected incurred obligations of the program during the current rate-setting cycle. In
addition, other tests can be developed by the actuary that are suitable to the program.
11
Appendix 2
Comments on the 1997 Third Exposure Draft

The third exposure draft of the proposed standard was exposed for review in May 1997, with a
comment deadline of September 2, 1997, which was subsequently extended to October 1. (The
second and third exposure drafts summarize comments received on the first and second exposure
drafts, respectively, and the responses of the Committee on Social Insurance to such comments.
Copies of these exposure drafts are available from the ASB office.) Four letters of comment were
received on the third exposure draft. Summarized below are the significant issues and questions
contained in the comment letters, printed in standard type. The committee’s responses appear in
boldface.
General Comments
One commentator raised the issue of “macro” financial adequacy with respect to social
insurance. The commentator suggested that, in addition to looking at the program cost relative to
program income, the actuary should consider and test the ability of the economy to support the
benefit payments. The committee acknowledges that the commentator has a point in that the
economy may not be able to provide the program income and assets as needed by the social
insurance program. However, this is an issue that is outside the scope of this actuarial stan-
dard of practice.
The same commentator suggested that if a social insurance program is skewed such that a subset
of the covered population receives a disproportionately small amount of net benefit, the actuary
should take this into account in determining the viability of the current program. The committee
again acknowledges that the commentator has a point, but feels that any attempt to deter-
mine future program changes based on presumed participant attitudes is too speculative
and is outside the scope of this actuarial standard of practice.
Section 1.2, Scope—The third exposure draft specifically requested input with respect to the
scope of the standard. Specifically, the committee requested comments on whether the listed
exclusions regarding which programs are covered by the standard are appropriate. Three com-
mentators commented on this area. One suggested that the scope be applied broadly to every
social insurance program, or to none. The second asked if a program with prescribed benefits,
but not prescribed income, wouldn’t benefit from actuarial analysis. The third commented that
the existence of a trust fund does not provide accountability. As for the first comment, the
committee agrees that the scope should be applied broadly to every social insurance
program that meets the definition of such in the standard. The committee believes the
definition of social insurance program from the third exposure draft, along with the listed
12
examples, is satisfactory. As for the second comment, the committee notes that programs
that do not meet all aspects of the definition of social insurance may benefit from actuarial
analysis, but that it is not appropriate to subject such programs to the entire standard of
practice. As for the third comment, the committee agrees, but believes that the wording in
section 1.2(b), i.e., that the program provides for explicit accountability, is clear. No changes
were made to the section.
Section 2.4, Financial Adequacy—The exposure draft specifically requested input on whether a
definition for financial adequacy was needed and whether the proposed definition was appro-
priate. The one comment letter received on this section did not address the question as posed in
the transmittal memorandum, but asked why a period of time is not specified within the defini-
tion. While the phrase specified period of time is used within the definition, section 3.6.6,
Tests of Financial Adequacy, provides further guidance: If a test of financial adequacy is
appropriate, the actuary normally should apply such a test to both short- and long-range
periods. The committee feels that the definition used in the third exposure draft is adequate.
No change was made.
Section 2.8, Program Cost—One commentator was concerned about the inclusion of an arbitrary
target trust fund level while recognizing the need for a working cash balance. The committee
notes that the inclusion of such targets is discre tionary based on the actuary’s judgment.
Sections 2.12, Short-Range Period, and 2.14, Trust Fund—One commentator provided minor
editorial comments on these two definitions. The committee slightly revised sections 2.12 and
2.14 to reflect these comments.
Section 3.3.2(d), Government Guarantee—One commentator was concerned with the amount of
government subsidies that are likely to occur, preferring that a range of results be provided. The
committee believes that the presentation of ranges of results is adequately covered by
section 3.5, Sensitivity Testing.
Section 3.4, Actuarial Assumptions—One commentator provided minor editorial comments on

this section. The committee slightly revised the first paragraph of this section to reflect
these comments.
Section 3.6.2, Participants—One commentator wondered why open-group projections are

preferred, while another wondered whether they are preferred or mandatory. The section was
revised to better reflect the committee’s intent.
13
Section 3.6.5, Summarized Values—One commentator was confused as to why summarized
values can’t also be appropriate for short-term valuations as well. The committee agrees and
deleted the phrase, For long-range valuations, at the beginning of the sentence.
Appendix 1—Background and Current Practices
Characteristics of Social Insurance—One commentator noted that new entrants are not included
in actuarial valuations under other actuarial standards of practice. This commentator also ex-
pressed a belief that the principle of pensions do apply to social insurance programs. The com-
mittee believes that the statement, the laws and regulations governing private insurance and
pensions do not apply, is correct. The committee also believes that the text in appendix 1
regarding new entrants and open groups is helpful in understanding the need for this actu-
arial standard of practice. No changes were made to appendix 1.
The Committee on Social Insurance of the American Academy of Actuaries thanks everyone
who took the time and made the effort to submit comments on all three exposure drafts. The
input was much appreciated.
14
Actuarial Standard
of Practice
No. 33
Actuarial Responsibilities
with Respect to Closed Blocks in
Mutual Life Insurance Company Conversions
Developed by the
Closed Block Task Force of the
Adopted by the
January 1999
(Doc. No. 065)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.2 Closed Block 1
2.3 Individual Policy 2
2.4 Initial Assets 2
2.5 Initial Liabilities 2
2.6 Operating Rules 2
2.7 Reasonable Dividend Expectations 2
2.8 Reinvestment Rate 2
2.9 Tontine 2

3.1 Objectives of the Closed Block 2
3.2 Policy Inclusion Criteria 3
3.3 Determination of Funding 3
3.4 Funding Assumptions 3
3.4.1 Reinvestment Rate 3
3.4.2 Mortality and Morbidity 4
3.4.3 Lapses 5
3.4.4 Commissions and Expenses 5
3.4.5 Taxes 5
3.4.6 Other Factors 5
3.5 Operating Rules 5
3.5.1 Insurance Cash Flows 5
3.5.2 Investment Cash Flows 5
3.5.3 Commissions and Expenses 5
3.5.4 Taxes 5
3.5.5 Initial Liabilities 6
3.6 Closed Block Operation 6

4.2 Reliance on Asset Cash-Flow Projections Supplied by Others 6
4.3 Actuarial Report and Statement of Actuarial Opinion 6
ii
APPENDIXES

Background 8
Demutualization Statutes 9
The Role of the Actuary 9
iii
February 1999

Actuarial Standards Board and Other Persons Interested in Mutual Life Insurance
Company Conversions
This booklet contains the final version of Actuarial Standard of Practice No. 33, Actuarial
Responsibilities with Respect to Closed Blocks in Mutual Life Insurance Company Conversions.
Background
In the past decade, an increasing number of mutual life insurance companies have converted to
stock life insurance companies, sometimes including the formation of a mutual holding
company. Demutualizations present important actuarial issues, including the preservation of
reasonable policyholder dividend expectations and, in a traditional demutualization, the
allocation among eligible policyholders of the compensation due them in exchange for their
membership rights (i.e., consideration).
This actuarial standard of practice (ASOP) deals with actuarial responsibilities with respect to
closed blocks, which have often been used as devices to preserve reasonable policyholder
dividend expectations. (This ASOP addresses situations in which a closed block is used; it does
not require that a closed block be used.) Actuaries are often involved in all aspects of a closed
block, including advising on the types of policies that should be included, the initial funding, and
the development of the operating rules; and in reviewing actual operations once a closed block
has been established.
Drafting Issues
A draft of this standard was exposed for review and comment in a document dated May 1998,
with a comment deadline of September 1, 1998. Eighteen comment letters were received. The
Life Committee’s Closed Block Task Force and the committee members reviewed each comment
carefully and made a number of changes to the exposure draft in response (see appendix 2).
The comment that prompted the most discussion was one that objected to the approach taken in
the exposure draft to setting the reinvestment rate when the investment policy of the closed block
differed from that underlying the current dividend scale. The committee made two changes in
response to this letter.
iv
1. The committee added the following sentences:
Usually, policyholders would not expect that the company’s investment policy for new
assets would change as a result of the establishment of the closed block. Therefore,
policyholders’ reasonable dividend expectations are most likely to be met if the
investment policy for new assets to be purchased with the closed block’s cash flows is the
same as the investment policy underlying the current dividend scale.
2. The committee replaced a requirement that the actuary consider any change in investment
policy with a requirement that the actuary fully disclose the effect of any non-recognition
of a change in investment policy.
The Closed Block Task Force and the Life Committee thank all those who commented on the
exposure draft. The ASB voted in January 1999 to adopt this standard.
Closed Block Task Force

Kenneth M. Beck Dale S. Hagstrom
Charles Carroll William C. Koenig
Gary Corbett

John W. Brumbach Stephen G. Hildenbrand
Frank J. Buck Walter N. Miller
Marc A. Cagen Godfrey Perrott
Mark Freedman Thomas A. Phillips
Jane L. Hamrick Roger K. Wiard-Bauer

v
ACTUARIAL RESPONSIBILITIES
WITH RESPECT TO CLOSED BLOCKS
IN MUTUAL LIFE INSURANCE
COMPANY CONVERSIONS
1.1 Purpose—The purpose of this standard is to define the responsibilities of an actuary when
the actuary is asked to advise on, review, or opine on a proposed or existing closed block
formed in connection with a mutual life insurance company conversion.
1.2 Scope—This standard of practice applies to actuaries who perform professional services
in connection with the design and operation of a closed block in conjunction with the
conversion of a mutual life insurance company to a stock life insurance company,
including conversion to a mutual holding company structure.
law is not considered a deviation from this standard.
1.3 Effective Date—This standard will apply to any actuarial work performed or opinions
issued on or after June 1, 1999.
binding authority that may govern the conversion of the subject mutual life insurance
company to a stock life insurance company, including conversion to a mutual holding
company structure.
2.2 Closed Block—A mechanism to preserve (over time) the reasonable dividend
expectations of policyholders with individual life, health, or annuity policies. A closed
block comprises a defined, limited group of policies and a defined set of assets, and is
governed by a set of operating rules. All cash flows arising from the closed block are
exclusively committed to supporting the policies in the closed block as specified in the
operating rules.
1
2.3 Individual Policy—Any policy (or contract) that is defined as an individual policy under
state insurance law or by the terms of the policy. Any certificate issued under any other
policy that is sold to a passive trust but is marketed to individuals is also defined as an
individual policy for purposes of this standard.
2.4 Initial Assets—The assets allocated to a closed block at its inception. The assets of the
closed block may be either of the following:
a. a distinct segment of assets (which may contain either 100% or a specified

fraction of each designated asset) associated exclusively with the closed block; or
b. a defined share of a larger segment of assets. Such larger segment may also
contain assets associated with participating business sold after the date of
conversion. Such defined share will vary from time to time according to the
methodology specified in the operating rules.
2.5 Initial Liabilities—The obligations ascribed to the closed block at its inception by the
operating rules.
2.6 Operating Rules—All portions of the plan of conversion that specify the methods and
procedures for setting up, maintaining, and monitoring the operations of a closed block.
2.7 Reasonable Dividend Expectations—The expectations that the current dividend scale will
be maintained if the experience underlying the current scale continues, and that the
dividend scale will be adjusted appropriately if the experience changes.
2.8 Reinvestment Rate—The assumed yield rate on assets to be purchased with the closed
block’s cash flows.
2.9 Tontine—An outcome of a closed block in which relatively few last surviving
policyholders receive dividends substantially disproportionate to those previously
received by other policyholders in the same closed block, particularly policyholders who
had persisted for a considerable period.
The actuary may be requested to advise on, review, or opine on various aspects of the closed
block. In doing so, the actuary should be guided by the following:
3.1 Objectives of the Closed Block—The objective in establishing the closed block is to
preserve the reasonable dividend expectations of each class of policyholders. After the
closed block is established, the objective is to manage aggregate dividends so as to
exhaust the assets when the last policy terminates, while avoiding the creation of a
tontine.
2
3.2 Policy Inclusion Criteria—Policies included in a closed block should be reasonably
expected to generate experience-based policy dividends over which the company has
significant discretion. Policies chosen for inclusion should be such that the number of
policies will decrease to zero in a finite time. These policies are usually individual
policies. Practical considerations may result in the inclusion of other policies.
3.3 Determination of Funding—The actuary should ensure that the initial assets, together
with the anticipated revenue from the closed block business, are reasonably expected to
be just sufficient to permit the closed block to pay all policy benefits, including dividends
according to the current dividend scale, and other items identified in the operating rules,
if the funding assumptions are realized. These assets should include all policy loans and
due and deferred premiums on policies in the closed block. It is customary to assign to
the closed block the due and accrued investment income on the initial assets.
The actuary should be satisfied that the methods and assumptions used to calculate the
amount of the initial assets are consistent with the operating rules and the assets’
characteristics. If the actuary finds that the operating rules are ambiguous, then the
actuary should state, in his or her written report, the interpretation he or she used to
determine the funding.
3.4 Funding Assumptions—The actuary should select assumptions consistent with the recent
experience underlying the current dividend scale for the closed block policies; these
assumptions are not necessarily the factors used in the dividend formula. The actuary
should use his or her best estimates of cash flows from the initial assets and the
reinvestment rate assumption described in section 3.4.1. The actuary should review the
data relevant to an assumption. If the data are inconclusive, the actuary may include a
modest provision for uncertainty that is designed to increase rather than reduce the
amount of initial assets.
3.4.1 Reinvestment Rate—The actuary should choose a reinvestment rate assumption

that is directly related to the company’s practice for determining its current
dividend scale for business to be placed in the closed block. Dividend structures
commonly fall into one of three types:
a. Portfolio Rate—If the company uses a dividend scale based on a portfolio

rate, then the reinvestment rate should be equal to the portfolio rate that
underlies the current dividend scale.
b. Segmented Portfolio Rate—If the company uses a dividend scale based on

asset segments or an investment generation method to allocate investment
income among generations of policies or among different products, then
multiple projection segments with different reinvestment rate assumptions
are used. The reinvestment rate for each projection segment should be
equal to the segment portfolio rate that underlies the current dividend scale
for that generation of policies.
3
c. Generational Rate—If the company uses a dividend scale that credits
investment returns to each policyholder based on the investment
generations of that policy’s cash flows, then the reinvestment rate should
be equal to the investment rate that underlies the rate being credited on
current cash flows.
If capital gains and losses have been reflected in some way in the investment rate
underlying the current dividend scale, then the actuary should include those gains
or losses in a consistent fashion in determining the reinvestment rate assumption.
If the investment rate underlying the current dividend scale reflects gains from
other sources (such as group lines of business or earnings on surplus), then the
actuary should not include the effect of such gains in setting the reinvestment rate
assumption, unless the operating rules provide for crediting such gains to the
closed block.
Usually, policyholders would not expect that the company’s investment policy for
new assets would change as a result of the establishment of the closed block.
Therefore, policyholders’ reasonable dividend expectations are most likely to be
met if the investment policy for new assets to be purchased with the closed
block’s cash flows is the same as the investment policy underlying the current
dividend scale. However, if the closed block investment policy is different from
the investment policy underlying the current dividend scale, the actuary may,
notwithstanding earlier provisions of this section, modify the reinvestment rate
assumption to reflect the change. If the change in investment policy is not fully
reflected in the reinvestment rate assumption, the actuary should disclose this fact
in his or her opinion. The disclosure should include the following:
a. the extent to which this change in investment policy was not reflected in
the reinvestment assumption;
b. the rationale for having not fully reflected this change; and
c. whether future dividend scales are expected to be higher or lower as a

result of having not fully reflected this change.
If the plan of conversion does not specify an investment policy for new assets to
be purchased for the closed block, the actuary should obtain a statement of such
investment policy from company management and refer to it in the actuarial
report and statement of actuarial opinion (see section 4.3).
3.4.2 Mortality and Morbidity—The actuary should select assumptions that are
consistent with the experience underlying the current dividend scale for the closed
block policies.
4
3.4.3 Lapses—The actuary should choose a lapse assumption that is consistent with
company experience. Experience data antedating public knowledge that the
company was considering converting are preferable to later experience data,
which may have been distorted by the announcement.
3.4.4 Commissions and Expenses—The treatment of commissions and expenses should

be in accordance with that detailed in the operating rules (see section 3.5.3).
3.4.5 Taxes—The treatment of taxes should be in accordance with that detailed in the
operating rules (see section 3.5.4).
3.4.6 Other Factors—The actuary should take into account the company’s recent
experience with respect to other relevant factors, such as dividend options,
nonforfeiture options, reinsurance, conversions, or riders.
3.5 Operating Rules—The operating rules are an integral part of the plan of conversion of the
mutual life insurance company. Any actuary drafting or reviewing the operating rules
should ensure that the operating rules cover all charges and credits to the closed block,
including at least the treatment of insurance cash flows (including reinsurance, if any),
investment cash flows, and the bases for charging commissions, expenses, and taxes; and
that the initial assets and liabilities are defined.
3.5.1 Insurance Cash Flows—The operating rules should set forth the procedure for
crediting and charging cash flows related to policy premiums and benefits to the
closed block. For example, cash premiums, cash repayments of policy loans, and
policy loan interest paid in cash on closed block policies would usually be
credited to the closed block; death, surrender, and maturity benefits paid in cash,
policy loans taken in cash, annuity and other income benefits, and dividends paid
in cash would usually be charged to the closed block.
3.5.2 Investment Cash Flows—The operating rules should specify which investment
earnings or cash flows should be credited or charged to the closed block. For
example, cash flows related to the assets allocated to the closed block, such as
dividend and interest payments, and maturities and sales of assets, would usually
be credited; brokerage expenses and other expenses directly related to the
acquisition, maintenance, or sale of a closed block asset would usually be charged
to the closed block.
3.5.3 Commissions and Expenses—The operating rules should specify the method for
calculating future commission and expense charges, if any, to the closed block.
3.5.4 Taxes —The operating rules should specify the method for calculating any future
tax charges to the closed block. Because a closed block is not a separate taxable
entity, allocation methods will have to be developed for some tax items.
5
3.5.5 Initial Liabilities—The operating rules should specify each category of liability,
and its amount, that will be assigned to the closed block at its inception. The asset
valuation reserve (AVR) and interest maintenance reserve (IMR) are usually
excluded from the closed block because they are not cash items.
3.6 Closed Block Operation—When advising a company on the operation of an existing

closed block, the actuary should recommend a dividend scale that is consistent with the
goal of exhausting the assets when the last policy terminates, while avoiding the creation
of a tontine. When reviewing the operation of an existing closed block, the actuary should
determine whether the total amount of dividends is consistent with this goal. In either
case, the actuary should be mindful of the guidance found in ASOP No. 15, Dividend
Determination and Illustration for Participating Individual Life Insurance Policies and
Annuity Contracts, with respect to the allocation of dividends among classes of policies.
who supply the data. However, when practicable, the actuary should review the data for
reasonableness and consistency. For further guidance, the actuary is directed to ASOP
No. 23, Data Quality.
4.2 Reliance on Asset Cash-Flow Projections Supplied by Others—The actuary may rely on
asset cash-flow projections or other analyses of assets supplied by others—for example,
projections of real estate or equity assets. In doing so, the actuary should disclose both
the fact and the extent of such reliance. The accuracy and soundness of projections
supplied by others are the responsibility of those who supply the projections. However,
when practicable, the actuary should review the projections for reasonableness and
consistency.
4.3 Actuarial Report and Statement of Actuarial Opinion—At the time of the establishment
of a closed block, an actuary who advises an employer or client concerning the closed
block’s development or who reviews a closed block under development on behalf of an
employer or client should issue a written actuarial report or statement of actuarial opinion
concerning the appropriateness of the closed block arrangements, unless another actuary
advising the same entity is issuing such a report or statement. Each actuarial report or
statement of actuarial opinion usually should express an opinion concerning the classes of
policies to be included in a closed block, the appropriateness of the operating rules of the
closed block, and the sufficiency of the funding of the closed block, all in light of the
objective of the closed block.
An actuary who advises an employer or client on the operation of a closed block that is
already in existence, or reviews a closed block already in existence on behalf of an
employer or client, should issue a written actuarial report or statement of actuarial
6
opinion concerning the operations of the closed block, unless another actuary advising
the same entity is issuing such a report or statement. Any such report or statement should
address the subject described in section 3.6, and may also discuss other aspects of closed
block operations.
An actuary who is testifying about a proposed or actual closed block should consult
ASOP No. 17, Expert Testimony by Actuaries, for guidance on expert testimony.
4.4 Prescribed Statement of Actuarial OpinionThe actuarial communication described in

section 4.3 is a prescribed statement of actuarial opinion as described in the Qualification
Academy of Actuaries, whether or not it is issued for purposes of compliance with law,
regulation, or other standards. In addition, law, regulation, or accounting requirements
may also apply to another actuarial communication prepared under this standard, and as a
result, such other actuarial communication may be a prescribed statement of actuarial
opinion.
7
Appendix 1
practice.
Background
In the early 1980s, a few large mutual life insurance companies evinced an interest in
demutualization. The Society of Actuaries (SOA) responded to this interest in 1984 by
appointing a task force on mutual life insurance company conversion with the following charge:
“To examine the actuarial issues involved in converting a mutual life insurance company to a
stock form of ownership, and to produce a record of its examination.”
At that time there had been relatively few conversions of mutual insurance companies, and most
of these had been conversions of property and casualty companies. The few mutual life insurance
company conversions had involved relatively small companies or immediate acquisition by
another company; many of the issues that a large, multi-line mutual life insurance company
would encounter in a conversion to an independent stock life insurance company were new. To
the extent that states had laws permitting such conversions, these laws had been derived from, or
were identical to, laws applicable to conversions of property and casualty companies. There was
relatively little actuarial literature on the subject.
The “Report of the Task Force on Mutual Life Insurance Company Conversion,” completed in
July 1987 by the SOA (see Transactions 39 (1988): 295–391), covered what the task force
considered to be the three principal actuarial aspects of a mutual life insurance company
conversion: how to maintain policyholders’ reasonable dividend expectations; how to determine
the aggregate amount of compensation due to policyholders in exchange for their membership
rights; and how to allocate this aggregate amount of compensation among participating
policyholders.
The report stated that the conversion plan should be designed to assure policyholders that their
reasonable dividend expectations (i.e., that the current dividend scale would continue if current
experience continued) would be met. Otherwise, policyholders would be required, when voting
on the conversion plan, to weigh the compensation offered for the cancellation of their
membership rights against the possibility of reduced dividends. The SOA task force considered a
number of methods of maintaining policyholders’ dividend expectations and concluded that the
closed block approach was the most promising for most individual coverages.
The SOA task force recognized that a closed block may not be appropriate or effective for all
lines of business and, thus, that decisions must be made as to the classes of business to be
8
included in a closed block. To the extent that these decisions are not preempted or prescribed by
statute, the task force suggested the following criteria:
1. If, for a class of policies, there is an expectation of substantial policy dividends and the
company has significant discretion as to whether those dividends are paid and in what
amounts, the class should probably be included in the closed block.
2. If the dividend structure for a class of policies is based more on broad averaging of costs
than on policy-by-policy experience rating, the class should probably be included in the
closed block. Policies that are experience rated largely on an individual basis should
probably not be included.
3. Classes of policies included in the closed block should be expected to diminish in size
with the passage of time and, eventually, to disappear. Any class of policies not expected
to diminish over time probably should not be included.
Demutualization Statutes
Many states enacted legislation governing the conditions under which life insurance companies
can convert to the stock form, both before and after the task force’s report. For example, the New
York statute requires that the plan of conversion be “fair and equitable to the policyholders.”
More particularly, the New York statute requires that participating business that is in force on the
effective date of the conversion must be operated by the reorganized insurer as a closed block,
for policyholder dividend purposes only. Some or all classes of group policies and contracts may
be excluded from the closed block.
The past few years have seen the advent of the mutual holding company form of conversion.
With this form, just as with a traditional demutualization, a mutual life insurance company is
converted to the stock form of ownership. Ultimately, if not immediately, the converted life
insurance company may have owners other than policyholders, and the policyholders’ reasonable
dividend expectations will need protection.
To date, all conversions that have involved outside (non-policyholder) shareholders, whether
occasioned by traditional demutualization or by conversion to a mutual holding company
structure, have, with minor exceptions, resulted in the formation of a closed block. Generally,
only dividend-paying participating individual policies (including some group policies that were
marketed and administered as individual) have been included within the closed block. Other
protective mechanisms have sometimes been used for non-dividend–paying policies that con-
tained some form of discretionary benefit.
The Role of the Actuary
The New York statute requires that “one or more qualified and disinterested actuaries,”
appointed by the superintendent, certify “the reasonableness and sufficiency” of the assets
9
initially allocated to the closed block. This certification must “be made in accordance with
professional standards and practices generally accepted by the actuarial profession and such
other factors as such actuary in his professional judgment believes are reasonable and
appropriate.” Some states, Illinois being an example, require that an opinion of the actuary as to
the sufficiency of the initial asset allocation “be based on methods of analysis deemed
appropriate for those purposes by the Actuarial Standards Board.”
Actuaries are often involved in all aspects of a closed block, advising on the selection of policies
to be included, the initial funding, and the operating rules, and, subsequently, reviewing the
operation. Actuaries have acted in at least three roles: as the company’s own actuaries; as
independent consulting actuaries who may both advise the company and provide independent
opinions to management, the board of directors, policyholders, and to the state regarding certain
aspects of the closed block; and as independent actuaries retained by a supervisory authority for
advice and to provide one or more opinions on certain aspects of the closed block.
This ASOP reflects what is considered good practice used in the establishment of closed blocks
up until this time. The unique circumstances and characteristics of each mutual company,
however, make it impossible to state with confidence that the goal of protecting policyholders’
reasonable dividend expectations can be met, in all future transactions, without deviating from
this standard in some way as yet unforeseen. The actuary is best qualified, of all participating
professionals, to assess and analyze the particular circumstances and operating philosophies of
the mutual company, as demonstrated over its history, in determining what actually constitutes
“reasonable dividend expectations” and to recommend funding to that end.
10
Appendix 2

The exposure draft of the proposed standard was circulated for review in May 1998, with a
comment deadline of September 1, 1998. Eighteen letters of comment were received. The Closed
Block Task Force and the Life Committee carefully reviewed each comment and made a number
of changes in response. Summarized below are the significant issues and questions contained in
the comment letters, printed in roman. The committee’s responses appear in boldface.
General Comments
Several comment letters did not apply to any particular part of the exposure draft. One letter
approved of the proposed actuarial standard of practice (ASOP); another letter disapproved of
the proposed ASOP and of the concept of closed blocks. One letter suggested that a closed block
should be funded with assets equal to liabilities and profit transfers made periodically. Another
letter requested guidance on how to avoid a tontine. Another letter suggested that guidance
should be given on reinsurance that should be secured by the closed block to avoid mortality
fluctuations. The committee did not make any change to the ASOP as a result of these
letters.
One letter requested guidance on spreading deviations of actual from expected experience over
several years. The committee felt that this question was beyond the scope of this ASOP.
In the exposure draft’s transmittal memorandum, the committee drew its readers’ attention to
three provisions in particular: section 3.4, Funding Assumptions; section 3.4.1, Reinvestment
Rate Assumption; and section 3.4.5, Taxes. Please see those sections, below, for discussion of
any pertinent readers’ comments and committee responses.
Two commentators objected to the term full demutualization, which appeared elsewhere in the
transmittal memorandum. The committee changed the term to traditional demutualization.
Three letters suggested recognizing protection methods other than closed blocks. The committee
acknowledges that there are other valid methods, but believes them to be beyond the scope
of this ASOP.
11
Section 1.3, Effective Date—One commentator suggested that section 1.3 should encourage
earlier implementation of the ASOP. The committee changed the effective date at the ASB’s
direction.
Five commentators requested a definition of reasonable dividend expectations. The committee

added such a definition (see section 2.7). One letter commented on the definition of individual
policy used; another letter requested a definition of group policy; a third suggested adding a
definition of initial liabilities. The committee edited the definition of individual policy (see
section 2.3) slightly; decided not to define group policy; and added a definition of initial
liabilities (see section 2.5).
Section 3.2, Policy Inclusion Criteria—One commentator suggested that universal life insurance
policies should be included in closed blocks and that the guidance on what policies should be
included should be expanded. Several letters requested more examples. The committee did not
agree that more examples would clarify the proposed standard. The committee retained
section 3.2 as written.
Section 3.3, Determination of Funding—One letter suggested including due and accrued
investment income in section 3.3. The committee edited section 3.3 to include such income.
Two letters suggested editorial changes to section 3.3. Some of the suggested editorial changes
appear in the revised text.
Section 3.4, Funding Assumptions—In the exposure draft’s transmittal memorandum, the
committee asked for comment on this section as follows:
Section 3.4, Funding Assumptions, states that the assumptions should be consistent with
the recent experience underlying the current dividend scale. An alternative position could
be that the assumptions should be consistent with the experience underlying the dividend
scale at the last time it was approved by the board of directors, which may have been
several years ago. The Life Committee believes that the approach set forth in the
exposure draft is preferable, but welcomes comments.
No comment letters directed to this point were received and the committee believes that the
approach taken by the standard is appropriate.
One letter suggested that section 3.4 specifically refer to the possible use by a closed block of a
slice of a larger portfolio. Language has been added to the definition of initial assets (see
section 2.4) to accommodate this suggestion.
12
Several letters suggested editorial changes. The committee adopted some suggested changes to
improve clarity.
Section 3.4.1, Reinvestment Rate Assumption (now titled Reinvestment Rate)—In the exposure
draft’s transmittal memorandum, the committee asked a specific question about this section as
follows:
Section 3.4.1, Reinvestment Rate Assumption, provides for an adjustment to the

reinvestment rate assumption if the investment policy for assets to be purchased for the
closed block is different from the investment policy underlying the current dividend scale
(i.e., the dividend scale in effect immediately prior to the establishment of the closed
block). This statement implies that if the closed-block’s cash flows are to be invested in
assets significantly different, in type or maturity pattern, from assets underlying the
current dividend scale, the reinvestment rate should be modified. For example, the
investment policy might state that closed-block investments are not to include a
substantial common stock component that underlies the current scale, or that closed-
block assets are to be invested in debt instruments of significantly shorter maturities than
those underlying the current scale. Should the ASOP provide more guidance in this area?
One comment letter objected to the approach taken in the exposure draft to setting the
reinvestment rate when the investment policy of the closed block differed from that underlying
the current dividend scale. The committee made two changes in response to this letter:
1. The committee added the following sentences:
Usually, policyholders would not expect that the company’s investment policy for new
assets would change as a result of the establishment of the closed block. Therefore,
policyholders’ reasonable dividend expectations are most likely to be met if the
investment policy for new assets to be purchased with the closed block’s cash flows is
the same as the investment policy underlying the current dividend scale.
2. The committee replaced a requirement that the actuary consider any change in
investment policy with a requirement that the actuary fully disclose the effect of any
non-recognition of a change in investment policy.
One letter suggested that where the experience had changed dramatically since the dividend scale
was set, but before the closed block was funded, current experience, rather than the experience
underlying the dividend scale, should be used. The committee found this to be inconsistent
with the purpose and design of a closed block and made no change.
Section 3.4.2, Mortality and Morbidity—One letter indicated that the commentator thought that
section 3.4.2 referred to the dividend mortality rather than to the mortality underlying the
dividend scale. The committee believes that the meaning is clear.
13
Section 3.4.4, Commissions and Expenses—One letter suggested that expenses should always be
funded by the closed block. This is contrary to current practice. The committee made no
change.
Section 3.4.5, Taxes—The committee had explicitly asked for comment on this section in the
exposure draft’s transmittal memorandum as follows:
Section 3.4.5, Taxes, does not discuss the treatment of the IRC Section 809 so-called
equity tax on mutual insurance companies. Historically, this tax (even if it is still
payable) has not been charged to the closed block in the operating rules and therefore
has been ignored in the funding calculations.
Some dividend scales contain either an implicit or explicit charge to reflect the equity
tax. The Life Committee considered whether the operating rules should specify making
this charge to the closed block under the tax allocation procedures, provided the
company was still subject to the equity tax. If the company were not subject to the equity
tax, this charge would not be allocated to the closed block. Under this approach (which
has not to our knowledge been followed in any transaction), the charge would be
assumed in the closed-block funding calculations so that if and when the company were
no longer subject to the equity tax, the closed-block policies would benefit to the extent
they had been previously charged. The ASB Life Committee believes that the approach
set forth in the exposure draft is preferable, but welcomes comments.
No letters on this point were received and the committee believes that the approach taken
in the ASOP is appropriate.
A number of commentators made editorial suggestions, particularly with respect to section 3.4,
Funding Assumptions, and section 3.5, Operating Rules. The committee considered all
editorial suggestions and adopted a number of them.
The Closed Block Task Force and the Life Committee of the ASB thank everyone who took the
time and made the effort to submit comments.
14
Actuarial Standard
of Practice
No. 34
Actuarial Practice Concerning

Retirement Plan Benefits in Domestic Relations Actions
Developed by the
Adopted by the
September 1999
(Doc. No. 066)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.2 Age- or Service-Dependent Benefits 2
2.3 Allocation Date 2
2.4 Allocation Method 2
2.5 Allocation of Retirement Plan Benefits 2
2.6 Allocation Period 2
2.8 Covered Party 2
2.9 Direct User 2
2.10 Domestic Relations Action 2
2.11 Domestic Relations Order (DRO) 2
2.12 Judge 3
2.13 Marital Property 3
2.15 Qualified Domestic Relations Order (QDRO) 3
2.16 Retirement Plan 3
2.17 Spouse 3

3.1 Overview 3
3.2 Initial Considerations 3
3.2.1 Identify the Client 3
3.2.2 Disclose Any Conflicts of Interest 4
3.2.3 Determine the Nature and Scope of the Engagement 4
3.2.4 Avoid the Unauthorized Practice of Law 5
3.2.5 Be Familiar with Applicable Law 5
3.3.1 Information Requirements 5
3.3.2 Selecting an Allocation Method 6
3.3.3 Actuarial Assumptions 7
3.3.4 Valuation Process 10
3.3.5 Computing After-Tax Values 11
ii
3.3.6 Prescribed Dates, Methods, and Assumptions 11
3.3.7 Consistency with the Actuary’s Previous Actuarial Valuations 11
3.4 Participating in Adversarial Proceedings 11
3.4.1 Reviewing the Work of Another Expert 11
3.4.2 Submitting Work for Review by Another Expert 12
3.4.3 Participating in Negotiations with Another Expert 12
3.4.4 Providing Expert Testimony 12
3.5 Providing Guidance on the Division of Retirement Plan Benefits 13
3.6 Assisting in Drafting a Court Order 13
3.7 Assisting in Reviewing or Implementing a Court Order 13
3.7.1 Reviewing a Court Order 14
3.7.2 Assisting in Implementing a DRO 14
4.1 Audience 14
4.2 Conflict of Interest 15
4.3 General Disclosures 15
4.4 Actuarial Valuation Results 16
APPENDIXES

Measurement of Retirement Plan Benefits in Domestic Relations Actions 17
Division of Retirement Plan Benefits in Domestic Relations Actions 18
Appendix 2Illustrations of Allocation Methods 20

Basic Information 20
Direct Tracing Allocation Method 20
Fractional Rule Allocation Method 21
Allocation Method for Age- or Service-Dependent Benefits 21
Appendix 3Comments on the 1998 Second Exposure Draft and Committee Responses 23
iii
September 1999

Actuarial Standards Board and Other Persons Interested in Actuarial Practice
Concerning Retirement Plan Benefits in Domestic Relations Actions
This booklet contains the final version of ASOP No. 34, Actuarial Practice Concerning
Retirement Plan Benefits in Domestic Relations Actions.
Background
This standard has been prepared by the Pension Committee of the Actuarial Standards Board at
the request of the Actuarial Board for Counseling and Discipline (ABCD). The ABCD requested
that an actuarial standard of practice be developed because a number of cases involving this type
of practice had been referred to the ABCD.
Key Changes to First Exposure Draft
The first draft of a proposed standard was exposed for review in a document dated January 1998,
with a comment deadline of June 1, 1998. Twenty-seven comment letters were received. The
significant issues and questions contained in these letters, as well as the Pension Committee’s
responses to such, are summarized in appendix 3 of the second exposure draft.
The first exposure draft described two types of allocation methods—direct tracing and fractional
rule—and two approaches to allocating age- or service-dependent benefits—immediate
termination and continued employment. The draft solicited comments as to whether there were
additional methods or approaches that should be addressed by the standard, or whether the
standard of practice should prescribe the use of only one method or approach. The comment
letters did not describe any additional allocation methods or approaches to allocating age- or
service-dependent benefits. Some commentators felt that the standard should prescribe one
allocation method or approach, but overall there was no uniformity as to which method or
approach should be prescribed. Therefore, the second exposure draft, like the first, described two
basic allocation methods (acknowledging that there are numerous variations of these two
methods) and two approaches to allocating age- or service-dependent benefits.
The first exposure draft also asked for comment on the guidelines for selecting the discount rate,
mortality assumption, disability assumption, and assumptions regarding growth of individual
iv
account balances. The second exposure draft provided different guidance for selecting these
assumptions in response to the comments received.
Some commentators felt that the required communications and disclosures were excessive and
would increase the cost of providing actuarial services in domestic relations actions. However,
because the standard provides broad leeway with respect to allocation methods and assumptions,
the Pension Committee believes extensive disclosures are necessary to document an actuarial
valuation sufficiently to permit another actuary to make an objective appraisal of its
reasonableness and validity. The communications and disclosure requirements were essentially
unchanged from the first exposure draft to the second.
The second exposure draft of this actuarial standard of practice was issued in October 1998 with
a comment deadline of April 1, 1999. The Pension Committee carefully considered the thirteen
comment letters received. The key changes made to the final standard in response to these
comment letters are as follows:
1. Section 3.4.4, Providing Expert Testimony, was revised to remove the requirement that
the actuary state that a valuation prepared using dates, methods, or assumptions
prescribed by applicable law does not necessarily reflect the actuary's own expert
opinion, and to soften the wording generally.
2. The requirement to identify the legal jurisdiction assumed to govern the domestic
relations action was removed from section 4.3, General Disclosures, and added to section
4.4, Actuarial Valuation Results.
detailed discussion of the comments received and the Pension Committee's response.
suggestions on the first and second exposure drafts.
The Pension Committee would like to thank all who have made significant contributions to this
and earlier drafts of this standard of practice, including Arthur W. Anderson, C. Stephen Parker
Jr., Franklin E. Peters, and Kenneth A. Steiner.
v
Richard Joss, Chairperson

Lawrence Deutsch William Reimert
Bruce C. Gaffney Lawrence J. Sher
Lawrence Golden Diane M. Storm
Susan E. Lee James E. Turpin
Lindsay J. Malkiewich Joan M. Weiss*
Eric I. Palley Richard Q. Wendt
*Abstained from vote on this text.

vi
ACTUARIAL STANDARD OF PRACTICE No. 34
ACTUARIAL PRACTICE CONCERNING

RETIREMENT PLAN BENEFITS IN
DOMESTIC RELATIONS ACTIONS
a. provides guidance to actuaries who perform professional services concerning

retirement plan benefits in domestic relations actions;
b. amplifies those provisions of Actuarial Standard of Practice (ASOP) No. 17,

Expert Testimony by Actuaries, and ASOP No. 4, Measuring Pension
Obligations, that relate to actuarial practice concerning retirement plan benefits in
domestic relations actions; and
c. provides information to enhance understanding of the actuary’s role and

responsibilities, and of the factors that may affect the measurement, allocation, or
division of retirement plan benefits in domestic relations actions.
1.2 Scope—This standard applies to actuarial services performed in connection with the
measurement, allocation, or division of retirement plan benefits in domestic relations
actions. This standard is not applicable to actuarial services performed in connection with
other post-employment benefits, such as medical benefits, that may also be considered as
part of the domestic relations action.
To the extent that the guidance in this standard may conflict with ASOPs of a more
general nature, this standard will govern. If a conflict exists between this standard and
applicable law, compliance with applicable law is not considered to be a deviation from
this standard.
1
1.4 Effective Date—This standard will be effective for relevant assignments for which the
actuary is first engaged on or after March 31, 2000.
2.1 Actuarial Valuation—The determination, as of a measurement date, of the actuarial

present value of a retirement plan benefit and any related benefits.
2.2 Age- or Service-Dependent Benefits—Benefits for which the amount or timing of benefit
payments depends on the covered party’s age or length of service.
2.3 Allocation Date—The date through which the benefits earned during the marriage are
determined. Generally, this is the last day of the allocation period.
2.4 Allocation Method—A method used to determine the portion of retirement plan benefits
that is included in marital property.
2.5 Allocation of Retirement Plan Benefits—The allocation of retirement plan benefits into
two or more portions: a portion that is fully considered to be marital property and a
portion that is not marital property, and perhaps a portion that is determined to be
partially marital property.
2.6 Allocation Period—The period over which the benefits earned during the marriage are
determined. This is typically the period from the date of marriage (or, if later, the hire
date or plan entry date) to the date of marital separation.
binding authority that may govern the domestic relations action, the retirement plan or
plans, or any other aspect of the actuary’s engagement.
2.8 Covered Party—The party in a domestic relations action who is covered by the retirement
plan.
2.9 Direct User—A present or prospective client or employer who has the opportunity to
select the actuary and is able to communicate directly with the actuary about the actuary’s
qualifications, work, or recommendations.
2.10 Domestic Relations Action—Prenuptial, postnuptial, separation, divorce, and support

agreements, and other domestic relations proceedings.
2.11 Domestic Relations Order (DRO)—A court order dividing retirement plan benefits
between the covered party and spouse.
2
2.12 Judge—The judicial officer presiding over a domestic relations action, or an arbitrator,
mediator, or special master acting in a similar adjudicatory capacity.
2.13 Marital Property—Assets of the marital estate as determined under the laws and
regulations of the applicable jurisdiction.
2.14 Measurement Date—The date as of which the actuarial present value is determined. The
measurement date may be different from the allocation date.
2.15 Qualified Domestic Relations Order (QDRO)—A domestic relations order that satisfies
the qualification requirements of Internal Revenue Code (IRC) section 414(p) and section
206(d) of the Employee Retirement Income Security Act of 1974 (ERISA).
2.16 Retirement Plan—An employment-related arrangement for determining the amount and
timing of retirement plan benefit payments, eligibility for benefits, etc. A retirement plan
may be a defined benefit pension plan, a defined contribution plan, or a hybrid plan with
both defined benefit and defined contribution elements. It may be a plan qualified under
the IRC, a nonqualified plan of deferred compensation, or a governmental plan sponsored
by the United States or its agencies or a state or local government.
2.17 Spouse—A party to the domestic relations action who is not the covered party. Normally,
the term refers to the current spouse or former spouse of the covered party, but may on
occasion refer to a child (or children) or other party to the domestic relations action.
3.1 Overview—Section 3 provides specific guidance for actuaries who undertake one or
more of the following tasks in connection with a domestic relations action: performing
an actuarial valuation and preparing the related report (section 3.3); participating in
adversarial proceedings (section 3.4); providing information on the division of retirement
plan benefits (section 3.5); assisting in drafting a court order (section 3.6); and reviewing
or implementing a court order (section 3.7).
3.2 Initial Considerations—When undertaking an assignment concerning retirement plan

benefits in a domestic relations action, the actuary should do the following:
3.2.1 Identify the Client—One or more of the following parties may select the actuary
and shall be deemed to be the actuary’s client for purposes of this standard:
a. the covered party or his or her attorney;
b. the spouse, other interested party, or his or her attorney;
3
c. the judge presiding over the domestic relations action;
d. the court overseeing the domestic relations action; or
e. a retirement plan sponsor, administrator, or trustee.
3.2.2 Disclose Any Conflicts of Interest—The actuary should be alert to the possibility
of a conflict of interest and should disclose any actual or potential conflict of
interest to all known direct users. A conflict of interest exists whenever the
actuary’s objectivity, or duty owed to a client or employer, is impaired by
competing interests. A potential conflict of interest exists whenever it reasonably
appears that the actuary’s objectivity, or duty owed to a client or employer, may
be impaired by competing interests. For example, a potential conflict of interest
exists when the retirement plan’s enrolled actuary is retained on behalf of the
covered party, spouse, judge, or court. Similarly, a potential conflict of interest
exists when the actuary has previously performed professional services for or has
a personal relationship with the opposing attorney or any other party to the
domestic relations action. In these matters, the actuary should be guided by the
Code of Professional Conduct, Precept 8, Conflict of Interest.
3.2.3 Determine the Nature and Scope of the Engagement—The actuary should make
certain that he or she has a clear understanding of the scope of the actuary’s
engagement, and that the scope of the engagement is clearly communicated to the
client. For example, if the plan has retained the actuary to calculate the covered
party’s benefit amounts at various dates—as distinguished from being retained on
behalf of the covered party or spouse to value the benefit—then the actuary’s
communication and underlying work product should so indicate. Typically, the
engagement may include one or more of the following:
a. calculating the covered party’s accrued or projected benefit at various

dates;
b. selecting an allocation method;
c. selecting actuarial assumptions;
d. performing an actuarial valuation of retirement plan benefits;
e. participating in adversarial proceedings, including reviewing the work of

another expert in the domestic relations action, participating in
negotiations with another expert, assisting with the attorney’s case
preparation, and providing expert testimony as to the actuary’s opinion of
the value or appropriate allocation of retirement plan benefits;
f. providing information on the division of retirement plan benefits;
4
g. assisting in drafting a court order that will accomplish a division of
retirement plan benefits, including providing sample documents; or
h. assisting the plan sponsor or administrator in reviewing or implementing a

court order, including interpreting the provisions of the order or
expressing an opinion as to whether a DRO is a QDRO (or satisfies other
applicable requirements).
3.2.4 Avoid the Unauthorized Practice of Law—The actuary should be familiar with
the rules regulating the practice of law in the jurisdiction where the actuary will
be rendering the services and should avoid the unauthorized practice of law. For
example, normally it would be inappropriate for the actuary to advise a non-
attorney whether a draft court order meets applicable procedural requirements to
be a valid order in the jurisdiction. It would, however, be appropriate for the
actuary to advise whether the order is consistent with the terms of the retirement
plan and whether each party’s benefit is definitely determinable from the order.
3.2.5 Be Familiar with Applicable Law—The actuary should have a general familiarity
with applicable law that affects the actuary’s work product or opinion. If a
conflict exists between this standard and applicable law, compliance with
applicable law is not considered to be a deviation from this standard.
3.3 Actuarial Valuation—An actuarial valuation is required to determine the value of benefits
payable from a defined benefit pension plan that may be included in marital property.
Defined contribution plans have individual account balances and usually do not require
an actuarial valuation. However, an actuarial valuation may be required for a defined
contribution plan if the time or form of benefit payment is restricted or the benefits are
not yet fully vested. The goal of performing an actuarial valuation is to provide a
reasonable and objective assessment of the value of retirement plan benefits that are
marital property. While an actuarial valuation may be used in drafting a DRO, this
section does not apply to reviewing or implementing a DRO (see section 3.7).
To prepare an actuarial valuation, the actuary should do the following: identify and
collect the information required to determine the covered party’s retirement plan benefits;
select an allocation method, unless prescribed; select nonprescribed actuarial assump-
tions; and perform the computations. Each of these steps is described in more detail
below.
3.3.1 Information Requirements—The actuary is responsible for identifying and

collecting the information necessary for the actuarial valuation. Such information
will typically include the following:
5
a. the identity of the retirement plan(s) relevant to the engagement and each
plan’s circumstances—such as ongoing, frozen, or terminated; qualified,
nonqualified, or governmental;
b. relevant retirement plan provisions—including benefit formulas, eligibility

for participation and for benefit entitlement, ancillary benefits, early
retirement subsidies, and optional forms of payment;
c. covered party and spouse information—such as employment and plan

participation status (active, terminated, vested, disabled, retired);
compensation history; dates of birth, hire, plan participation, marriage,
separation, or other relevant dates; accrued retirement plan benefits; prior
domestic relations orders; and any special circumstances that might
materially affect the valuation results; and
d. measurement date—when the measurement date is selected by the actuary,

such date should be reasonable, and the actuary should be prepared to
justify the date selected.
The actuary may rely on information supplied by the attorney, plan sponsor, plan
administrator, covered party, spouse, or plan record keeper, but the actuary is
responsible for reviewing, when practicable, the reasonableness of the applicable
data. The actuary should disclose the data used, the source of the data, and any
data deficiencies that might materially affect the results.
3.3.2 Selecting an Allocation Method—When the actuary is responsible for selecting an

allocation method, the allocation method should be reasonable, and the actuary
should be prepared to justify the selection. The acceptability of a given allocation
method may depend on the legal jurisdiction applicable to the parties involved in
the action. The following provides the actuary additional guidance regarding the
selection of an allocation method.
a. Direct Tracing and Fractional Rule Methods—Where not restricted by

applicable law, either of the following two types of methods may be used:
1. Direct Tracing—The portion of the retirement benefit that is

marital property is equal to the actual benefit accrued during the
allocation period. For example, in applying direct tracing to a
defined benefit pension plan, the portion of the retirement benefit
included in marital property would generally be the increase from
the accrued (or vested) benefit, if any, at the marriage date to the
accrued (or vested) benefit at the allocation date.
2. Fractional Rule—The retirement benefit is allocated by

multiplying the retirement benefit by a fraction. The numerator and
6
denominator of the fraction may be based on compensation,
contributions, benefit accrual service, plan participation,
employment, or other relevant data that are used directly in the
determination of the accrued benefit. The numerator is equal to the
selected measure accrued during the allocation period. The
denominator is equal to the selected measure accrued during the
total period in which the benefit is earned. When the selected
measure is an elapsed time period, this method is commonly
referred to as the time rule.
Illustrations of the calculations involved in the above two methods are

included in appendix 2. Variations of these basic methods exist. The
actuary should provide a complete description of the method(s) utilized.
b. Age- or Service-Dependent Benefits—If the covered party has not

satisfied the applicable age or service conditions for certain benefits
provided in the plan but remains employed by the plan sponsor at the
allocation date, the actuary should determine how to allocate the age- or
service-dependent benefit. Unless otherwise required by applicable law,
acceptable approaches include the immediate termination approach, which
values the benefit as if the covered party terminated on the allocation date;
and the continued employment approach, which reflects continued
covered employment in accordance with selected retirement, turnover,
mortality, or disability assumptions.
c. Different Results from Different Methods—Different types of allocation

methods can produce significantly different results. An actuary working in
situations where different methods are used should educate his or her
client as to the differences between the methods and the general financial
impact of those differences.
3.3.3 Actuarial Assumptions—When selecting assumptions for an actuarial valuation of

retirement plan benefits in a domestic relations action, the actuary should consider
limitations imposed by applicable law and the facts and circumstances of the
valuation, including each relevant retirement plan’s circumstances and provisions;
information about the covered party and spouse (see section 3.3.1); and past
experience and future expectations for the group of which the covered party is a
member.
Each assumption selected by the actuary should be individually reasonable and

consistent with every other assumption selected by the actuary. The actuary
should be prepared to justify each assumption selected.
The following sections (a–j) describe assumptions commonly used in valuing

retirement plan benefits and factors that the actuary should consider in selecting
7
assumptions for valuing such benefits in domestic relations actions. This list is not
intended to be all-inclusive; additional assumptions may be required depending on
the provisions of the retirement plan being valued, specific circumstances of the
covered party or spouse, and unique requirements of the jurisdiction.
a. Discount Rate—Unless another assumption is clearly warranted by the

facts and circumstances, the discount rate selected for valuing retirement
plan benefits in domestic relations actions should be a low-risk rate of
investment return, determined as of the measurement date and based on
the cash-flow pattern of benefits being valued (for example, the current or
a recent average yield to maturity on U.S. Treasury bonds of comparable
duration, or a published index reflecting yield rates for high-quality
corporate bonds).
b. Mortality Assumption—A mortality table that is generally accepted for

valuing annuities or pension benefits, or a table that reflects the expected
mortality experience of plan participants, is generally appropriate.
However, in some cases it may be appropriate to adjust the mortality
assumption to reflect the health of the covered party or spouse.
c. Annuity Purchase—As an alternative to selecting a discount rate under

section (a), and a mortality assumption under section (b), the actuary may
assume the cost of the purchase of an immediate or deferred annuity
contract, as appropriate, from an insurance carrier. Typically, this may be
done by using an actual insurance survey or by reference to published
tables that are derived from such surveys.
d. Retirement Assumption—The retirement assumption may be a single

assumed retirement age or a table of retirement rates by age. The
retirement assumption should reflect the applicable facts and
circumstances, such as the following:
1. the plan’s normal retirement age;
2. the ages at which the covered party is first eligible to retire, to

receive subsidized early retirement plan benefits, to receive
unreduced retirement plan benefits, to receive Social Security
benefits, and to receive Medicare benefits;
3. plan participants’ average retirement age and retirement rates by

age (if known to the actuary), or norms as to retirement age in the
covered party’s industry or profession;
4. the availability of medical and other post-retirement plan benefits;
8
5. the level of total retirement plan benefits; or
6. the covered party’s income level, job position, and family

circumstances.
Statements made by the covered party or spouse as to anticipated

retirement age may also be considered, but should not be given undue
weight because such statements may be self-serving and the domestic
relations action itself may alter retirement planning decisions.
e. Cost-of-Living Adjustments—If the retirement plan automatically adjusts

benefits for increases in the cost of living, the actuarial valuation should
generally reflect expected future increases in benefits attributable to such
cost-of-living adjustments. In some cases, it may be appropriate to make
an assumption about future ad hoc cost-of-living adjustments.
f. Disability Assumption—A disability assumption may be required if the

plan provides special benefits upon disability and if including a disability
assumption would materially affect the valuation results. A disability table
that is generally accepted for use in valuing annuities or pension benefits,
or a table that reflects the expected disability experience of plan
participants, is generally appropriate. However, in some cases it may be
appropriate to adjust the disability assumption to reflect the health of the
covered party.
g. Turnover Assumption—An assumption as to the rate of participant

termination may be required if the benefit is not yet vested or the benefit
amount depends on future service. However, some jurisdictions permit
only involuntary termination to be reflected when valuing retirement plan
benefits in domestic relations actions. The turnover assumption should
reflect the specific facts and circumstances, such as the following:
1. the actual or expected turnover experience of plan participants (if

known to the actuary);
2. the covered party’s age and service;
3. the covered party’s job position; and
4. plan provisions such as the age and service required to receive

subsidized early retirement plan benefits.
h. Compensation Scale—While it is common for the actuarial valuation of

retirement plan benefits in domestic relations actions to reflect
compensation through the allocation date only, some methods, and some
9
jurisdictions, require the actuary to consider future levels of compensation.
For example, a compensation scale may be appropriate when the
retirement plan automatically adjusts accrued retirement plan benefits
based on compensation increases for the covered party’s last position, title,
or pay grade, regardless of whether the covered party remains employed.
i. Growth of Individual Account Balances—Some retirement plan benefits

have components directly related to the accumulation of real or
hypothetical individual account balances (including defined contribution
plans, floor-offset arrangements, and cash balance pension plans). An
assumption regarding the future investment return earned by the actual or
hypothetical accounts may be required to value benefits under such plans.
Unless another assumption is clearly warranted, this assumed rate of
investment return should generally equal the discount rate.
j. Variable Conversion Factors—Valuing certain retirement plan benefits

may require converting from one payment form to another, such as
converting a projected individual account to an annuity or converting an
annuity to a lump sum. If the conversion basis is variable (for example,
recalculated each year based on a stated mortality table and an interest rate
equal to the yield on 30-year Treasury bonds), an assumption regarding
future conversion rates may be required.
3.3.4 Valuation Process—An actuarial valuation should generally involve the following
steps:
a. identify the measurement date, the allocation date, the allocation period,
potential retirement plan benefits, the contingencies that may affect
payment of those benefits, and any special requirements of the applicable
legal jurisdiction;
b. project the timing and amounts of potential benefit payments, applying the
selected or prescribed allocation method and applicable economic
assumptions, and assuming that any required contingencies are met;
c. calculate expected payments by multiplying each potential benefit

payment determined in section (b) by the probability that the required
contingencies are met, and applying the selected or prescribed
demographic and other assumptions; and
d. discount the expected payments determined in section (c) back to the

measurement date, using the selected or prescribed discount rate.
10
3.3.5 Computing After-Tax Values—In some cases, the actuary may be asked for an
opinion of the “after-tax” actuarial present value of retirement plan benefits. If the
actuary has sufficient training or experience, the actuary may prepare such
calculations even though the actuary may not be a credentialed tax practitioner.
Responding to such requests will generally involve making a number of
additional assumptions, such as the potential rate of taxation of retirement plan
benefit payments and the tax rate applicable to investment returns. The actuary
should disclose such assumptions and be prepared to justify each assumption.
3.3.6 Prescribed Dates, Methods, and Assumptions—Applicable law may specify or

restrict the measurement date, the allocation date, the allocation method, some or
all of the actuarial assumptions, or the process the actuary should use to select the
measurement date, allocation date, allocation method, or actuarial assumptions. In
other situations, the parties to the domestic relations action may stipulate or
request the use of alternative measurement dates, allocation dates, allocation
methods, some or all assumptions, or the selection process. In such jurisdictions
or situations, the actuary should use the prescribed measurement date, allocation
date, allocation method, actuarial assumptions, or selection process. Each
nonprescribed date, method, and assumption selected by the actuary should be
reasonable and consistent with every other nonprescribed assumption selected by
the actuary, and the actuary should be prepared to justify each selection. When the
actuary uses a prescribed measurement date, allocation date, allocation method,
actuarial assumptions, or selection process, the actuary should disclose the
prescribed items and the source. The actuary may also choose to present results
using the actuary’s own best-estimate dates, methods, and assumptions in addition
to providing the results using the prescribed dates, methods, and assumptions.
3.3.7 Consistency with the Actuary’s Previous Actuarial Valuations—The actuarial

valuation should be objective and reasonable. Unless the dates, methods, or
assumptions are prescribed, or the facts and circumstances dictate otherwise, the
actuary should generally use the same process to select dates, methods, or
assumptions for all actuarial valuations in the same jurisdiction. The actuary
should not select different dates, methods, or assumptions than the actuary would
ordinarily use solely to accommodate the litigation position of the actuary’s client.
If the actuary uses a different selection process, the actuary should be prepared to
explain the change from the actuary’s previous selection process in the same
jurisdiction.
3.4 Participating in Adversarial Proceedings—When participating in adversarial proceedings,

the actuary’s responsibilities may include the following:
3.4.1 Reviewing the Work of Another Expert—The actuary participating in adversarial

actions may be asked to review the work of another expert. The actuary should
conduct this review objectively, in terms of the reasonableness of the other
expert’s opinion, rather than solely in terms of whether it agrees or disagrees with
11
the actuary’s own opinion. In reviewing another expert’s work, the actuary should
generally follow the steps below:
a. review the basic facts of the situation used by the other expert (see section
3.3.1);
b. review the allocation date, allocation method, and actuarial assumptions

used;
c. determine whether any material computational errors have occurred;
d. summarize the findings with respect to sections (a), (b), and (c) that would
have a significant impact on the valuation results; and
e. report these findings to the client, including the actuary’s assessment of

the reasonableness of the other expert’s opinion.
The actuary should be aware that the parties may use these findings to form an
opinion on whether to litigate or settle the issue of retirement values, and should
therefore strive neither to minimize legitimate differences of opinion nor to
magnify immaterial differences.
3.4.2 Submitting Work for Review by Another Expert—The actuary participating in

adversarial actions may be asked to submit work for review by another expert.
The actuary should not submit work for review without the express consent of the
client or the client’s authorized representative. The actuary should request
guidance from the client as to the scope of material that may be disclosed. To the
extent authorized, the actuary should be prepared to disclose the type of infor-
mation described in section 3.4.1. Any authorized contact should be conducted in
accordance with the Code of Professional Conduct, Precept 11, Courtesy and
Cooperation.
3.4.3 Participating in Negotiations with Another Expert—The actuary may be asked to

participate in negotiations with another expert to identify any differences (see
section 3.4.1), and, possibly, to settle on a compromise value to which the parties
can stipulate, thus avoiding litigation costs. The actuary should request guidance
from the client as to the scope of the actuary’s negotiating authority and the scope
of material that may be disclosed. The client has the ultimate responsibility for
any agreed-upon positions. The result of such negotiation with another expert
might be a suggested stipulation or a list of irreconcilable positions that must be
resolved.
3.4.4 Providing Expert Testimony—The actuary participating in adversarial

proceedings may be asked to provide expert testimony. The actuary undertaking
such an engagement should be familiar with, and comply with, all relevant
12
actuarial standards of practice and general standards for the conduct of
professional practice. Before providing expert testimony, the actuary should
review data, materials, and documents that are relevant to the subject on which
the actuary is expected to testify.
When testifying as to the differences between the actuary’s opinion and another
expert’s opinion, the actuary should do so factually. For example, such testimony
may take the following forms:
a. showing that data currently available call into question a key assumption,
method, or conclusion of the other expert;
b. showing that the two conclusions do not conflict as much as they appear
to, or that the difference is not material;
c. showing what kinds of data may become available in the future to support
one or the other set of assumptions or conclusions; or
d. showing the effects of different dates, methods, or assumptions.
3.5 Providing Guidance on the Division of Retirement Plan Benefits—The actuary may be
retained by an attorney or the court to provide guidance on alternative methods available
for the division of retirement plan benefits between the covered party and spouse. In this
situation, the actuary should be generally knowledgeable about (1) methods for the
division of retirement plan benefits that are available in the jurisdiction; and (2) the types
of court orders available for the division of retirement plan benefits under each retirement
plan considered in the domestic relations action, and the differences between these
various types of court orders (see appendix 1 for a discussion of the types of court orders
available).
3.6 Assisting in Drafting a Court Order—When retirement plan benefits are to be directly
divided or assigned by court order, the actuary may be retained to assist in drafting a
court order that will accomplish the desired division of retirement plan benefits. Such
assistance may include providing sample documents and calculating benefits payable
under different payment schemes.
The actuary assisting in drafting a court order should take into account early retirement
subsidies and ancillary benefits available under the retirement plan as appropriate. The
actuary should suggest that the proposed language unambiguously define the benefit
amount payable to each party and that relevant contingent events, such as the covered
party’s death before retirement or the covered party’s retirement after becoming eligible
for subsidized early retirement plan benefits, be appropriately considered.
3.7 Assisting in Reviewing or Implementing a Court Order—When retirement plan benefits

are to be directly divided or assigned by court order, the actuary may be retained by the
13
plan sponsor or administrator to assist in reviewing or implementing the court order, as
described below. Services provided by the actuary may include interpreting the
provisions of the order or expressing an opinion as to whether a DRO is a QDRO or
satisfies such other requirements as may apply to the specific type of court order and
retirement plan (see section 3.5).
3.7.1 Reviewing a Court Order—To be a QDRO, a domestic relations order must

satisfy the qualification requirements of IRC section 414(p) and ERISA section
206(d). The actuary may offer an opinion as to whether a particular order meets
the qualification requirements. However, the actuary should bear in mind that one
of the requirements is that the division of retirement plan benefits must be
pursuant to a judgment, decree, or order under the domestic relations law of a
state. If the order being reviewed fails to meet the procedural requirements of the
court, it may not be a valid court order. The question of whether the proposed
order meets the state’s procedural requirements is a legal one and is beyond the
qualifications of actuaries who are not also attorneys.
The actuary’s opinion as to whether a DRO is a QDRO or satisfies such other

requirements as may apply to the specific type of court order and retirement plan
should clearly state the scope of such opinion. For example, if the opinion is
limited to an examination of the technical content of the order and does not extend
to the legal form of the order, the opinion should so state. If the actuary’s opinion
is intended to cover both the technical content and the legal form of the order, the
actuary should beware of possible unauthorized practice of law (see section
3.2.4).
3.7.2 Assisting in Implementing a DRO—The plan sponsor or administrator

responsible for implementing a DRO may retain the actuary to determine the
benefit amount payable to the spouse or covered party in the various forms of
payment available under the provisions of the plan, the DRO, and other governing
document(s). This may include determining the amount of actuarially equivalent
optional forms of payment in accordance with the plan provisions (including the
plan’s definition of actuarial equivalence) and any relevant applicable law. If the
terms of the DRO or retirement plan are ambiguous, if the plan is silent, or if the
DRO and plan conflict, the actuary may offer an opinion as to the appropriate
interpretations or resolutions. However, the plan administrator or other authorized
plan representative must make the final determination of the benefit amount that
will be paid.
4.1 Audience—In reporting the results of the actuary’s work, the actuary should consider the
background of the likely audience and should explain technical terms and concepts so
that they can be understood by the likely audience. For example, a report made to an
14
attorney experienced in the measurement, allocation, and division of retirement plan
benefits in domestic relations actions might presuppose more actuarial knowledge than a
report that is to be made part of the court record.
4.2 Conflict of Interest—The actuary should make full disclosure of any actual or potential
conflict of interest to all known direct users. Such disclosure should generally occur
before the actuary accepts the engagement or as soon as practicable after the date the
actuary learns of the actual or potential conflict of interest, if later.
4.3 General Disclosures—Any communication of actuarial findings, conclusions, or

recommendations concerning retirement plan benefits in domestic relations actions
should include at least the following:
a. the name of the actuary responsible for the communication;
b. the identity of the client who has retained the actuary to provide services in
connection with the domestic relations action and the identities of the parties to
the domestic relations action;
c. a description of the actuary’s role and the nature and scope of the actuary’s
engagement, including the scope of any statement of actuarial opinion;
d. the name of the retirement plan, description of the retirement plan’s

circumstances, and a summary of key provisions or other relevant plan
information affecting the measurement, allocation, or division of the retirement
plan benefit;
e. covered party and spouse information that the actuary used when performing the
services;
f. the source of any information supplied by others and the extent of the actuary’s
reliance on that information;
g. data deficiencies that might materially affect the results, opinion, or advice being
communicated;
h. a statement of the findings, conclusions, or recommendations necessary to satisfy

the purpose of the communication and a summary of the actuarial determinations
upon which these are based; and
i. any facts that, if not disclosed, might reasonably be expected to lead to a

materially incomplete understanding of the communication.
15
4.4 Actuarial Valuation Results—The actuary’s communication of the results of an actuarial
valuation of retirement plan benefits, as described in section 3.3, should include sufficient
detail to allow another actuary to make an objective appraisal of the reasonableness and
validity of the actuarial valuation. In addition to the items described in section 4.3, the
actuary’s communication of actuarial valuation results should include at least the
following information:
a. the identity of the legal jurisdiction assumed to govern the domestic relations
action, if applicable;
b. the measurement date;
c. a description of the allocation method, including the allocation date and allocation
period; a description of the benefit being allocated (for example, the vested
accrued benefit, the accrued benefit, the employer-provided benefit, or projected
retirement plan benefits); a description of the allocation procedure and the unit of
measure (for example, fractional rule, based on years of employment); a
description of the allocation of age- or service-dependent benefits; and a
description of any adjustments made to reflect limits on benefit accruals or
varying benefit accrual rates under the benefit formula;
d. a description of the benefits being valued (including applicable ancillary benefits)

and any significant benefits of which the actuary has knowledge that are not
included in the actuarial valuation;
e. a description of each actuarial assumption; and
f. the source of any prescribed measurement date, allocation date, allocation

method, actuarial assumption, selection process, or other prescribed item that has
a material effect upon the actuarial valuation results.
If the actuary has used a prescribed measurement date, allocation date, allocation method,
actuarial assumption, selection process, or other prescribed item, the communication
should so disclose. The actuary may also choose to disclose results that represent the
actuary’s own opinion as to the value of the retirement plan benefits.
4.5 Prescribed Statement of Actuarial Opinion—Any communication of the type described in

section 4.4 of this ASOP shall be deemed to be a prescribed statement of actuarial
opinion (PSAO) as described in the Qualification Standards for Prescribed Statements of
Actuarial Opinion of the American Academy of Actuaries.
16
Appendix 1
practice.
Measurement of Retirement Plan Benefits in Domestic Relations Actions
State statutes governing domestic relations actions generally take one of three approaches to the
division of marital property:
1. Under the common-law approach, any particular asset is generally awarded to the party
who contributed the asset to the marriage. In the case of retirement plan benefits, the
entire retirement plan benefit is generally awarded to the covered party. Thus, there is
generally no need for an actuarial valuation of the retirement plan benefit in a common-
law state.
2. Under the community-property approach, all assets accumulated during the marriage are
subject to division between the parties. This approach may require a monetary value to be
placed on retirement plan benefits.
3. The equitable-distribution approach is a less rigid approach that gives some weight to
assets contributed to the marriage and some weight to other criteria, such as the length of
the marriage. This approach may require a monetary value to be placed on retirement
plan benefits.
Determining the actuarial present value of retirement plan benefits that are marital property
typically involves the following steps:
1. identify the measurement date, the allocation date, the allocation period, potential
retirement plan benefits, the contingencies that may affect payment of those benefits, and
any requirements applicable in the legal jurisdiction;
2. project the timing and amounts of potential benefit payments (which may be contingent
upon the occurrence of specified events), applying the selected or prescribed allocation
method and applicable economic assumptions, and assuming that any required
contingencies are met;
3. calculate expected payments by multiplying each potential payment determined in (2) by

the probability that the required contingencies are met, and applying the selected or
prescribed demographic and other assumptions; and
17
4. discount the expected payments determined in (3) back to the measurement date, using
the selected or prescribed discount rate.
Step (2) entails the determination of the portion of the benefit payments that is marital property.
This determination is made as of an allocation date by means of an allocation method. In general,
allocation methods may be characterized as either direct tracing methods or fractional rule
methods, as described in section 3.3.2 and illustrated in appendix 2. In many jurisdictions, the
allocation date and method have been established by applicable law; in others there is no legally
prescribed approach, and the allocation date or method may be an issue in the domestic relations
action.
Steps (2) through (4) require a measurement date and a number of different actuarial assumptions
(see section 3.3.3). In some legal jurisdictions, applicable law prescribes the measurement date
and certain actuarial assumptions, such as the discount rate, mortality table, and retirement
assumption. Similarly, applicable law may prohibit the use of certain types of actuarial
assumptions, such as a compensation scale or voluntary turnover assumption. In some
jurisdictions, the process the actuary must use to select the assumptions is prescribed; for
example, the actuary might be required to assume that retirement occurs at the age at which the
retirement plan benefit is most valuable. In other jurisdictions, there are no legally prescribed or
prohibited actuarial assumptions, measurement dates, or selection methods.
Because of the widely divergent approaches prescribed by or available in different jurisdictions,

it is clear that there can be no uniform national approach to the actuarial valuation of retirement
plan benefits. In many parts of the country, the law in this field is still evolving, while elsewhere
there are governing statutes or a substantial body of established precedent. Where choice of
method or assumption is allowed by law, a wide difference can exist between the values
computed by different actuaries—a difference that may be attributable not to errors on the part of
either actuary, but to legitimate differences of opinion as to the appropriate measurement date,
allocation date, allocation method, or actuarial assumptions.
Division of Retirement Plan Benefits in Domestic Relations Actions
Alternative methods for the division of retirement plan benefits that are marital property may
include the award of the retirement plan benefits to one party, with other marital property
awarded to the other party, as well as the direct division of the retirement plan benefits of either
party by an appropriate court order.
The types of court orders available may include the following:
1. a QDRO for a retirement plan covered by ERISA;
2. a qualifying court order for a federal government retirement plan, such as the Civil
Service Retirement System, the Federal Employees’ Retirement System, the Federal
Thrift Savings Plan, and military retirement systems;
18
3. a court order mandated by local law for the division of retirement plan benefits earned
under a retirement plan sponsored by a state, county, municipality, school district, or
other governmental entity; or
4. a court order dividing benefits earned under a nonqualified retirement plan.
For certain types of retirement plans, there may be no provision in the law to permit division or
assignment by court order.
19
Appendix 2
Illustrations of Allocation Methods
practice.
Basic Information
The plan provides a retirement plan benefit equal to 1% of the final year’s compensation
multiplied by years of service. Accrued benefits vest after 5 years of service, and participants are
eligible to retire early at age 55 if they have completed 10 years of service. Normal retirement is
at age 65. The covered party joined the plan at age 25, was married at age 29, and is age 40 at the
allocation date. The covered party’s historical service, compensation, accrued benefit, and vested
accrued benefit are shown in the following table.
Completed Vested
Years of Prior Plan Year’s Accrued Accrued
Age Service Compensation Benefit Benefit
26 1 $11,500 115 0
27 2 $12,500 250 0
28 3 $14,000 420 0
29 4 $14,500 580 0
30 5 $15,000 750 750
31 6 $15,500 930 930
32 7 $16,750 1,173 1,173
33 8 $18,000 1,440 1,440
34 9 $19,000 1,710 1,710
35 10 $20,000 2,000 2,000
36 11 $23,500 2,585 2,585
37 12 $25,000 3,000 3,000
38 13 $27,500 3,575 3,575
39 14 $29,000 4,060 4,060
40 15 $33,000 4,950 4,950
Direct Tracing Allocation Method
In the direct tracing method, the portion of the retirement plan benefit that is often considered to
be marital property is equal to the actual benefit accrued during the allocation period (typically
the period from the date of marriage to the allocation date). For example, in applying direct
tracing to a defined benefit pension plan, the portion of the retirement plan benefit included in
marital property would generally be the increase from the accrued benefit, if any, at the marriage
date to the accrued benefit at the allocation date. If the direct tracing method were applied to the
data given in the table above, subtracting the $580 accrued benefit at the date of marriage from
20
the $4,950 accrued benefit at the allocation date would give the portion of the accrued benefit
that is marital property: $4,370.
Alternatively, the direct tracing method could be applied to the covered party’s vested accrued
benefit. Under this approach, the entire $4,950 is marital property because the vested accrued
benefit was $0 at the date of marriage.
Fractional Rule Allocation Method
The fractional rule method allocates the retirement plan benefit by multiplying the retirement
plan benefit by a fraction. The fraction may be based on compensation, contributions, benefit
accrual service, plan participation, employment, or other relevant historical data. The numerator
is equal to the selected measure accrued during the allocation period (typically the period from
the date of marriage to the allocation date). The denominator is equal to the selected measure
accrued during the total period in which the retirement plan benefit is earned. When the selected
measure is an elapsed time period, this method is commonly referred to as the time rule.
If the fractional rule method based on benefit accrual service were applied to the data in the table
above, the $4,950 accrued benefit at the allocation date would be multiplied by the fraction (11 ÷
15) because the covered party was married for 11 of the 15 years over which the benefit was
accrued. The portion of the accrued benefit that is marital property is $3,630.
If the fractional rule method were based on compensation instead, the numerator of the fraction
would be compensation earned from the date of marriage to the allocation date ($242,250), and
the denominator would be the covered party’s total compensation earned from employment date
to the allocation date ($294,750).
When the $4,950 accrued benefit is multiplied by the fraction ($242,250 ÷ $294,750), the
portion of the accrued benefit that is considered to be marital property is $4,068.
Allocation Method for Age- or Service-Dependent Benefits
Under both the direct tracing and fractional rule allocation methods, the allocation of age- or
service-dependent benefits must be defined. Age- or service-dependent benefits are benefits for
which the amount or timing of benefit payments depends on the covered party’s age or length of
service. Subsidized early retirement plan benefits are often age- or service-dependent. For
example, a retirement plan might provide that the benefit payable upon early retirement at age 55
is 100% of the accrued benefit if the participant has completed at least 25 years of service, and
50% of the accrued benefit otherwise.
If the covered party has not satisfied the eligibility requirements at the allocation date but
remains employed by the plan sponsor, alternative approaches are available. One approach
would exclude from marital property any age- or service-dependent benefit that is available only
21
if the covered party remains employed after the allocation date. A second approach would
include such benefits in marital property under the assumption that the covered party will remain
employed by the plan sponsor until eligibility conditions for the higher benefit level are satisfied.
These two approaches may produce quite different results. Under the early retirement provision
described above, including the value of the 25-years-of-service subsidy in marital property could
double the value of the retirement plan benefit.
As these examples illustrate, retirement plan benefits included in marital property can vary
substantially depending on the allocation method used. This highlights the importance of the
point raised in the last paragraph of section 3.3.2. An actuary working in an adversarial situation
where different approaches have been proposed or used should inform the actuary’s client of the
nature of those differences and the financial consequences of choosing one approach over
another.
22
Appendix 3
Comments on the 1998 Second Exposure Draft and Committee Responses
The second exposure draft of this proposed actuarial standard of practice (ASOP) was issued
October 1998, with a comment deadline of April 1, 1999. (Copies of the first exposure draft, and
the second exposure draft, which contains comments on the first, are available from the ASB
office.) Thirteen comment letters were received. The Pension Committee of the ASB carefully
considered all comments received. Summarized below are the significant issues and questions
contained in the comment letters, printed in standard type. The committee’s responses to these
issues and questions appear in boldface.
General Comments
A number of commentators expressed the view that the second exposure draft was an
improvement over the first exposure draft.
A number of comments were received that clearly reflected practices and rules relating to only
certain jurisdictions. The committee feels strongly that the standard must be relevant to all
jurisdictions. Therefore, the text was not changed.
One commentator felt that the standard should include an explicit discussion of remarriage rates.
The committee believes that a detailed discussion of remarriage rates would be beyond the
scope of the standard.
In the transmittal memorandum for the second exposure draft, the committee requested comment
on the following:
1. Does the text added to sections 3.3.3(b), Mortality Assumption, and 3.3.3(f), Disability
Assumption, regarding the health of the covered party and spouse, place an unreasonable
burden on the actuary to inquire as to the health of the covered party and spouse and
make underwriting judgments based on this information?
2. Does the revised text of section 3.3.3(i), Growth of Individual Account Balances,
adequately address the valuation of cash balance plans and floor-offset arrangements?
There was little direct reply to these questions. One commentator did approach the issue by
describing his practice of cursory investigation of health factors when making mortality
assumptions for section 3.3.3(b), but did not seem to feel that the standard was imposing
additional burden.
23
One commentator expressed approval of section 3.3.3(i) in its present form. The committee
accordingly made no substantive changes in these sections.
Section 1. Purpose, Scope, and Effective Date (now titled Purpose, Scope, Cross References,
and Effective Date)
Section 1.4, Effective Date—One commentator felt that a three-month lag between Board
approval and required implementation was not long enough for the profession to adjust to the
changes. The committee agreed and changed the effective date to March 31, 2000.
One commentator requested clarification on whether the effective date refers to the performance
of the assignment or to the engagement for the assignment. The committee modified the
wording to clarify that the standard refers to the time when the actuary is first engaged to
perform an assignment and does not refer to the time the work is performed.
Section 2.6, Allocation Period—One commentator suggested substituting coverage period for
allocation period. Since the coverage period is not always the allocation period, the
committee chose to retain the term allocation period as defined.
Section 2.17, Spouse—One commentator objected to the nonstandard use of the term spouse to
include children. This definition also received comment after the first exposure draft. On
revisiting the issue, the committee reworded the definition to improve clarity, but retained
a “nonstandard”usage.
Section 3.2.2, Disclose Any Conflicts of Interest—As after the first exposure draft, a number of
letters again reflected concern about the broad language dealing with personal relationship and
conflicts of interest. Some new language was suggested. The committee discussed the matter
at some length, but ultimately decided not to change the language. The committee notes
that the term personal relationship is not intended to encompass casual acquaintance.
Section 3.2.3, Determine the Nature and Scope of the Engagement—One letter suggested that
paragraph (g) be amended to indicate that the actuary was assisting legal counsel. The
committee did not agree. The actuary may be assisting a court or judge.
Section 3.2.5, Be Familiar with Applicable Law—One commentator suggested that applicable
law be expanded to include significant case law. The committee noted that applicable law, as
defined in section 2.7, already includes case law.
One commentator asked whether the discussion of assumption selection applies to calculations of
the final annuity benefit amounts payable from a plan under a QDRO. The commentator
expressed the opinion that this discussion should not apply to such calculations, because the
24
terms of the plan, including its provisions regarding the basis of actuarial equivalence, would
govern these calculations. The committee agreed and added language to clarify that this
section does not apply to the review or implementation of a DRO.
Section 3.3.1, Information Requirements—One commentator suggested more general language

to avoid suggesting that the list of circumstances was fixed. The committee edited the text to
clarify that the list is not all-inclusive.
One letter suggested adding the phrase that are within the actuary’s purview to judge after the
phrase the actuary is responsible for reviewing, when practicable, the reasonableness of the data
supplied. The committee believes that the current text gives the actuary sufficient discretion
regarding data review.
One commentator argued that the direct tracing allocation method ought to be the only one
endorsed. The committee disagreed and maintained the inclusion of the fractional rule
method. The committee had reached a similar decision earlier, in response to comments on
the first exposure draft.
Section 3.3.3(a), Discount Rate—One letter suggested replacing the words low-risk with risk-
appropriate, implying that investment aggressiveness or investment acumen of the covered party
or spouse is a factor to be considered. The committee disagrees. References to facts and
circumstances are intended to be references to the nature of the plan and its provisions, not
references to the investment expertise of a covered party or spouse.
Section 3.3.3(b), Mortality Assumption—One commentator wanted the leeway to choose the
mortality table to use. The committee believes that the text gives the actuary the leeway to
choose the mortality table.
One commentator invited the committee to make a choice between unisex mortality tables and
sex-specific tables, and also suggested replacing the word participant with covered party in the
last line. The committee declined to take a stance on mortality table preference, but agreed
to adopt the wording suggested.
Section 3.3.3(c), Annuity Purchase—One commentator questioned the use of commercial

annuity purchase rates as an alternative to explicit selection of mortality and discount rates. This
commentator considers it inappropriate to use rates loaded for expenses and profits. The
committee decided not to exclude this generally accepted alternative to explicit selection of
mortality and discount rates.
Section 3.3.3(d), Retirement Assumption—One letter suggested that section 3.3.3(d)(5) be

amended to specifically take into account when the receipt of retirement benefits is most
valuable. The committee believes that the current text encompasses this concept.
25
One commentator objected to the idea that statements concerning anticipated retirement age
should not be given undue weight and instead called for the “utmost respect” for such statements.
The committee disagreed.
Section 3.3.3(e), Automatic Cost-of-Living Adjustments (now titled Cost-of-Living

Adjustments)—One commentator disagreed with the idea that it might sometimes be appropriate
to assume future ad hoc cost-of-living adjustments. The committee did not clarify the
circumstances under which it might be acceptable to assume a nonautomatic cost-of-living
increase, but the title of the section was changed to show that both automatic and
nonautomatic cost-of-living increases are covered.
Another commentator noted that the word however at the beginning of the last sentence
suggested a contrast that was not present. The committee agreed and deleted the word.
Section 3.3.3(h), Compensation Scale—One commentator suggested that the standard include a
direct reference to the Social Security Administration wage index. The committee declined to
make a change in this section.
One letter suggested that the section was too limiting and suggested language similar to that used
in the first exposure draft. The committee expressed satisfaction with the current language.
Section 3.3.4, Valuation Process—One commentator wanted codification of the procedure of

looking to the plan assumptions and methods, suggesting that the standard’s requirements would
introduce too much subjectivity. The committee considers it inappropriate in this context to
calculate present values by automatically using assumptions inherent in the plan’s basis of
actuarial equivalence. As stated in section 3.3, the goal of performing an actuarial valuation
is to provide a reasonable and objective assessment of the value of retirement benefits that
are marital property. The plan’s actuarial equivalence basis may or may not be reasonable
or appropriate for the specific circumstances.
Section 3.3.5, Computing After-Tax Values—One letter expressed concern that this section, as
well as the standard as a whole, would be interpreted as prohibiting the actuary from providing
services in this area. The committee does not believe the standard is open to this narrow
construction.
Section 3.3.7, Consistency with the Actuary’s Previous Actuarial Valuations—One commentator
objected to, and others expressed concern about, the requirement of consistency because it limits
the ability of the actuary to advocate for the client. This topic also received comment after the
first exposure draft. The committee reviewed the matter extensively and reiterated its
strong position that the credibility of the profession is paramount. The committee made no
changes.
Section 3.4.4, Providing Expert Testimony—One letter objected to the requirement that the
actuary state when a valuation prepared using dates, methods, or assumptions prescribed by
applicable law does not necessarily reflect the actuary’s own expert opinion. After much
26
discussion, the committee agreed, removed the requirement, and softened the wording
generally.
Section 3.5, Providing Guidance on the Division of Retirement Plan Benefits—One

commentator suggested raising the standard of required actuarial expertise to include knowledge
about the “tax consequences of various approaches to division of retirement plan benefits.” The
committee did not agree.
Section 4.3, General Disclosures—A number of letters protested that disclosure requirements
were unnecessarily onerous. The first exposure draft met a similar response. The committee
agreed with those commentators who argued that disclosing the legal jurisdiction was not
necessary for services such as reviewing or implementing a DRO. Section 4.3(e) was moved
to become section 4.4, Actuarial Valuation Results, subparagraph (a), and the phrase if
applicable was added at the end (after domestic relations action). The remaining
subparagraphs were renumbered accordingly, as were the subparagraphs of section 4.4.
27
Actuarial Standard
of Practice
No. 35
Selection of Demographic and

Other Noneconomic Assumptions
for Measuring Pension Obligations
Revised Edition
Developed by the
Adopted by the
September 2007
(Doc. No. 110)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Assumption Format 2
2.2 Assumption Universe 2
2.3 Demographic Assumptions 3

3.1 Overview 3
3.2 Types of Demographic Assumptions 3
3.3 Demographic Assumption Selection Process 4
3.3.1 Identify the Types of Assumptions 4
3.3.2 Consider the Relevant Assumption Universe 4
3.3.3 Consider the Assumption Format 5
3.3.4 Select the Specific Assumptions 5
3.3.5 Evaluate Reasonableness of the Selected Assumptions 6
3.4 Individual Assumptions 7
3.5 Specific Considerations 7
3.5.1 Retirement Assumption 7
3.5.2 Termination of Employment Assumptions 7
3.5.3 Mortality Assumption 7
3.5.4 Disability and Disability Recovery Assumption 8
3.5.5 Optional Form of Benefit Assumption 8
3.6 Other Demographic Assumptions 8
3.6.1 Administrative Expenses Charged to the Plan 8
3.6.2 Household Composition 9
3.6.3 Marriage, Divorce, and Remarriage 9
3.6.4 Open Group 9
3.6.5 Hours of Service 9
ii
3.6.6 Transfers and Return to Employment 9

3.6.7 Missing or Incomplete Data 9
3.7 Consistency Among Demographic Assumptions Selected by the Actuary 10
3.8 Prescribed Assumptions 10
3.9 Reviewing Assumptions 10
3.10 Other Considerations 10
3.10.1 Materiality 10
3.10.2 Cost Effectiveness 10
3.10.3 Combined Effect of Assumptions 11
3.10.4 Knowledge Base 11
3.10.5 Advice of Experts 11

4.1 Disclosures 11
4.1.1 Assumptions Used 11
4.1.3 Changes in Circumstances 12
4.2 Prescribed Assumptions 12
4.3 Required Government Forms 12
4.4 Deviation 12

Background 13
iii
September 2007

Actuarial Standards Board and Other Persons Interested in the Selection of
Demographic and Other Noneconomic Assumptions for Measuring Pension
Obligations
This document contains the final version of the revision of Actuarial Standard of Practice No.
35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension
Obligations.
Background
2. This ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for
3. ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations; and
iv
ASOP No. 35
The Actuarial Standards Board adopted ASOP No. 35 in 1999 as one of several standards
designed to provide guidance on key elements in measuring pension obligations.
The original ASOP No. 35 contained a statement to the effect that, in case of a conflict between
the guidance in ASOP No. 35 and ASOP No. 4, ASOP No. 35 will govern. However, the ASB
has adopted a revision of ASOP No. 4 and intends that the revision of ASOP No. 4 should
govern in any such conflicts.
The revision of ASOP No. 4 conflicted with the original ASOP No. 35 in one substantive way,
its treatment of prescribed assumptions selected by the plan sponsor. The ASB released an
exposure draft highlighting proposed wording changes that would resolve the conflict regarding
which standard governs.
The original ASOP No. 35, including the Transmittal Memorandum and the appendix that
summarized the significant issues and questions received in response to the exposure draft and
the Pension Committee’s responses, can be found on the ASB website among the “Superseded
Standards.”
Exposure Draft
The exposure draft of this revision was issued in March 2005 with a comment deadline of
October 31, 2005. The Pension Committee reviewed the three comment letters received and
concluded that they raised no substantive issues. There were no significant changes from the
exposure draft.
suggestions on the exposure draft.
v


vi
SELECTION OF DEMOGRAPHIC AND

OTHER NONECONOMIC ASSUMPTIONS FOR
MEASURING PENSION OBLIGATIONS
a. provides guidance to actuaries in selecting (including giving advice on selecting)

demographic and other noneconomic assumptions for measuring obligations
under defined benefit pension plans; and
b. expands upon and, in some areas, modifies those provisions of Actuarial Standard
of Practice (ASOP) No. 4, Measuring Pension Obligations, that relate to the
selection and use of demographic and other noneconomic assumptions.
1.2 Scope—This standard applies to actuaries when they are selecting demographic and all
other assumptions not covered by ASOP No. 27, Selection of Economic Assumptions for
Measuring Pension Obligations, to measure obligations under any defined benefit
pension plan that is not a social insurance program as described in ASOP No. 32, Social
Insurance (unless an actuarial standard of practice on social insurance explicitly calls for
application of this standard). Measurements of defined benefit pension plan obligations
include calculations that assign plan costs to time periods, actuarial present value
calculations, and estimates of the magnitude of future plan obligations. Measurements of
pension obligations do not generally include individual benefit calculations or individual
benefit statement estimates.
Throughout this standard, any reference to selecting demographic and other noneconomic
assumptions also includes giving advice on selecting demographic and other
noneconomic assumptions.
To the extent that the guidance in this standard may conflict with ASOP No. 4, ASOP
No. 4 will govern.
1
complying with such law, regulation, or other binding authority shall not be deemed a
deviation.
This standard does not apply to the selection of an assumption where the actuary is
precluded from exercising independent judgment by an applicable law, regulation, or
other binding authority (i.e., when a specific assumption is mandated or when only a
specified range of assumptions is deemed to be acceptable). For example, this standard
does not apply to the selection of a current liability mortality assumption under Internal
Revenue Code (IRC) section 412, because the mortality assumption is governed by the
IRC and regulations.
2.1 Assumption Format—The form in which a particular demographic assumption will be

used or expressed. In some cases, the assumption will take the form of a table where the
probability of the occurrence of a given event depends on parameters such as gender, age,
service, or calendar year. In other cases, the assumption may be a point estimate,
implying 100% probability of occurrence of a given event at the stated point. An example
of a point estimate assumption is an assumption that 100% of the population will retire at
age 62. The assumption format may include different tables or point estimates for
different segments of the covered population.
2.2 Assumption Universe—For each demographic assumption, a universe consisting of the

possible options that the actuary might reasonably use for the specific assumption. For
example, an assumption universe for a mortality assumption might reasonably include
relevant published or proprietary mortality tables and possible adjustments, such as
projections of mortality improvement. For some pension plans, an assumption universe
for a specific assumption might reasonably include a table or factors developed
specifically for that plan.
2
2.3 Demographic Assumptions—Demographic and all other noneconomic assumptions (i.e.,

those assumptions not covered in ASOP No. 27), unless explicitly stated otherwise.
2.4 Measurement Date—The date as of which the value of the pension obligation is
2.5 Measurement Period—The period subsequent to the measurement date during which a
particular demographic assumption will apply in a given measurement.
2.6 Prescribed Assumption—A specific assumption that is mandated or that is selected from
a specified range or set of assumptions that is deemed to be acceptable by law, regulation,
or other binding authority.
3.1 Overview—The actuary should use professional judgment to estimate possible future
outcomes based on past experience and future expectations, and select assumptions based
upon application of that professional judgment. The actuary should select reasonable
demographic assumptions in light of the particular characteristics of the defined benefit
plan that is the subject of the measurement. A reasonable assumption is one that is
expected to appropriately model the contingency being measured and is not anticipated to
produce significant cumulative actuarial gains or losses over the measurement period. For
any given measurement, the actuary may be able to identify two or more reasonable
assumptions for the same contingency. In some instances, the actuary may present several
results to illustrate the effect of alternative reasonable assumptions.
3.2 Types of Demographic Assumptions—The types of demographic assumptions used to

measure pension obligations may include, but are not necessarily limited to, the
following:
a. retirement;
b. mortality;
c. termination of employment;
d. disability and disability recovery;
e. election of optional forms of benefits; and
3
f. other assumptions, such as administrative expenses; household composition;

marriage, divorce, and remarriage; open group assumptions; transfers; hours
worked; and assumptions regarding missing or incomplete data.
3.3 Demographic Assumption Selection Process—The actuary should follow the general
process for selecting demographic assumptions, as discussed below. It is not necessary
that the actuary follow this complete process at each measurement date for each
assumption if, in the actuary’s professional judgment, previously selected assumptions
continue to be reasonable (see section 3.9).
3.3.1 Identify the Types of Assumptions—The actuary should consider the following
factors when identifying which types of demographic assumptions to use for a
specific measurement:
a. the purpose and nature of the measurement;
b. the plan provisions or benefits and factors that will affect the timing and
value of any potential benefit payments;
c. the characteristics of the obligation to be measured (such as measurement

period, pattern of plan payments over time, open or closed group,
volatility);
d. the contingencies that give rise to benefits or result in loss of benefits;
e. the materiality of each assumption; and
f. the characteristics of the covered group.
It is not necessary that every contingency should give rise to a separate

assumption. For example, for a plan that is expected to provide benefits of equal
value to employees who voluntarily terminate employment, become disabled,
retire, or die, the actuary may use an assumption that reflects some or all of the
above contingencies in combination rather than selecting a separate assumption
for each.
3.3.2 Consider the Relevant Assumption Universe—The actuary should consider the
assumption universe relevant to each type of assumption identified in section
3.3.1. This may include tables or factors particular to the given plan as well as
general tables, factors, and modifications to the tables that are available to
actuaries. Sources of information relevant to many demographic assumptions
4
a. experience studies or published tables based on experience under

uninsured plans and annuity contracts, or based on any other populations
considered representative of the group at hand;
b. relevant plan or plan sponsor experience, to the extent that it is credible,

which may include analyses of gains or losses by source;
c. studies or reports of the effects of plan design, specific events (for

example, shutdown), economic conditions, or sponsor characteristics on
the demographic assumption under consideration; and
d. studies or reports of general trends relevant to the type of demographic

assumption in question (for example, mortality improvement in the United
States).
3.3.3 Consider the Assumption Format—The actuary should consider the appropriate
format for each demographic assumption. Factors that affect format specification
a. the degree to which the assumption format may affect the results;
b. the availability of tables, data, or information relevant to the assumption

being selected;
c. the degree to which the assumption format has the potential to model
anticipated plan experience;
d. the size of the covered population; and
e. the degree to which a parameter (such as gender, age, service, or calendar

year) is anticipated to affect experience.
In many situations it is appropriate for the format to include assumptions for

different segments of the covered population. For example, it may be appropriate
to have different mortality tables for males and females or different turnover
tables for salaried and hourly employees.
3.3.4 Select the Specific Assumptions—The actuary should select each demographic
assumption from the appropriate assumption universe. In all cases, the actuary
should consider the materiality of each assumption selected and the consequences
of experience deviating significantly from the selected assumption. The actuary
5
should consider measurement-specific factors when selecting assumptions.

Examples of such factors are the following:
a. the purpose and nature of the measurement; for example, a cash flow
projection may require more refined assumptions than a liability measure;
b. any features of the plan design or change in the plan design that may
influence the assumption; for example, the introduction of an early
retirement subsidy could influence the plan’s incidence of retirement;
under these circumstances, in order to measure the incremental cost
associated with this change, the retirement assumption for the proposed
plan provision may differ from the retirement assumption for the current
provision;
c. appropriate experience from the specific plan and other relevant sources;
and
d. relevant factors known to the actuary that may affect future experience,
such as the economic conditions of the area or industry, availability of
alternative employment, or the human resources policy or practices of the
employer.
Specific experience of the covered group or other groups with similar

characteristics may be useful in forming a judgment about future expectations.
However, the actuary should not give undue weight to past experience or to
experience that is not sufficiently credible. For example, if recent rates of
termination and retirement were largely attributable to a one-time work force
reduction, it may be unreasonable to assume that such rates will continue over the
measurement period.
3.3.5 Evaluate Reasonableness of the Selected Assumptions—The actuary should

evaluate the reasonableness of each material demographic assumption selected.
Unless facts and circumstances clearly warrant otherwise, the actuary should base
this evaluation on the following criteria:
a. The assumption is expected to appropriately model the contingency being

measured. For example, a reasonable retirement assumption for a plan
with a large number of retirements expected to occur at different ages
should generally be a set of decrements at a variety of ages instead of at a
single age. On the other hand, in a plan with a small number of expected
retirements, it may not be possible to model experience any better using
rates that vary by age than by using a single age. As a second example, for
6
a plan where a significant portion of the liability is attributable to a single

individual, a single retirement age may be appropriate.
b. The assumption is not anticipated to produce significant cumulative

actuarial gains or losses over the measurement period.
3.4 Individual Assumptions—Each individual demographic assumption selected by the

actuary should satisfy this standard.
3.5 Specific Considerations—When performing the assumption selection process described

in section 3.3, the actuary should be aware of specific considerations that may apply to
the selection of individual assumptions, as discussed below.
3.5.1 Retirement Assumption—The actuary should consider factors such as the

following:
a. the plan design, where specific incentives may influence when participants
retire;
b. the design of, and date of anticipated payment from, social insurance
programs (for example, Social Security or Medicare); and
c. the availability of other employer-sponsored postretirement benefit

programs (for example, postretirement health coverage or savings plan).
3.5.2 Termination of Employment Assumptions—The actuary should consider factors

such as the following:
a. employer-specific or job-related factors such as occupation, employment

policies, work environment, unionization, hazardous conditions, and
location of employment; and
b. plan provisions, such as early retirement benefits, vesting schedule, or

payout options.
3.5.3 Mortality Assumption—The actuary should consider factors such as the

following:
a. the possible use of different mortality assumptions before and after

retirement (for example, in some small plan cases a reasonable model for
mortality may be to assume no mortality before retirement);
7
b. the likelihood and extent of mortality improvement in the future;
c. the use of a different mortality assumption for disabled lives, which in turn
may depend on the plan’s definition of disability and how it is
administered; and
d. the use of different mortality tables for different participant subgroups and
beneficiaries.
3.5.4 Disability and Disability Recovery Assumption—The actuary should consider

factors such as the following:
a. the plan’s definition of disability (for example, whether or not the disabled
person is eligible for Social Security benefits); and
b. the potential for recovery. For example, if the plan requires continued
disability monitoring and if the plan’s definition of disability is very
liberal, an assumption for rates of recovery may be appropriate.
Alternatively, the probability of recovery may be reflected by assuming a
lower incidence of disability than the actuary might otherwise assume.
3.5.5 Optional Form of Benefit Assumption—The actuary should consider factors such
as the following:
a. the benefit forms and benefit commencement dates available under the
plan being valued;
b. the historical or expected experience of elections under the plan being

valued and similar plans; and
c. the degree to which particular benefit forms may be subsidized.
3.6 Other Demographic Assumptions—The actuary should follow the general selection
process outlined in section 3.3 when selecting other assumptions relevant to the
measurement. Such assumptions may include the following:
3.6.1 Administrative Expenses Charged to the Plan—The actuary should consider

expenses such as investment advisory, investment management, or insurance
advisory services, to the extent that the costs of these services are not reflected in
the investment return assumption; premiums paid to the Pension Benefit Guaranty
Corporation (PBGC); accounting and auditing services; actuarial services; plan
administration services; legal services; and trustee services. Formats for this
8
assumption may include a dollar amount, a specific percentage of assets, a

specific (and explicitly disclosed) reduction in the investment return assumption,
or a percentage of benefit obligation or normal cost.
3.6.2 Household Composition—If household composition affects the payment of

benefits, the amount of benefits, or other demographic assumptions, the actuary
should make assumptions for household composition and for the demographic
characteristics of the household members in the measurement. For example, some
plans provide annuity death benefits to surviving children under a stated age. In
that case, an assumption as to the number and ages of the potential beneficiaries
may be needed.
3.6.3 Marriage, Divorce, and Remarriage—The actuary should consider whether

marriage, divorce, or remarriage affects the payment of benefits, the amount or
type of benefits, or the continuation of benefit payments. If such an assumption is
selected, it may also be necessary to make an assumption regarding beneficiary
ages.
3.6.4 Open Group—Certain assumptions, such as the number and characteristics of new
entrants, are applicable in open-group measurements.
3.6.5 Hours of Service—Assumptions for hours of service are generally plan- or

industry-specific. Separate assumptions may also be needed for such purposes as
benefit accrual and total employer plan contributions.
3.6.6 Transfers and Return to Employment—The assumptions for transfers or return to

employment are generally plan- or industry-specific. Transfers and return to
employment may be one-time events, or may be continual if employees are
required or permitted to move between groups that are covered by the same or
different plans.
3.6.7 Missing or Incomplete Data—At times, the actuary may find that the data
provided are incomplete due to missing elements such as birth dates or hire dates.
Provided that the actuary has determined, in accordance with ASOP No. 23, Data
Quality, that the overall data are of sufficient quality to complete the assignment,
the actuary may need to make reasonable assumptions for the missing data
elements. In making such assumptions, the actuary should consider the relevant
data actually supplied. For example, it may be appropriate to assume a missing
birth date is equal to the average birth date for other participants who have
complete data and who have the same service credits as the participant whose date
of birth is missing.
9
3.7 Consistency Among Demographic Assumptions Selected by the Actuary—With respect

to any particular measurement, each demographic assumption selected by the actuary
should be consistent with the other assumptions selected by the actuary unless the
assumption, considered individually, is not material (see section 3.10.1). For example, if
an employer’s business is in decline and the effect of that decline is reflected in the
turnover assumption, it should also be reflected in the retirement assumption.
3.8 Prescribed Assumptions—When an assumption is prescribed, the actuary is obligated to

use it. Examples of prescribed demographic assumptions include the required mortality
assumption for determining the present value of vested benefits for PBGC variable-rate
premiums and for current liability; and demographic assumptions selected by the plan
sponsor for purposes of compliance with Statement of Financial Accounting Standards
No. 87, Employers’ Accounting for Pensions. As indicated in section 1.2, Scope, this
standard does not apply to the selection of prescribed demographic assumptions, although
it does apply to the advice that the actuary gives to the party responsible for selecting the
prescribed assumptions.
All nonprescribed demographic assumptions should satisfy this standard. Selection of a

demographic assumption that does not satisfy this standard in order to offset the effect of
one or more prescribed assumptions is a deviation to which the disclosure requirements
of section 4.5 apply.
3.9 Reviewing Assumptions—At each measurement date the actuary should consider
whether the selected assumptions continue to be reasonable. The actuary is not required
to do a complete assumption study at each measurement date. However, if the actuary
determines that one or more of the previously selected assumptions are no longer
reasonable, the actuary should follow the general process described in section 3.3 and
select reasonable new assumptions as appropriate.
3.10 Other Considerations—The following issues may also be considered when selecting
demographic assumptions:
3.10.1 Materiality—The actuary should establish an appropriate balance between refined

methodology and materiality. The actuary is not required to use a particular type
of demographic assumption or to select a highly refined demographic assumption
when it is not expected to affect results materially. For example, the actuary is not
required to use termination rates that vary by both age and service when the
actuary does not expect them to produce materially different results from rates
that vary by age or service alone.
3.10.2 Cost Effectiveness—The actuary should also establish an appropriate balance

between refined methodology and cost effectiveness. Although all material
10
demographic assumptions should be reflected, highly refined methodology is not

required when it is not expected to affect results materially.
3.10.3 Combined Effect of Assumptions—The combined effect of all nonprescribed

assumptions selected by the actuary (both demographic assumptions selected in
accordance with this standard and economic assumptions selected in accordance
with ASOP No. 27) should be reasonable. For example, the actuary may have
decided not to make any assumption with regard to four different types of future
events, each of which alone is immaterial. However, the effect of omitting
assumptions for all four types of future events may be a material understatement
or overstatement of the measurement results. In these circumstances, the
assumptions should be revised.
3.10.4 Knowledge Base—The demographic assumptions selected should reflect the

actuary’s knowledge as of the measurement date. However, the actuary may learn
of an event occurring after the measurement date (for example, plan termination
or death of the principal owner), that would have changed the actuary’s selection
of a demographic assumption. If appropriate, the actuary may reflect this change
as of the measurement date.
3.10.5 Advice of Experts—Demographic data and analyses are available from a variety
of sources, including representatives of the plan sponsor and administrator,
demographers, economists, accountants, and other professionals. When the
actuary is responsible for selecting demographic assumptions within the scope of
this standard, external expert advice may be considered, but the selection should
still reflect the actuary’s professional judgment.
4.1 Disclosures—Pension actuarial communications should contain descriptions of the

following:
4.1.1 Assumptions Used—Each material assumption used in the measurement.

Sufficient detail should be shown to permit another qualified actuary to assess the
level and pattern of the rates (for example, by supplying the name of a published
decrement table or by showing turnover rates at every fifth age for an unpublished
age-based table).
4.1.2 Changes in Assumptions—Any material changes in the assumptions from those

previously used for the same type of measurement. The general effects of any
such changes should be disclosed in words or by numerical data, as appropriate.
11
4.1.3 Changes in Circumstances—Any significant event of which the actuary is aware

that has occurred since the measurement date that would have materially changed
any of the demographic assumptions selected. The likely effect of any such
change should also be described.
4.2 Prescribed Assumptions—The actuary’s communication should identify and state the
source of any prescribed assumptions.
4.3 Required Government Forms—The disclosure requirements in sections 4.1 and 4.2 do
not apply to government forms. Instead, the actuary should comply with the instructions
for such forms.
4.4 Deviation —An actuary must be prepared to justify the use of any procedures that depart
materially from those set forth in this standard and must include, in any actuarial
12
Appendix 1
practice.
Background
Actuaries have historically used various practices for selecting the demographic and other
noneconomic assumptions they use to measure pension obligations. For example, some actuaries
looked to surveys of assumptions used by other actuaries, some relied on detailed research by
experts, some used experience studies, and other actuaries used a combination of these practices.
Before computer technology was widely available, actuaries commonly used simplified
demographic assumptions that were not necessarily individually reasonable, but that in aggregate
produced results the actuary believed to be reasonable. As technological developments made the
use of individually reasonable assumptions feasible, many actuaries began selecting economic
and demographic assumptions that were individually reasonable. This trend was accelerated by
amendments to the Internal Revenue Code effective for plan years beginning after 1987. These
amendments require actuaries to determine the minimum required contribution for a qualified
pension plan (other than a multi-employer plan) using either individually reasonable assumptions
or assumptions that reached the same total contribution determination as would have been
reached had each assumption been individually reasonable.
Current Practices
Many actuaries change demographic assumptions infrequently when measuring obligations of

ongoing pension plans. Other actuaries assess emerging experience and reevaluate the
assumptions as of each measurement date and change demographic assumptions more
frequently.
For some purposes, such as funding public employee pension plans, complying with financial
accounting rules, or adhering to other requirements, the actuary may advise the plan sponsor
about the selection of demographic assumptions. But these assumptions—particularly the
mortality assumption or the retirement age assumption—may be prescribed by others. In some of
these cases, it is possible that actuaries may have adjusted other assumptions to compensate for
the effect of the prescribed assumption.
13
In preparing calculations for purposes other than ongoing plan valuations, actuaries often use
demographic assumptions that are different from those used for the ongoing plan valuation.
14
Actuarial Standard
of Practice
No. 36
Statements of Actuarial Opinion Regarding

Property/Casualty Loss and Loss Adjustment Expense Reserves
Developed by the
Adopted by the
March 2000
(Doc. No. 069)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.3 Claim 2
2.4 Coverage 2
2.5 Data 2
2.6 Expected Value Estimate 3
2.7 Exposure 3
2.8 Loss 3
2.9 Loss Adjustment Expense 3
2.10 Present Value 3
2.11 Reinsurance Contract 3
2.12 Reserve 3
2.13 Risk Margin 3

3.1 Professional Qualifications 3
3.1.1 Qualification Standards 3
3.1.2 Legal and Regulatory Requirements 3
3.1.3 Appointment as Appointed Actuary 4
3.2 Professional Guidance Concerning Reserve Opinions 4
3.2.1 Reserving Principles 4
3.2.2 Discounting of Reserves 4
3.3 Contents of a Statement of Actuarial Opinion 4
3.3.1 Items Covered by the Opinion 4
3.3.2 Types of Statements of Actuarial Opinion 4
3.3.3 Significant Risks and Uncertainties (Explanatory Paragraph) 5
3.4 Materiality 6
3.5 Reserve Analysis 6
3.5.1 Coverage Provisions 6
3.5.2 Changing Conditions 7
ii
3.5.3 External Conditions 7
3.5.4 Data 7
3.5.5 Assumptions 7
3.5.6 Changes in Assumptions, Procedures, or Methods 8
3.6 Uncertainty 8
3.6.1 Sources of Uncertainty 8
3.6.2 Aggregation and External Data Sources 9
3.6.3 Expected Value Estimate 9
3.6.4 Range of Reasonable Reserve Estimates 9
3.6.5 Adverse Deviation 10
3.7 Reinsurance Ceded 10
3.7.1 Gross vs. Net Reserves 10
3.7.2 Collectibility 10
3.7.3 Uncollectible Reinsurance and Commutation 10
3.7.4 Risk Transfer Requirements 11
3.8 Review Opinion 11
3.8.1 Responsibilities of Reviewing Actuary 11
3.8.2 Responsibilities of Reviewed Actuary 11
3.9 Financial Reporting Items Affected by Loss and Loss Adjustment Expense Reserves 12
3.10 Adequacy of Assets Supporting Reserves 12

4.1 Form and Content of Statement 12
4.3 Reliance on Others for Supporting Analysis 12
4.4 Reliance on Opinions of Other Actuaries 13
4.5 Changes in Opining Actuary’s Assumptions, Procedures, or Methods 13
4.6 Disclosure in the Opinion 13
APPENDIXES

Background 16
Appendix 2⎯Comments on the 1999 Third Exposure Draft and Subcommittee Responses 18
iii
March 2000

Actuarial Standards Board and Other Persons Interested in Statements of Actu-
arial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense
Reserves
This booklet contains the final version of Actuarial Standard of Practice No. 36, Statements of
Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves.
Background
In 1978, to guide actuaries on their responsibilities, the American Academy of Actuaries adopted
Financial Reporting Recommendation (FRR) 8, Statement of Actuarial Opinion for Fire and
Casualty Insurance Company Statutory Annual Statements, along with Interpretations 8-A, 8-B,
and 8-C.
In order to replace Recommendation 8 and its Interpretations and to provide more consistent
guidance to actuaries, the Actuarial Standards Board determined that the guidance in this area
should be embodied in an actuarial standard of practice. The ASB assigned the project to the
Subcommittee on Reserving of the Casualty Committee.
Exposure Drafts and Public Hearing
The first exposure draft (published in February 1998) received thirty-nine letters of comment and
fifty-three comment postcards. The second exposure draft (published in January 1999) received
nineteen letters of comment. The third exposure draft (published in September 1999) received
fifteen letters of comment. In addition, in November 1999 a public hearing was held in San
Francisco to permit anyone to present their comments directly to members of the ASB. For a
detailed summary of the substantive issues contained in the comment letters, and the
subcommittee’s responses to such, please see appendix 2.
The following highlights the significant changes made to the final ASOP from the third exposure
draft.
1. Section 1.2, Scope, was changed so that the ASOP only applies if the opinion is provided
to comply with law or regulation, or if the opinion is represented by the actuary as a
statement of actuarial opinion. Language was added to clarify that the ASOP does not
iv
apply to other actuarial work products, such as reserve estimates, unless the work product
meets one of the two conditions specified. References in this and other sections to an
actuarial report supporting the statement of actuarial opinion were deleted. Also, the
scope was further clarified to say that the ASOP only applies to the portion of a statement
of actuarial opinion that addresses losses and loss adjustment expenses.
2. The proposed effective date of the ASOP (see section 1.4) was revised to October 15,
2000.
3. The definition of an actuarial report (section 2.1) was deleted because the final ASOP
does not reference an actuarial report supporting the statement of actuarial opinion.
4. Section 2.14, Statement of Actuarial Opinion, was changed by deleting the language
regarding descriptive of numerical details not normally included in the statement of
actuarial opinion.
5. Section 3.3.2, Types of Statements of Actuarial Opinion, section (c) (Determination of

Redundant or Excessive Provision) was reworded to match the wording under section (b)
(Determination of Deficient or Inadequate Provision) that the stated reserve amount does
not make a reasonable provision for the liabilities associated with the specified reserves.
6. Section 3.3.3, Significant Risks and Uncertainties (Explanatory Paragraph), was modified
to replace the previous wording “a significant risk of material adverse deviation” with
“significant risks and uncertainties that could result in material adverse deviation.” One
of the requirements for the explanatory paragraph was changed from a description of
“particular reasons underlying the actuary’s conclusion that there is a significant risk” to
“major factors or particular conditions underlying the risks and uncertainties.” Also,
language was added to clarify that the actuary is not required “to include an exhaustive
list of all potential sources of risks and uncertainties.”
7. For consistency with the changes to section 3.3.3, several other sections of the ASOP
were modified to replace the phrases “significant risk of material adverse deviation” or
“the uncertainty of the reserve estimates” with the phrase “risks and uncertainties
associated with the reserves.”
8. Suggested language was added to section 3.4, Materiality, to elaborate that the actuary
should evaluate materiality based on professional judgement, applicable materiality
guidelines or standards, and the actuary’s intended purpose for the opinion.
9. Section 3.5, Reserve Analysis, was modified to incorporate portions of the section from
the third exposure draft on Testing and Validation (now deleted). References to testing,
validation, or verifying data, assumptions or compilations were deleted, and the phrase
“be familiar with” was changed to “consider.”
v
10. The title of section 3.6.5, Adverse Deviation, was changed to eliminate the “Risk of
Material” phrase and the section was modified to incorporate portions of the section from
the third exposure draft on Probability Assumptions for Adverse Deviation (now deleted).
References to probability assumptions, probability models, and scenario testing were
deleted.
11. Section 3.7.4, Risk Transfer Requirements, was reworded to clarify that this ASOP does
not obligate the actuary to opine on risk transfer. However, if the actuary intends to
address risk transfer requirements in the scope of the opinion, then the actuary needs to
consider only whether a reserve adjustment to meet the risk transfer requirements is
likely to have a material effect on the reserve opinion.
12. Section 4.4, Reliance on Opinions of Other Actuaries, was modified to eliminate the
requirements to review, comprehend, or perform tests or analyses of another actuary’s
work if the actuary is not claiming reliance on the work or opinion of another actuary.
13. Section 4.5, Changes in Opining Actuary’s Assumptions, Procedures, or Methods, was
reworded to clarify that no disclosure is required unless the actuary believes that the
change in assumptions, procedures, or methods is likely to have a material effect on the
actuary’s opinion. Language was eliminated that may have been interpreted to require the
actuary to perform analyses of reserves using assumptions, procedures, or methods
employed by a prior actuary. References to whether materiality is unknown were changed
to permit the actuary to make a judgement as to whether the change is likely to have a
material effect on the opinion.
14. Section 4.6, Disclosure in the Opinion, was modified to ensure that certain phrases were
consistent with the phrases used elsewhere in the ASOP. Section (h) was further clarified
to require disclosure of the use of discounting, the interest rate(s) used by the actuary, and
the amount of the discount that was included in the stated reserve amount. Also, such
disclosure is only required if the actuary believes that reliance on present values is likely
to have a material effect on the actuary’s opinion. Section 4.6 was changed by adding a
new section (i), which states that if the actuary relied on risk margins and the actuary
believes that the effect of such reliance is likely to have a material effect on the result of
the actuary’s reserve analysis, then the actuary should disclose that risk margins were
used and, if practical, disclose the amount of risk margin included in the stated reserve
amount.
The subcommittee appreciates those who submitted comments on the three exposure drafts. The
subcommittee would also like to thank former members Martin Adler and John P. Tierney for
their significant contribution to the development of this standard. The ASB voted in March 2000
to adopt this standard.
vi
Subcommittee on Reserving of the Casualty Committee
Robert S. Miccolis, Chairperson

Brian Z. Brown Raymond S. Nichols
Edward W. Ford Terrence M. O’Brien
Bertram A. Horowitz Mark J. Sobel
Elise C. Liebers Patricia A. Teufel
Mary Frances Miller Steven M. Visner

Ronald T. Kozlowski Alfred O. Weller
Robert J. Lindquist Patrick B. Woods
Robert S. Miccolis

vii
STATEMENTS OF ACTUARIAL OPINION

REGARDING PROPERTY/CASUALTY
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

guidance to the actuary in issuing a written statement of actuarial opinion regarding
property/casualty loss and loss adjustment expense reserves.
1.2 Scope—This standard applies to actuaries who provide written statements of actuarial
opinion with respect to loss and loss adjustment expense reserves for any
property/casualty insurance coverage. This standard applies to actuaries providing
professional services with respect to loss and loss adjustment expense reserves of
insurance or reinsurance companies and other property/casualty risk financing systems,
such as self-insurance, that provide similar coverages. References in the standard to
insurance, reinsurance, or self-insurance should be interpreted to include risk financing
systems that provide for risk retention in lieu of risk transfer. This standard applies to
practices that relate to the principles presented in the Statement of Principles Regarding
Property and Casualty Loss and Loss Adjustment Expense Reserves (hereafter the
Statement of Principles), as adopted by the Board of Directors of the Casualty Actuarial
Society. This standard does not apply to statements of actuarial opinion subject to ASOP
No. 22, Statutory Statements of Opinion Based on Asset Adequacy Analysis by Appointed
Actuaries for Life or Health Insurers, or Actuarial Compliance Guideline No. 4, Statutory
Statements of Opinion Not Including an Asset Adequacy Analysis by Appointed Actuaries
for Life or Health Insurers.
This standard applies only to a written statement of actuarial opinion, as defined in

section 2.14 of this ASOP, for which one of the following applies:
a. the opinion is provided to comply with the requirements of law or regulation for a
statement of actuarial opinion; or
b. the opinion is represented by the actuary as a statement of actuarial opinion.
This standard does not apply in instances where an actuary is providing analyses,
estimates, information, data compilations, or other actuarial work products unless the
actuarial work product meets one of the conditions (a) or (b) stated above.
1
If the actuary’s statement of actuarial opinion includes an opinion regarding amounts for
items other than loss and loss adjustment expense reserves, this standard applies only to
the portion of the statement of actuarial opinion that relates to loss and loss adjustment
expense reserves.
If any law or government regulation contains requirements for the statement of actuarial
opinion for loss and loss adjustment expense reserves that conflict with the provisions of
this actuarial standard of practice, then the actuary should comply with the requirements
of the law or regulation and make any disclosures as specified in section 4.6(j) of this
ASOP. Compliance with applicable law or regulation is not considered to be a deviation
from this standard.
1.4 Effective Date—This standard will be effective for all statements of actuarial opinion
provided for reserves with a valuation date on or after October 15, 2000.
2.1 Actuarial Work Product—The result of an actuary’s work. The term applies to the
following actuarial communications, whether written or oral: statements of actuarial
documents.
2.2 Appointed Actuary—An actuary who is appointed or retained in accordance with the
provisions of law, regulation, or contract or other arrangement, as the designee to issue a
statement of actuarial opinion.
2.3 Claim—A demand for payment under the coverage provided by a plan or contract.
2.4 Coverage—The terms and conditions of a plan or contract that provide for certain
payments associated with contingent events.
2.5 Data—Statistical or other information that is generally numerical in nature or susceptible

to quantification.
2
2.6 Expected Value Estimate—An estimate of the mean value of an unknown quantity where
the mean value represents a probability-weighted average of the quantity over the range
of all possible values.
2.7 Exposure—The extent of risk presented by one or more entities that have been provided
coverage under a plan or contract.
2.8 Loss—The cost that is associated with an event that has taken place and that is subject to
coverage under a plan or contract; also known as claim amount.
2.9 Loss Adjustment Expense—The expense associated with investigating and settling
claims.
2.10 Present Value—The value at a point in time of cash flows at other points in time,
calculated at selected interest rates; also known as discounted present value or discounted
value.
2.11 Reinsurance Contract—A contractual agreement whereby some element of risk contained
in the coverage provided by one or more plans or contracts is transferred from the ceding
entity (the reinsured) to the assuming entity (the reinsurer).
2.12 Reserve—A provision to satisfy obligations as of a specified date.
2.13 Risk Margin—An amount that recognizes uncertainty; also known as a provision for
uncertainty.

opinion on a defined subject.
3.1 Professional Qualifications—The following sections address professional issues of which

the actuary needs to be aware.
3.1.1 Qualification Standards—Before accepting an assignment to issue a statement of

actuarial opinion, the actuary should determine that he or she meets the
qualifications described in the Qualification Standards for Prescribed Statements
of Actuarial Opinion, promulgated by the American Academy of Actuaries. (See
section 4.7 of this ASOP.)
3.1.2 Legal and Regulatory Requirements—When an actuary prepares a statement of

actuarial opinion to satisfy the requirements of laws or regulations, the actuary
should have the necessary knowledge to comply with the specific requirements of
the applicable laws and of the regulatory authorities to whom the opinion is to be
expressed. The actuary should make a reasonable effort to consider the relevant
3
generally distributed interpretations of those regulatory authorities. In addition,
the actuary should be satisfied that the relevant requirements of duly adopted laws
and regulations have been met.
3.1.3 Appointment as Appointed Actuary—If the appointment as an entity’s appointed

actuary is required by law or regulation, the actuary should accept or withdraw
from such an appointment in conformance with the applicable laws or regulations.
3.2 Professional Guidance Concerning Reserve Opinions—In issuing a statement of actuarial

opinion regarding property/casualty loss and loss adjustment expense reserves, the
actuary should consider the following:
3.2.1 Reserving Principles—The actuary should consider the Statement of Principles,

particularly the section titled Considerations.
3.2.2 Discounting of Reserves—If the actuary is providing a statement of actuarial

opinion for discounted loss and loss adjustment expense reserves, the actuary
should be guided by both this standard and ASOP No. 20, Discounting of
Property and Casualty Loss and Loss Adjustment Expense Reserves.
3.3 Contents of a Statement of Actuarial Opinion—The actuary should document the scope
and intended use of the statement of actuarial opinion. The following sections provide
guidance on the various types of opinion the actuary may provide, as well as specifics to
be included in the opinion.
3.3.1 Items Covered by the Opinion—The statement of actuarial opinion should list the
items on which the actuary expresses an opinion. The content of the list will
depend upon the intended use of the opinion, particularly with respect to
regulatory requirements, where applicable. If separate reserve amounts for
different reserve items ( for example, losses vs. loss adjustment expenses) are
provided in the statement of actuarial opinion, then the actuary’s opinion should
state whether it applies to those items in the aggregate or individually.
3.3.2 Types of Statements of Actuarial Opinion—A statement of actuarial opinion

should be made in accordance with one of the following sections (a–e):
a. Determination of Reasonable Provision—When the stated reserve amount

is within the actuary’s range of reasonable reserve estimates (see section
3.6.4), the actuary should issue a statement of actuarial opinion that the
stated reserve amount makes a reasonable provision for the liabilities
associated with the specified reserves.
b. Determination of Deficient or Inadequate Provision—When the stated

reserve amount is less than the minimum amount that the actuary believes
is reasonable, the actuary should issue a statement of actuarial opinion that
the stated reserve amount does not make a reasonable provision for the
4
liabilities associated with the specified reserves. (See section 4.6(d) for
related disclosure requirements.)
c. Determination of Redundant or Excessive Provision—When the stated

reserve amount is greater than the maximum amount that the actuary
believes is reasonable, the actuary should issue a statement of actuarial
opinion that the stated reserve amount does not make a reasonable
provision for the liabilities associated with the specified reserves. (See
section 4.6(e) for related disclosure requirements.)
d. Qualified Opinion—When, in the actuary’s opinion, the reserves for a

certain item or items are in question because they cannot be reasonably
estimated or the actuary is unable to render an opinion on those items, the
actuary should issue a qualified statement of actuarial opinion. Such a
qualified opinion should state whether the stated reserve amount makes a
reasonable provision for the liabilities associated with the specified
reserves, except for the item, or items, to which the qualification relates.
The actuary is not required to issue a qualified opinion if the actuary
reasonably believes that the item or items in question are not likely to be
material. (See section 4.6(f) for related disclosure requirements.)
e. No Opinion—The actuary’s ability to give an opinion is dependent upon

data, analyses, assumptions, and related information that are sufficient to
support a conclusion. If the actuary cannot reach a conclusion due to
deficiencies or limitations in the data, analyses, assumptions, or related
information, then the actuary may issue a statement of no opinion. A
statement of no opinion should include a description of the reasons why no
opinion could be given.
3.3.3 Significant Risks and Uncertainties (Explanatory Paragraph)—When the actuary

reasonably believes that there are significant risks and uncertainties that could
result in material adverse deviation, the actuary should also include an
explanatory paragraph in the statement of actuarial opinion. (See sections 3.4 and
3.6.5 for guidance on evaluating materiality and considering risks and
uncertainties.) The explanatory paragraph should contain the following:
a. the amount of adverse deviation that the actuary judges to be material with
respect to the statement of actuarial opinion; and
b. a description of the major factors or particular conditions underlying risks

and uncertainties that the actuary believes could result in material adverse
deviation.
The actuary is not required to include in the explanatory paragraph general, broad
statements about risks and uncertainties due to economic changes, judicial
decisions, regulatory actions, political or social forces, etc., nor is the actuary
5
required to include an exhaustive list of all potential sources of risks and
uncertainties.
3.4 Materiality—In evaluating materiality within the context of a reserve opinion, the actuary
should consider the purposes and intended uses for which the actuary prepared the
statement of actuarial opinion. The actuary should evaluate materiality based on
professional judgement, materiality guidelines or standards applicable to the statement of
actuarial opinion and the actuary’s intended purpose for the statement of actuarial
opinion. The actuary should understand which financial values are usually important to
the intended uses of the statement of actuarial opinion and how those financial values are
likely to be affected by changes in the reserves and future payments for losses and loss
adjustment expenses. For example, materiality might be evaluated in terms of the
specified reserve amount for which an opinion is being given. For a statement of actuarial
opinion for an insurance company to be used for financial reporting to insurance
regulators, materiality might be evaluated in terms of the company’s reported statutory
surplus. As another example, for a statement of actuarial opinion to be used for an
actuarial appraisal of an insurance company, it might be appropriate to evaluate
materiality in terms of both the company’s net worth and annual net income, since both
values are usually important factors in assessing the value of the company.
3.5 Reserve Analysis—The appropriate type and extent of reserve analysis will vary with the
nature of the claims and exposures, the historical pattern of loss development, and the
expectation of future conditions as they affect the liabilities associated with unpaid losses
and loss adjustment expenses. A number of reserve analysis methods are available to and
are used by actuaries. Selection of specific methods, a modification of such methods, or
the development of new methods, should be based on an understanding of the nature of
the claims, the development characteristics associated with these claims, and the
applicability of various methods to the available data. The actuary may use a number of
different methods for each of several segments of reserves. The actuary should be
satisfied that the analysis methods chosen are appropriate to support the statement of
actuarial opinion. If the actuary cannot draw a reasonable conclusion based on available
methods or modifications of such methods, then the actuary should issue a qualified
opinion or statement of no opinion as discussed in section 3.3.2(d) and (e).
In addition to the reserve methods used, the actuary should consider the relevant past,
present, or reasonably foreseeable future conditions that are likely to have a material
effect on the results of the actuary’s reserve analysis or on the risks and uncertainties
arising from such conditions (see section 3.6).
In conducting a reserve analysis, the actuary should consider the following:
3.5.1 Coverage Provisions—The actuary should consider the various types of coverage
underlying the reserves that are the subject of a statement of actuarial opinion.
The actuary should consider the significant issues regarding coverage disputes,
coverage litigation, or other relevant interpretations of coverage that are likely to
6
have a material effect on the results of the actuary’s reserve analysis or on the
risks and uncertainties associated with the reserves.
3.5.2 Changing Conditions—The actuary should consider the likely effect of changing
conditions on the subject loss and loss adjustment expense reserves. The actuary
should consider whether there have been significant changes in conditions
particularly with regard to claims, losses, or exposures that are new or unusual
and that are likely to be insufficiently reflected in the experience data or in the
assumptions used to estimate loss and loss adjustment expense reserves. Changing
conditions can arise from circumstances particular to the entity or from external
factors affecting others within an industry.
The actuary should also consider the relevant characteristics of the entity’s
exposures to the extent that they are likely to have a material effect on the results
of the actuary’s reserve analysis. These characteristics may be influenced by the
methods used to sell or provide coverages, the distribution channels from which
the entity’s business is obtained, the general underwriting practices and pricing
philosophy of the entity, and the marketing objectives and strategies of the entity.
Further, the actuary should consider relevant reinsurance program changes to the
extent that such changes are likely to have a material effect on the results of the
actuary’s reserve analysis. The actuary should obtain information from the entity
regarding the significant changes in the practices or philosophy used by the
entity’s claims personnel and ascertain whether such changes are likely to have a
material effect on the results of the actuary’s reserve analysis or on the risks and
uncertainties associated with the reserves.
3.5.3 External Conditions—The reserves may be influenced by future contingent

events. Therefore, the actuary should consider forces in the environment that are
likely to have a material effect on the results of the actuary’s reserve analysis.
However, the actuary is not required to have detailed knowledge of all the
economic changes, regulatory actions, judicial decisions, political or social forces,
etc., that may affect the settlement values.
3.5.4 Data—With respect to the quality and availability of the data to be used in
analyzing loss reserves, the actuary is directed to ASOP No. 23, Data Quality.
The organization and reconciliation of data for loss reserve analysis is discussed
in the Statement of Principles.
The actuary should consider whether there are significant data problems or issues
and, if so, their implications regarding the risks and uncertainties associated with
the reserves (see section 3.6).
3.5.5 Assumptions—Assumptions may be implicit or explicit, and may involve

interpreting past data or estimating future trends. The actuary should consider the
sensitivity of the reserve estimates to reasonable, alternative assumptions. When
the use of reasonable, alternative assumptions would have a material effect on the
7
results of the actuary’s reserve analysis, the actuary should consider the
implications regarding the risks and uncertainties associated with such an effect
(see section 3.6).
3.5.6 Changes in Assumptions, Procedures, or Methods—If a change occurs in the

opining actuary’s assumptions, procedures, or methods from those previously
employed in providing an opinion on the entity’s reserves, the actuary should
consider whether the change is likely to have a material effect on the results of the
actuary’s reserve analysis (see section 4.5). The use of assumptions, procedures,
or methods for new reserve segments that differ from those used previously is not,
however, a change in assumptions, procedures, or methods within the meaning of
this section. Similarly, when the determination of reserves is based on the periodic
updating of experience data, factors, or weights, such periodic updating is not a
change in assumptions, procedures, or methods within the meaning of this section.
3.6 Uncertainty—Actuarial estimates are inherently uncertain because they are dependent on
future contingent events. Moreover, loss and loss adjustment expense reserve estimates
are generally derived from analyses of historical data, and future events or conditions
often differ from the past. Even when appropriate actuarial techniques and assumptions
indicate that the stated reserve amount is reasonable, the actual amount necessary to settle
the unpaid claims can be significantly different from the stated reserve amount.
The actuary should consider the implications of uncertainty in loss and loss adjustment
expense reserve estimates in determining a range of reasonable reserve estimates and the
need for an explanatory paragraph on significant risks and uncertainties in the statement
of actuarial opinion (see section 3.3.3). The sections that follow address important
considerations regarding the risks and uncertainties associated with loss and loss
adjustment reserves.
3.6.1 Sources of Uncertainty—Undiscounted loss and loss adjustment expense reserve

estimates are essentially estimates of future payments associated with current
liabilities. Variations between the estimated and actual amounts commonly occur.
Such variations can be the result of many factors, including the following:
a. random chance;
b. erratic historical development data;
c. past and future changes in operations, particularly when the change is

recent;
d. changes in the external environment such as inflation, coverage litigation,

judicial decisions, legislative changes, claimants’ attitudes with respect to
settlements, etc;
e. changes in data, trends, development patterns, and payment patterns;
8
f. the emergence of unusual types or sizes of claims;
g. shifts in types of reported claims or reporting patterns; and
h. changes in claim frequency or severity.
If reserves are stated on a present value basis, the actuary should consider the
additional sources of uncertainty associated with the use of discounted reserves,
as discussed in ASOP No. 20.
3.6.2 Aggregation and External Data Sources—The level of aggregation at which

reserves are analyzed is a significant factor in forming an opinion. When reserves
are aggregated for analysis, greater volume may provide more stability and
possibly less uncertainty in the estimates. Combining reserve data from different
business segments or claim groupings, however, may mask underlying trends or
patterns and actually decrease the accuracy of the reserve estimates. Less-
aggregated data may provide greater insights regarding the development process
and, therefore, provide a more appropriate basis for a statement of actuarial
opinion. When a grouping of the entity’s claims is homogeneous with respect to
development, aggregation of data would be appropriate. When the data volume
for a segment or grouping is too small for effective analysis, aggregation of the
data or the use of relevant external data sources would be appropriate. In
aggregating data for analysis, the actuary should give consideration to the homo-
geneity and stability of the development characteristics of the claims.
3.6.3 Expected Value Estimate—In evaluating the reasonableness of reserves, the

actuary should consider one or more expected value estimates of the reserves,
except when such estimates cannot be made based on available data and
reasonable assumptions. Other statistical values such as the mode (most likely
value) or the median (50th percentile) may not be appropriate measures for
evaluating loss and loss adjustment expense reserves, such as when the expected
value estimates can be significantly greater than these other measures.
The actuary may use various methods or assumptions to arrive at expected value
estimates. In arriving at such expected value estimates, it is not necessary to
estimate or determine the range of all possible values, nor the probabilities
associated with any particular values.
3.6.4 Range of Reasonable Reserve Estimates—The actuary may determine a range of

reasonable reserve estimates that reflects the uncertainties associated with
analyzing the reserves. A range of reasonable estimates is a range of estimates
that could be produced by appropriate actuarial methods or alternative sets of
assumptions that the actuary judges to be reasonable. The actuary may include
risk margins in a range of reasonable estimates, but is not required to do so,
9
except as may be required by ASOP No. 20. A range of reasonable estimates,
however, usually does not represent the range of all possible outcomes.
3.6.5 Adverse Deviation—The potential variation in the actual amount that will be
needed to pay unpaid claims gives rise to uncertainty in the reserve estimates. An
adverse deviation occurs when such a variation results in paid amounts higher
than provided for in the reserves. The actuary should consider whether the future
paid amounts are subject to significant risks and uncertainties that could result in
a material adverse deviation.
When the actuary’s analyses break down the reserves into various segments or
claim groupings, for example, by line of business and accident year, the actuary
should consider the combined risks and uncertainties associated with the reserves
that are the subject of the opinion.
3.7 Reinsurance Ceded—An insurance company, risk pool, or similar entity is liable to its
policyholders, members, or reinsured companies (or entities) for all loss and loss
adjustment expense obligations covered under its contracts, regardless of subsequent
ceded reinsurance or retrocessions. A ceded reinsurance or retrocession transaction is
usually a separate agreement providing for reimbursement of some of the entity’s
obligations. Insurance coverage of self-insureds, pools, or similar entities may also
provide for certain payments similar to ceded reinsurance.
The sections that follow describe important considerations for the actuary’s treatment of
ceded reinsurance or insurance coverage in the statement of actuarial opinion.
3.7.1 Gross vs. Net Reserves—If the scope of the statement of actuarial opinion
addresses both gross (direct plus assumed) reserves and net reserves, the actuary
should evaluate both and provide an opinion on each. Such evaluation should
utilize gross, ceded, and net data to the extent the actuary deems appropriate to
reach a conclusion as to the reasonableness of both the gross and net reserves. The
actuary should also consider the relationship between gross and net reserves in his
or her evaluation.
3.7.2 Collectibility—If the amount of ceded reinsurance reserves is material, the

actuary should consider the collectibility of ceded reinsurance in evaluating net
reserves. The actuary should solicit information from management regarding
collectibility problems, significant disputes with reinsurers, and practices
regarding provisions for uncollectible reinsurance. The actuary’s consideration of
collectibility does not imply an opinion on the financial condition of any
reinsurer.
3.7.3 Uncollectible Reinsurance and Commutation—The actuary should consider

significant increases in net losses or reserves due to write-offs of uncollectible
reinsurance or commutations of ceded reinsurance liabilities. The impact on
reserves of such uncollectible reinsurance or of commutations should be
10
considered because of its potential distorting effects on the historical patterns of
development and the expectations of future conditions.
3.7.4 Risk Transfer Requirements—This standard does not obligate the actuary to opine
that the reserves are established in accordance with regulatory or accounting
requirements regarding risk transfer in reinsurance contracts. However, if the
actuary intends to address risk transfer requirements in the scope of the opinion,
then the actuary should ascertain whether an adjustment to the reserves to meet
such requirements is likely to have a material effect on the results of the actuary’s
reserve analysis or on the risks and uncertainties associated with the reserves.
3.8 Review Opinion—An actuary may be called upon to review the opinion and supporting
analyses of another actuary in order to render an opinion on the loss and loss adjustment
expense reserves. (This review of the work of another actuary and an opinion given based
on that review is also known as a second opinion.) The purpose and intended use of the
review opinion should be clearly understood by the reviewing actuary, since such
purpose might differ from the purpose of the opinion under review and could affect
considerations of materiality. In addition, the Code of Professional Conduct should guide
both the reviewing and reviewed actuaries. The following sections address the
responsibilities of both actuaries.
3.8.1 Responsibilities of Reviewing Actuary—The reviewing actuary should assess the

reasonableness of the data underlying the actuarial analysis and should evaluate
the appropriateness of the reserving methods and assumptions, with consideration
of the intended use of the reviewing actuary’s opinion. The reviewing actuary
need not perform an additional actuarial analysis if, in the opinion of that actuary,
the reviewed actuarial analyses are sufficient for the reviewing actuary’s
purposes. Where, in the opinion of the reviewing actuary, the reviewed analyses
need to be modified or expanded, this actuary should perform such analyses as
necessary to render an opinion.
If the conclusions reached by the reviewing actuary differ materially from those
of the reviewed actuary, the reviewing actuary should, when practical, contact the
reviewed actuary to discuss the differences. Where material differences exist, the
issues underlying the differences should be understood by the reviewing actuary
and should be disclosed in the review opinion.
3.8.2 Responsibilities of Reviewed Actuary—The reviewed actuary should comply

with the Code of Professional Conduct with respect to availability to respond to
questions from the reviewing actuary as to the methodology, assumptions, and
conclusions reached in the statement of actuarial opinion. If, in attempting to
resolve any differences in conclusions, the reviewed actuary changes his or her
opinion, the original statement by the reviewed actuary should be withdrawn or
revised.
11
3.9 Financial Reporting Items Affected by Loss and Loss Adjustment Expense Reserves—In
addition to loss and loss adjustment expense reserves, certain other assets and liabilities
can be contingent upon losses or loss adjustment expenses. Examples of such loss-
sensitive items include, but are not limited to, retrospective premiums, reinstatement
premiums, policyholder dividends, agent’s contingent commissions, profit-sharing
agreements, and contingent commissions or sliding scale commissions on ceded or
assumed reinsurance.
This standard does not obligate the actuary to undertake an evaluation of loss-sensitive
asset or liability accounts except as may be needed to comply with any applicable law,
regulatory requirement, or other ASOP. If the scope of the actuary’s opinion includes
loss-sensitive items, the actuary’s evaluation of such items should be consistent with the
actuary’s evaluation of the related loss and loss adjustment expense reserves.
3.10 Adequacy of Assets Supporting Reserves—This standard does not obligate the actuary to
undertake an evaluation of the adequacy of the assets supporting the stated reserve
amount except as may be needed to comply with section 3.9 of this ASOP or any
applicable law, regulatory requirement, or other ASOP.
4.1 Form and Content of Statement—A statement of actuarial opinion that is within the scope
of this standard of practice should include the words statement of actuarial opinion in the
title, and should satisfy the requirements of section 3.3 of this ASOP. When the statement
is provided to meet regulatory requirements, the actuary should consider the detailed
requirements specified by regulators as to the form and content of the statement and
supporting reports.

4.3 Reliance on Others for Supporting Analysis—The actuary who issues the statement of
actuarial opinion assumes responsibility for it, except to the extent to which the opinion
indicates reliance on the work of others. If the actuary makes use of other personnel to
carry out assignments relative to analyses supporting the opinion, the actuary should not
ordinarily indicate reliance on the work of others. In such cases, the actuary should
review and comprehend such contributions and be satisfied that the analysis provided was
reasonable. The actuary should then form an opinion without claiming reliance on the
work of others.
If the actuary claims reliance on the work of others and does not take responsibility for
such work, the actuary should include a disclosure in the opinion that describes the work
of others and the extent to which such others’ work was used in forming the opinion.
12
4.4 Reliance on Opinions of Other Actuaries—Another actuary may have provided a
statement of actuarial opinion regarding some portion of the subject reserves on which
the actuary is issuing a statement of actuarial opinion. The actuary should evaluate
whether such portions of the subject reserves are likely to have a material impact on the
actuary’s opinion regarding the total subject reserves. If the impact is likely to be
material, the actuary should decide whether or not to claim reliance on such opinions.
The actuary should claim reliance on the opinion of another actuary only if the actuary
ascertains that reliance on the other actuary’s opinion is consistent with the other
actuary’s intended use. The reliance on the opinion of another actuary should be
disclosed in the subject opinion with a description of the relevant reserves or subject
matter to which the reliance applies. If there is reliance on another actuary’s opinion that
precludes or limits the actuary’s recognition of significant risks and uncertainties
concerning material adverse deviation relating to the subject reserves, the actuary should
disclose this limitation.
4.5 Changes in Opining Actuary’s Assumptions, Procedures, or Methods—If a change occurs

in the opining actuary’s assumptions, procedures, or methods from those previously
employed in providing an opinion on the entity’s reserves, and if the actuary believes that
the change is likely to have a material effect on the results of the actuary’s reserve
analysis, then the actuary should disclose the nature of the change. If the actuary can not
make a judgement as to whether the change is likely to have a material effect on the
results of the actuary’s reserve analysis, then the actuary should disclose that there has
been a change in actuarial assumptions, procedures, or methods, the effect of which is
unknown. No disclosure is required unless the actuary believes that the change is likely to
have a material effect on the results of the actuary’s reserve analysis. In the case where
the opining actuary did not issue the prior statement of actuarial opinion, the actuary
should review the prior opining actuary’s work if possible. If the actuary is unable to
review the prior opining actuary’s work, the actuary should disclose this limitation.
4.6 Disclosure in the Opinion—The statement of actuarial opinion should include the
following disclosures:
a. If there have been changes in accounting or processing procedures that

significantly affect the consistency of the data used in the reserve analysis and
that the actuary believes are likely to have a material effect on the results of the
actuary’s reserve analysis, then the actuary should disclose the nature of such
changes in accounting or processing procedures.
b. The actuary should disclose whether the loss and loss adjustment expense
reserves that are the subject of the statement of actuarial opinion are on a gross
basis or if the reserves are net of applicable ceded reinsurance or net of applicable
excess insurance coverage.
c. If the scope of the opinion includes consideration of regulatory or accounting

requirements regarding risk transfer in reinsurance contracts and if an adjustment
13
to the reserves to satisfy such requirements is likely to have a material effect on
the results of the actuary’s reserve analysis, then the actuary should disclose the
impact of the risk transfer requirements.
d. If the actuary determines that the stated reserve amount is deficient or inadequate,
the actuary should disclose the additional amount of reserves that would be
necessary to equal the minimum amount that the actuary believes is reasonable.
e. If the actuary determines that the stated reserve amount is redundant or excessive,
the actuary should disclose the amount by which the stated reserve amount
exceeds the maximum amount that the actuary believes is reasonable.
f. If the actuary issues a qualified opinion, he or she should disclose in the opinion
the item or items to which the qualification relates, the reasons for the
qualification, and the amounts for such items, if disclosed by the entity, that are
included in the stated reserve amount. If the amounts for such items are not
disclosed by the entity, the actuary should disclose that the stated reserve amount
includes unknown amounts for such items.
g. If the actuary reasonably believes that there are significant risks and uncertainties
that could result in material adverse deviation, an explanatory paragraph (as
described in section 3.3.3) should be included.
h. If the statement of actuarial opinion relies on present values and if the actuary
believes that such reliance is likely to have a material effect on the results of the
actuary’s reserve analysis, the actuary should disclose that present values were
used in forming the opinion, the interest rate(s) used by the actuary, and the
monetary amount of discount that was included in the stated reserve amount.
i. If the statement of actuarial opinion relies on risk margins and if the actuary
believes that such reliance is likely to have a material effect on the results of the
actuary’s reserve analysis, then the actuary should disclose that risk margins were
used in forming the opinion and, if practical, disclose the amount of risk margin
that was included in the stated reserve amount.
j. If, in complying with the requirements of law or regulation, the actuary believes
that the reserve provisions are other than reasonable, he or she should so state,
consistent with sections 3.3.2(b–e) and 3.3.3.
4.7 Prescribed Statement of Actuarial Opinion—The actuarial communications described in

section 3.3.2 of this ASOP are prescribed statements of actuarial opinion (PSAOs) as
described in the Qualification Standards for Prescribed Statements of Actuarial Opinion,
promulgated by the American Academy of Actuaries, whether or not the PSAOs are
issued for purposes of compliance with law, regulation, or other standards.
14
15
Appendix 1
practice.
Background
In the mid-1970s, in reaction to the insolvency of a number of property/casualty insurance

companies, many of which involved inadequate reserves for loss and loss adjustment expenses,
the National Association of Insurance Commissioners (NAIC) recommended that a statement of
actuarial opinion on loss and loss adjustment expense reserves, signed by a qualified loss reserve
specialist, be submitted with the statutory annual statement to the domiciliary commissioner. The
qualified loss reserve specialist was initially defined as a member in good standing of the
American Academy of Actuaries or someone who otherwise satisfied the domiciliary commis-
sioner of his or her qualifications.
In 1978, to guide actuaries on their responsibilities, the American Academy of Actuaries adopted
Financial Reporting Recommendation 8, Statement of Actuarial Opinion for Fire and Casualty
Insurance Company Statutory Annual Statements, along with Interpretations 8-A, 8-B, and 8-C.
The Recommendation and Interpretations focused on the specific requirements at the time.
By 1990, the NAIC had adopted a change to the NAIC Instructions for the Annual Statement to
require a statement of opinion by a qualified actuary. Over the years, the number of specific
aspects upon which the signer was instructed to comment has continually grown. Such aspects
currently include anticipated salvage and subrogation; discount for time value of money; under-
writing pools and associations; loss portfolio transfers; financial reinsurance; reinsurance collect-
ibility; NAIC IRIS Tests 9, 10, and 11; and any additional relevant topics. The statement of
opinion has become a statement of actuarial opinion. In addition, effective with the 1993
statutory annual statements, the qualified actuary “must be appointed by the Board of Directors
or its equivalent, or by a committee of the Board, by December 31 of the calendar year for which
the opinion is rendered.”
In addition, statements of actuarial opinion have been requested for other entities that are not
covered by insurance company regulations. Such entities include self-insureds, self-insured
pools, residual market mechanisms, voluntary pools, and funds or other risk-pooling entities
created by legislation or regulation.
It was clear to the profession that Financial Reporting Recommendation 8 and its Interpretations
are outdated and provide inadequate guidance to actuaries. Moreover, the Actuarial Standards
Board determined that the guidance should be embodied in an actuarial standard of practice.
16
While the NAIC requirements for a statement of actuarial opinion by the appointed actuary gave
a sense of urgency for such a standard to be developed, it was also recognized that actuaries
often render statements of actuarial opinion, whether or not there are formal requirements.
Accordingly, it was determined that a standard of practice was needed with a more universal
application than the current NAIC requirements for the statement of actuarial opinion for the
statutory annual statement.
Current Practices
Actuaries are guided by the Statement of Principles Regarding Property and Casualty Loss and
Loss Adjustment Expense Reserves of the Casualty Actuarial Society and by other ASOPs issued
by the Actuarial Standards Board. In addition, since 1993, the Casualty Practice Council of the
American Academy of Actuaries has published practice notes addressing current NAIC
requirements for the statement of actuarial opinion. The practice notes describe some current
practices and show illustrative wording for handling issues and problems. While these practice
notes can be updated to react in a timely manner to new concerns or requirements, they are not
binding, and they have not gone through the exposure and adoption process of the actuarial
standards of practice promulgated by the Actuarial Standards Board.
17
Appendix 2
Comments on the 1999 Third Exposure Draft and Subcommittee Responses
The third exposure draft of this proposed actuarial standard of practice (ASOP) was exposed for
review in September 1999, with a comment deadline of December 16, 1999. (The third exposure
draft summarizes the comments received on the second exposure draft, and the responses of the
Subcommittee on Reserving to such comments. Copies of these exposure drafts are available
from the ASB office.) Fifteen letters of comment were received on the third exposure draft.
Some of the comment letters were submitted on behalf of groups of actuaries. Consequently, the
references to comments in letters may represent the suggestions of a group. Summarized below
are the significant issues and questions contained in the comment letters, printed in roman type.
The subcommittee’s responses appear in boldface. In order to provide more complete
documentation of the important issues raised in comments letters from previous drafts, this
appendix also includes some comments and responses from those previous drafts.
What follows is a general discussion of the main issues that surfaced in the comment letters, with
comments on specific sections of the standard following.
Comment letters included a request that the ASOP provide more guidance by giving examples in
the various sections of the ASOP, a concern that many actuaries are not really aware of the
ASOP, and a suggestion to contact all actuaries by telephone. The subcommittee followed a
format similar to other ASOPs and believed that detailed examples were not necessary for
this ASOP. The subcommittee believes that sufficient notification to affected actuaries had
been accomplished through the distribution of three exposure drafts to all members of the
American Academy of Actuaries, the presentation and public discussion of the drafts at
actuarial meetings and seminars over several years, and the holding of a public hearing.
A comment letter expressed concern that the profession is not yet ready for an ASOP and a
comment letter from a previous draft questioned the need for a formal ASOP. The chief concerns
were the possible negligence that could be attributed to actuaries who fail to follow the ASOP
and the possible interpretations of the ASOP that could be used against actuaries with different
interpretations of how to follow the ASOP. The subcommittee believes that regulators,
auditors, and others have expressed the need for formal standards for opinions on loss and
loss adjustment reserves. Since actuaries are the professionals who provide such opinions,
the subcommittee believes that actuaries ought to determine their own professional
standards. Without an ASOP in this area, there would be greater uncertainty about what is
an acceptable statement of actuarial opinion.
The subcommittee believes that it is appropriate to allow considerable latitude to actuaries

in judging materiality and disclosing significant risks and uncertainties, and in applying
other areas of the ASOP by using their own judgment. The subcommittee recognizes that
18
this latitude could result in different approaches among actuaries in applying this ASOP.
The subcommittee believes, however, that this ASOP is needed to promote a consistency of
approach such that actuaries will consider risk, materiality, and certain other factors in
developing their statements of actuarial opinion. The subcommittee believes that it would
not be appropriate for the ASOP to prescribe specific methods for including such
considerations. The subcommittee believes that the ASOP provides adequate guidance for
actuaries who provide statements of actuarial opinion.
Two comment letters from previous drafts expressed concern about the use of certain phrases in
the ASOP because of possible misinterpretations that might create unrealistic expectations that
actuaries will perform extensive or exhaustive investigations to support their opinions. The
phrases should consider and should ascertain were selected by the subcommittee to allow
actuaries to have a minimum level of knowledge about an area as might be obtained by
interviews, questionnaires, written memos or reports, or informal discussions. The
subcommittee eliminated the phrases should understand and should be knowledgeable about
that appeared in previous draft versions of the ASOP, because those phrases could be
interpreted to mean a higher level of knowledge than was intended. The subcommittee
believes that actuaries do not need to perform extensive investigations in order to comply
with this standard.
Another comment letter suggested that the reserve opinion include the actuary’s point estimate as
well as the actuary’s range of estimates and a discussion of the impact of changing the reserves
in terms of capital position, financial results, and regulatory tests. This letter also recommended
that a copy of the Statement of Actuarial Opinion (SAO) be sent to the ASB to insure
compliance with the ASOP and prescribed disciplinary action for lack of compliance. The
subcommittee did not believe that it was necessary for actuaries to provide a point estimate
of the needed reserves that differed from the stated reserve amount, nor to disclose a range
of reasonable estimates. Furthermore, the responsibilities of the ASB do not include
policing compliance with ASOPs.
Section 1.2, Scope—Seven comment letters were submitted with comments on this section.
Some of the comment letters mentioned concerns that possible misinterpretations of the scope of
the ASOP could result in the erroneous expectation that various actuarial work products are
SAOs or that actuaries might avoid application of the ASOP by not labeling their work product
specifically as a statement of actuarial opinion. Previous comment letters were also concerned
that the scope of the standard was too vague or that any statement of actuarial conclusion, or
even an internal memo or published article, could be interpreted as subject to the ASOP. The
subcommittee modified section 1.2 to state more clearly that the standard applies only to a
written SAO that is either provided to comply with law or regulation or is represented by
the actuary as an SAO regarding loss and loss adjustment expense reserves. The
subcommittee does not intend that this ASOP should apply to all reserve work performed
by actuaries. However, the ASOP is intended to apply to the actuary who represents a
formal written statement as his or her professional opinion regarding the reasonableness of
19
a stated amount as a provision for defined obligations for unpaid losses and loss
adjustment expenses.
One comment letter was concerned that the use of the words statement of actuarial opinion or
something similar may create an obligation for the actuary to adhere to the ASOP when the
actuary’s work was not intended or represented to be an SAO. The subcommittee believed that
if the actuary represents his or her actuarial work product as an SAO, then the work
product should be subject to the ASOP. Such representation could be in the title, cover
letter, engagement letter, or other communication. However, use of the words alone,
without any representation that the actuarial work product is an SAO, does not create an
obligation under the ASOP.
While it is fairly common for actuaries to make reserve estimates or recommendations

regarding reserves for losses and loss adjustment expenses, the subcommittee does not
believe that this ASOP should apply to such actuarial work. The subcommittee
understands that an actuary’s employer or client may expect that the actuary will be able
to provide an SAO that reserves are reasonable based on the estimates or
recommendations provided by the actuary. Consequently, actuaries may want to (1) clarify
the use of actuarial work products that are not intended to be an SAO; (2) follow the ASOP
guidance and be prepared to provide an SAO regarding the estimates or recommendations;
or (3) mitigate potential misinterpretation or misuse of the actuarial work product by
discussing the employer’s or client’s expectations regarding the work product.
The subcommittee modified the wording to clarify that this ASOP does not apply when an
actuary is providing analyses, estimates, information, data compilations, or other actuarial
work products unless they meet the conditions in section 1.2. Examples of actuarial work
products that would generally be excluded from this standard include rate filings,
reinsurance pricing, reports for internal purposes only, or work papers of actuaries
supporting independent auditors. The subcommittee believes that use of the specific title,
statement of actuarial opinion, will assist actuaries and their employers or clients in
communicating the actuary’s work product and the expectations regarding the actuarial
standards that apply. Consequently, section 1.2 is worded so that application of the ASOP
is not dependent on the use of a specific title, but rather on whether the intended use of the
SAO is to comply with law or regulation requiring an SAO or if the actuary represents the
work product as an SAO. The ASOP retains the requirement in section 4.1 that the title
include the words statement of actuarial opinion, but the standard applies even if a different
title is used.
Another comment letter questioned why the ASOP could not be expanded to address unearned
premium reserves or other non-loss reserves, particularly if a law or regulation requires that the
SAO include an opinion regarding such items. The subcommittee did not believe that it was
necessary for the ASOP to address non-loss reserves. However, section 3.9 of the ASOP
does require that an actuary issuing an opinion, which addresses loss-sensitive items should
be consistent with the related loss and loss adjustment expense reserves.
20
One comment letter recommended that the reference to reports, workpapers, or other
documentation in support of an SAO are outside the scope of this ASOP. The subcommittee
removed all references to actuarial work products or reports in support of an SAO.
Section 1.4, Effective Date—One comment letter suggested that Actuarial Standards Board delay
approving this ASOP until the NAIC can adopt similar actuarial opinion rule changes, which,
under current procedures, could not be effective until 2002. Six comment letters from the
previous draft strongly suggested that actuaries need substantial lead time in order to prepare for
implementing this ASOP. The subcommittee believes that this ASOP can be implemented
without NAIC approval and without changing the current actuarial opinion rules of the
NAIC. The subcommittee believes that in due course the NAIC may be able to incorporate
the ASOP by reference in place of many of the requirements contained in the current
NAIC actuarial opinion rules. The subcommittee also recognizes that variations in
actuarial practice may require additional communication and preparation time for some
actuaries to incorporate the requirements of this ASOP into their opinions. The
subcommittee believes that sufficient notification to affected actuaries has been
accomplished through the distribution of three exposure drafts to all members of the
American Academy of Actuaries, the presentation and public discussion of the drafts at
actuarial meetings and seminars over several years, and the holding of a public hearing.
Consequently, the subcommittee revised the effective date for all statements of actuarial
opinion provided for reserves with a valuation date on or after October 15, 2000.
Section 2.6, Expected Value Estimate (previously section 2.7)—Two comment letters believed
that the definition of an expected value estimate given in section 2.6 was inconsistent with
section 3.6.3 (previously section 3.7.3) on Expected Value Estimates or section 3.6.4 (previously
section 3.7.4) regarding the Range of Reasonable Estimates. While section 2.6 defined an
expected value estimate in terms of a probability-weighted average over all possible values,
section 3.6.3 does not require the determination of all possible values or the probabilities
associated with such values. The subcommittee does not find that these sections are inconsistent
and believes that the definition simply follows well-known statistical concepts of expected value
and mean value. This definition refers to an estimate of the underlying mean value, which is a
theoretical value, and the actuarial literature and statistical theory
provides many acceptable approaches to the estimation of an expected value or mean without
determining all possible values or the probabilities of such values.
Section 2.14, Statement of Actuarial Opinion (previously section 2.15)—Three comment letters
objected to the wording normally does not include descriptive or numerical details because they
believed it appears to limit the type of actuarial work product that can be an SAO simply because
of the type or extent of descriptive or numerical details it contains. The ASB agreed and
deleted this wording.
21
Section 3.1.3, Appointment as Appointed Actuary—A comment letter asked for the rewording of
this section to clarify that it is not the actuary’s responsibility to be appointed. The
subcommittee agreed and reworded this section.
Section 3.2.1, Reserving Principles—One comment letter thought that this section was repetitive
with the Statement of Principles. Another comment letter from the previous draft expressed
concern that the requirement that actuaries consider the Statement of Principles effectively
requires actuaries to comply with all the provisions contained in that statement. The
subcommittee believes that the ASOP does not rely on the Statement of Principles nor are
any of the statements contained in the Statement of Principles incorporated into this ASOP.
The reference to the Statement of Principles is made in this ASOP so that the actuary will
become familiar with the document and its contents; however, the actuary is not required
by this standard to comply with any statements contained in the principles. In particular,
Section III, Considerations, of the Statement of Principles contains several should
statements regarding various facets of actuarial reserve work. This ASOP includes similar
statements in those specific areas that the subcommittee believed the ASOP should address.
There are other areas addressed in the Statement of Principles that are not addressed in the
ASOP because the subcommittee believes that it is unnecessary to include them in the
ASOP.
The Statement of Principles does not set forth standards for reserve analysis. Principles are
not intended to contain guidance that would direct actuarial practice, whereas an ASOP
does specify professional practice requirements and must go through a specified due
process, including exposure, response to comments, and review and approval by the
independent Actuarial Standards Board.
Section 3.3.2(b), Determination of Deficient or Inadequate Provision and Section 3.3.2(c),

Determination of Redundant or Excessive Provision—One comment letter stated that the phrase
does not make a reasonable provision should equally be applied to sections 3.3.2(b) and 3.3.2(c)
and should therefore be changed. The subcommittee changed section 3.3.2(c) to the same
language as section 3.3.2(b).
Another comment letter from a previous draft was concerned about how this section should be
applied where the applicable statutes require reserves to be good and sufficient rather than
reasonable. The subcommittee recognizes that actuaries are required to comply with laws
and regulations. Sections 3.1.2 and 4.6(j) of the ASOP provide the guidance regarding such
compliance.
Section 3.3.2(d), Qualified Opinion—One comment letter thought that the term qualified had an
entirely different meaning when used for audit opinions. The subcommittee used accounting
guidance in developing the logic and language for this section and therefore there should be
little, if any, difference in the use of this term. The ASOP’s specific usage of this term is
similar to the accounting literature’s guidance suggesting except for in a qualified audit
opinion. However, the ASOP does not require the use of the term qualified in the SAO.
22
Two previous comment letters were concerned about reserves that cannot be reasonably
estimated and how large the except for reserves could be before the opinion is no longer useful.
The subcommittee believes that if a reserve component cannot be reasonably estimated,
and the actuary has determined that such a component is not material, then the actuary
can opine that the overall reserves are reasonable. The subcommittee recognizes that
companies with hard-to-analyze exposures may receive qualified opinions.
The subcommittee agrees that a qualified opinion is intended to exclude a portion of the
reserves from the opinion. A qualified opinion allows the actuary to separate a definable
segment of the reserves that cannot be evaluated for reasonableness. However, it may not
be possible for the actuary to specify the amount of reserves associated with the except for
portion of the reserves in a qualified opinion, because this is the portion that cannot be
reasonably estimated. If the entity separates its reserves associated with the qualified
portion, the subject reserves of the actuary’s opinion could exclude the amount associated
with this portion.
Section 3.3.3, Significant Risks and Uncertainties (Explanatory Paragraph) (previously titled
Significant Risk of Material Adverse Deviation)—Five comment letters were received regarding
this section. Some were concerned about the lack of guidance regarding what constitutes
significant and how it should be measured. Some suggested using a title and wording that were
less specific and did not appear to require specific measurement of probabilities. Others
suggested using wording similar to the NAIC requirement to comment on major risk factors. One
comment letter recommended use of the term significant risks and uncertainties as used in
accounting literature, because the disclosures for loss reserve opinions intended by this section
seem comparable to the disclosures required for estimations within audited financial statements
(AICPA Statement of Position 94-6, Disclosure of Significant Risks and Uncertainties). The
subcommittee modified the language of this section to remove the implication that risk
needs to be measured and the suggestions regarding the accounting disclosure guidance
and the NAIC discussion of risk factors were incorporated into the revised wording. The
ASOP still requires the actuary to make a judgment regarding when there are significant
risks and uncertainties associated with the reserves that could result in a material adverse
deviation. The changes are intended to reduce the concerns that actuaries will be expected
or required to measure risk.
One comment letter suggested that the actuary disclose any risk factor that can reasonably be
expected to cause material deviation. The subcommittee believes that it is unreasonable for
the ASOP to require the disclosure of any risk factor because this could imply that the
actuary has to do an unlimited amount of work to find any risk factor and then determine
if any of the risk factors can be reasonably expected to cause material deviation. Another
comment letter suggested that the ASOP should also clearly state that the actuary is not
compelled to identify any or all specific sources of potential deviation. The subcommittee
agrees with this comment and added wording to the ASOP to incorporate this clarification
of the actuary’s responsibility.
23
Two previous comment letters found the ASOP flawed in the use of the terms material and
significant because they believe that such terms do not give sufficient guidance. The
subcommittee’s use of the term material in the ASOP generally is intended to refer to a
financial amount selected by the actuary. Use of the term significant in the ASOP refers a
high degree of importance or relevance and is intended to reduce or limit the actuary’s
work with respect to minor items or items of little impact.
The subcommittee recognizes the challenges in considering the implications of risk and
uncertainty in reserves, particularly when some commonly used actuarial methods do not
address variability in reserves or materiality. Nonetheless, the subcommittee strongly
believes that the actuary should be capable of providing an opinion that provides
meaningful information when the risks and uncertainties associated with reserves is
noteworthy. The subcommittee believes that the actuary should have sufficient flexibility to
use a combination of the actuary’s own judgment and analysis as may be practical and
appropriate in each situation. The subcommittee believes that the actuary’s decision
whether to include an explanatory paragraph in the opinion needs such flexibility, and that
it is not desirable to specify measures or thresholds that would, in the end, be considered
arbitrary or very difficult to implement.
Section 3.4, Materiality—Two comment letters addressed several issues concerning this section.
One concern was that this topic probably needs a separate standard and that it is very difficult to
interpret what is expected of the actuary and how he or she is going to be judged. Another
concern was what is not material to one party may be to another party, or a relatively small
amount could be argued as material after a problem arises. One of the comment letters suggested
wording regarding that the actuary follow applicable guidelines or regulations for determining
materiality. The subcommittee agrees that it would be better to already have a materiality
standard to which to refer, but the lack of such a standard is not critical to the use of the
ASOP, particularly since the principal uses of materiality in the ASOP are for the actuary
to decide if an explanatory paragraph is needed or if the actuary’s opinion regarding
whether the reserves are reasonable will change due to certain factors, such as the use of
discounting. Portions of the suggested wording regarding applicable materiality guidelines
were incorporated into the ASOP.
A previous comment letter believed that the materiality threshold for gross versus net reserves
should not be the same. The subcommittee believes that the ASOP allows for an actuary to
select a different materiality threshold for gross reserves than for net reserves when the
actuary is opining on both gross and net. Similarly, an actuary may select a separate
materiality threshold for other amounts when the actuary is opining on them separately.
Another previous comment letter questioned how materiality issues of actuaries compare with
those of auditors. The subcommittee provided guidance in the ASOP to direct actuaries to
select one or more measures of determining materiality—specifically, measures that
consider the financial values important for the intended uses of the statement of actuarial
opinion. The subcommittee recognizes that the purpose and intended uses of actuarial
opinions may not be the same as for audit opinions. Consequently, the materiality
24
threshold for an actuarial opinion will depend on the purpose of the opinion, its intended
use, and the specific circumstances involved.
Section 3.5, Reserve Analysis (previously divided into two sections, including Section 3.6,
Testing and Validation, which is now deleted)—Two comment letters questioned the title
Testing and Validation because it could be interpreted to mean a very specific procedure and
may create an expectation that the actuary has audited the data underlying the opinion by testing
and validating various data compilations, which is generally not current practice. Another
concern was with the use of the phrase be familiar with because it could imply a higher degree of
knowledge about specific details than is normal in most actuarial work. It was suggested that the
wording be changed to request and consider information on in this section and in the associated
sections. The subcommittee merged the Testing and Validation section into section 3.5,
Reserve Analysis, and deleted the references to testing, validation, or verifying data,
assumptions or compilations, and changed be familiar with to consider. The subcommittee
did not believe it was necessary to add the suggested request information on wording.
Comment letters received about the Testing and Validation section from the previous draft
included remarks that questioned whether the ASOP requires the actuary to know everything that
could turn out to have been relevant and will be held responsible for not having dug deeply
enough to have known what could have gone wrong, and whether one numerical error could put
the actuary’s work in question. Other comments expressed concern that the actuary will be
judged using hindsight after a problem arises and that actuaries could be held to this ASOP even
before its effective date. Concern was also expressed that the ASOP does not provide an
effective safe harbor for actuaries because it is not specific enough and is too loosely defined.
Further, another comment letter believed that the actuary should only be required to inquire
about various items rather than consider them. The subcommittee believes that this ASOP will
not apply retroactively or before the effective date of the standard. In addition, the
subcommittee disagrees with the suggestion that actuaries should be protected by a safe
harbor which would only require collecting information or making inquiries. The ASOP is
intended to require the actuary to use the information collected or the responses to the
inquires in determining an opinion on the reasonableness of the stated provision for
reserves. The actuary’s responsibility is limited under the ASOP to when it is likely that
there is a material effect on the results of the actuary’s reserve analysis or on the risks and
uncertainties associated with the reserves.
Section 3.5.6, Changes in Assumptions, Procedures, or Methods (previously section 3.6.6)—One

comment letter expressed concern about the potential problems involved when the opining
actuary may change, the cumbersome procedures of having to distribute prior workpapers from
the previous actuary to potential new actuaries, and the complications associated with different
methods normally used by the new actuary versus the previous actuary. The subcommittee
believes that the actuary should obtain and review the previous actuarial analysis if
possible. The subcommittee believes that such a review is needed to assess changes in
methods or assumptions as required for NAIC opinions. Section 4.6 provides the disclosure
requirements regarding such changes and the actuary’s access to the prior actuarial work.
That section was reworded to permit disclosure of situations where the actuary can not
25
make a judgment regarding the effect of the change or where the actuary is unable to
review the prior work.
Section 3.6.3, Expected Value Estimate (previously section 3.7.3)—One comment letter, which
was resubmitted from the previous draft, objected to the implications that expected value
estimates were preferred over other measures and that the ASOP implied that the probability
distribution of reserves was not important. The subcommittee believes that the use of expected
value estimates is a common basis used by actuaries for determining the estimates used in
reserve analyses. However, the standard does not require actuaries to rely only on expected
value estimates, but rather to include such measures in evaluating the reasonableness of
reserves. The subcommittee agrees that the probability distribution of reserves is
important, but recognizes that such distributions are rarely available to the actuary.
Section 3.6.4, Range of Reasonable Reserve Estimates (previously section 3.7.4)—One previous
comment letter thought that the range should be disclosed in order for the reader of an opinion to
fully understand the implications of the opinion. Another believed that the disclosure of the
range should not be required. The subcommittee believes that the actuary may be able to
consider a range of reasonable estimates for purposes of the opinion without having to
specify the end points of the range. This is acceptable because the actuary could be basing
the opinion on various methods and estimates that produce results not much different from
the stated reserve amount. Consequently, disclosure of a specific range is unnecessary.
Several comment letters were received on the latest and the previous drafts. One comment
questioned whether a risk margin should be permitted at all because an actuary might be
considered negligent for not including a risk margin. Other comments objected to allowing risk
margins because of the lack of current guidance regarding them, argued that allowing risk
margins should require disclosure if such margins are included, and suggested that an actuarial
standard that allows including a risk margin is inconsistent with accounting principles and tax
laws, which do not provide this option. The subcommittee chose the permissive language, i.e.,
that the actuary may include a risk margin in a range of reasonable reserve estimates, to
allow actuaries to use a risk margin in special situations where the use of a risk margin is
justified and consistent with the purpose or intended uses of the opinion. If the particular
application does not allow a risk margin because of law or regulation, then the actuary may
not be able to consider a risk margin in the opinion. The subcommittee believes that
accounting rules or tax regulations are effectively law or regulation and, therefore, the
guidance in the last paragraph of section 1.2 requires that the actuary follow the law or
regulation. However, an actuary may be able to consider a risk margin for reserves that
might otherwise be held to be redundant or excessive, if such use does not conflict with
laws, regulations, or the intended purpose and uses of the opinion. Furthermore, for new
companies or companies with unique exposures (for example, high severity and low
frequency), a risk margin may be justified as a reasonable reserve because of the potential
adverse reserve development from large infrequent losses.
One comment letter expressed concern about an opinion that reserves are reasonable solely
because of the inclusion of risk margins. The subcommittee agreed that the use of a risk
margin to extend the range of reasonable estimates so that the actuary would not have to
26
issue an SAO that reserves were excessive or redundant would need to be disclosed. Section
4.6 was changed by adding section 4.6(i), such that if the actuary relied on risk margins and
the actuary believes that the effect of such reliance is likely to have a material effect on the
result of the actuary’s reserve analysis, then the actuary should disclose that risk margins
were used and, if practical, disclose the amount of risk margin included in the stated
reserve amount. The subcommittee believes that there would be a material effect if reliance
on risk margins was the difference between the actuary opining that the reserves were
reasonable versus opining that they were not reasonable. However, the subcommittee also
believed that disclosure of risk margin would not be necessary if reserves are judged to be
reasonable with or without the consideration of a risk margin.
The subcommittee believes that disclosure of a risk margin amount may be impractical
since it is not expected that such a margin would be a separate amount. In some cases a risk
margin could be the result of the selected actuarial assumptions and methods used to
evaluate the reasonableness of the reserves and cannot be readily identified. Also, the
actuary’s opinion addresses whether a stated amount is reasonable, and the actuary may
not know how much of a risk margin, if any, is included. However, the disclosures required
in section 4.6 were revised to include a disclosure that risk margins were used in forming
the opinion if the actuary believes that the reliance on risk margins is likely to have a
material effect on the results of the actuary’s reserve analysis. Also, the actuary is required
to disclose the amount of risk margin included in the stated reserve amount, if practical.
Section 3.6.5, Adverse Deviation (previously section 3.7.5, Risk of Material Adverse
Deviation)—Two comment letters questioned the one-sided nature of the risk consideration in
the ASOP. It was suggested that the risk of a favorable deviation should also be addressed. The
subcommittee considered whether the actuary’s opinion regarding reserves should include
the consideration of the risk of material favorable deviation. The subcommittee believed
that a common concern among users of SAOs is the risk of material adverse deviation. This
section of the ASOP does not restrict actuaries from addressing the risk of favorable
deviation but the subcommittee did not believe that it was necessary to require actuaries to
consider such risk in every SAO. The subcommittee recognizes that a situation could exist
where the risk of overstated reserves is important, such as when a potential seller might
want to know the chance of favorable deviation that could increase the net worth and
consequently the price received for the sale. The subcommittee believes that this type of
situation can be addressed by the actuary within the intended uses of the opinion, and that
this ASOP does not need to include specific requirements for such cases.
Section 3.7, Reinsurance Ceded (previously section 3.8)—Two comment letters were received
on this section and the related sections; both contained editorial suggestions. One comment letter
raised concern that the ASOP was not strong enough regarding reserves for uncollectible
reinsurance and an additional requirement should be added for a provision for potentially
uncollectible reinsurance. The subcommittee made minor wording changes based on the
suggestions, but did not believe that it was necessary to consider additional requirements
for uncollectible reinsurance. One letter suggested that the ASOP should address how to handle
intercompany pooling arrangements, particularly with respect to the use of data for the reserve
analysis. The subcommittee recognizes that the use of intercompany pooling arrangements
27
can vary from one organization to the next and the actuary may need to become familiar
with the details of such arrangements depending on their impact. However, the
subcommittee did not believe that this ASOP could provide guidance for such situations
because each situation would need to be evaluated individually.
Section 3.7.4, Risk Transfer Requirements (previously section 3.8.4)—Six comment letters
thought the requirements of this section were unclear as to when and how the actuary should
evaluate risk transfer in reinsurance contracts. One comment was that the evaluation of risk
transfer was not within the scope of this ASOP. Another comment letter suggested that the
actuary should make sure that all ceded reinsurance contracts meet the applicable accounting
standards for risk transfer. The subcommittee believes that this ASOP should not provide
guidance regarding risk transfer and reworded this section to clarify that the ASOP does
not require the actuary to opine on risk transfer. The subcommittee believes that if the
actuary’s opinion addresses risk transfer, the actuary needs only to consider if there are
any reserve adjustments needed to meet the risk transfer requirements and whether such
adjustments will affect the actuary’s reserve opinion.
Section 3.9, Financial Reporting Items Affected by Loss and Loss Adjustment Expense Reserves
(previously section 3.10)—A previous comment letter expressed concern that the ASOP does not
require actuaries to review accruals related to ceded reinsurance contracts with loss-sensitive
features for consistency with reserves net of reinsurance. The subcommittee agrees with the
concern, but did not wish to impose additional requirements on actuaries in this area,
unless such requirements were needed to comply with laws, regulations, or another ASOP.
The comments received on the first exposure draft were strongly opposed to including such
requirements in the ASOP.
Section 3.10, Adequacy of Assets Supporting Reserves (previously section 3.11)—A previous
comment letter was concerned about situations where liabilities or undiscounted reserves exceed
assets and suggested that actuaries should be required to disclose such circumstances. The
subcommittee believes that it is unnecessary for this ASOP to require actuaries to disclose
asset values, either alone or in comparison to liabilities, because of the additional
obligations actuaries might assume in the process.
Section 4.2, Documentation (previously titled Documentation and the Actuarial Report)—One
comment letter expressed concern that the actuary’s work papers must reference every
consideration mentioned in the ASOP, including how the actuary considered the items, what the
actuary found, and what effect it had on the opinion, in order to demonstrate compliance with the
standard. The disclosure and documentation requirements for actuarial work subject to this
ASOP are described in section 4 of this ASOP and in ASOP No. 9. The subcommittee
disagrees with the comment that every consideration must be referenced in the actuary’s
work papers in order to demonstrate compliance with this ASOP. The subcommittee
believes that the actuary only needs to document data or information that the actuary
judges to be significant. Furthermore, actuaries are guided by ASOP No. 9, regarding the
28
extent of documentation needed for actuarial work performed in complying with this
ASOP.
Section 4.3, Reliance on Others for Supporting Analysis—One comment letter requested
including the requirement that the actuary obtain confirmation in advance from those whose
work is being relied upon before claiming reliance on work performed by others. The
subcommittee did not believe that it was necessary to obtain such confirmation because the
reliance is disclosed in the opinion. This is simply a disclaimer regarding the work of others
for which the actuary does not accept responsibility. However, the actuary still should be
satisfied that it is appropriate to rely on the work of others. The subcommittee believed it
was unnecessary for the actuary to notify others or obtain such confirmation.
Section 4.4, Reliance on Opinions of Other Actuaries—One comment letter believed that the
actuary should not be responsible for reviewing the work underlying another actuary’s opinion.
The subcommittee eliminated the references to using the work of another actuary but not
claiming reliance on it. Another comment letter and two others from the previous draft were
concerned about reliance on another actuary’s opinion without notification or implied consent.
The subcommittee did not believe that it was necessary to notify another actuary because
the reliance is disclosed in the opinion. This is simply a disclaimer that the actuary relied
on the opinion of another actuary and the actuary does not accept responsibility for the
opinion of another actuary. The subcommittee believes that in rendering an opinion that
relies on another actuary’s opinion, the actuary still accepts the responsibility that relying
on another actuary’s opinion is appropriate given the scope, purpose and intended use of
each opinion. Consequently, the subcommittee did not believe it was necessary for the
actuary to notify another actuary or obtain consent in order to rely on another actuary’s
opinion.
Section 4.5, Changes in Opining Actuary’s Assumptions, Procedures, or Methods—One

comment letter from a previous draft noted that it would be reasonable for disclosure to be
required only if there were material effects associated with changes. The subcommittee concurs
with the comment. However, the subcommittee believes that disclosure is still required if a
change in methods, procedures, or assumptions produces a minimal change in reserves but
when the continued use of prior methods would still have resulted in a material reserve
change.
Section 4.6, Disclosure in the Opinion (previously titled Disclosure in Opinion and Report)—
Three comment letters contained a few suggestions for editorial changes to various sections. The
subcommittee made minor editorial changes based on some of these suggestions. One
comment letter objected to the disclosure of the discount amount because the actuary should not
be required to comment separately on the amount of discount as a separate component of the
reserves. Another comment letter suggested that the disclosure of the discount amount should be
limited to the amount reflected in setting the reserves. The subcommittee felt that if the
actuary believes that reliance on present values is likely to have a material effect on the
results of the actuary’s analysis, the actuary should be required to disclose that present
values were used in forming the opinion, the interest rates used by the actuary, and the
29
amount of discount included in the stated reserve amount. The subcommittee modified the
wording accordingly.
Section 4.7, Prescribed Statement of Actuarial Opinion—One comment letter suggested adding a
statement that not all PSAOs fall within the scope of this ASOP. The ASB believes it is clear
that section 4.7 only applies to those PSAOs that are within the scope of this standard and
therefore left the text unchanged.
The Subcommittee on Reserving thanks those who took the time and made the effort to send in
comment letters on the three exposure drafts. The input was very helpful in developing this
ASOP.
30
Actuarial Standard
of Practice
No. 37
Allocation of Policyholder Consideration

in Mutual Life Insurance Company Demutualizations
Developed by the
Task Force on Allocation of Policyholder Equity of the
Adopted by the
June 2000
(Doc. No. 070)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Actuarial Contribution 1
2.2 Consideration 2
2.3 Demutualization 2
2.4 Eligibility Date 2
2.5 Eligible Policyholder 2
2.6 Historical Contribution 2
2.7 Membership Rights 2
2.8 Mutual Company 2
2.9 Plan of Conversion 2
2.10 Policy 2
2.11 Voting Rights 2

3.1 Policyholder Eligibility 3
3.1.1 Components of Consideration 3
3.1.2 Reinsurance 3
3.2 Basis of Allocation 3
3.2.1 Basis for Allocating the Fixed Component 4
3.2.2 Amount Allocated as the Fixed Component 4
3.2.3 Basis for Allocating the Variable Component 4
3.2.4 Calculating the Actuarial Contribution 5
3.2.5 Treatment of Negatives 6
3.3 Experience Factors 7
3.3.1 Experience Factors Related to Past Experience 7
3.3.2 Experience Factors Related to Anticipated Future Experience 8
3.3.3 Other Approaches 9
3.4 Continuity Issues 9

4.2 Reliance on Asset Cash-Flow Projections Supplied by Others 10
ii
4.3 Law and Regulation 10

4.4 Actuarial Report or Statement of Actuarial Opinion 10
APPENDIXES

Background 12
Actuarial Contribution 12
Eligibility 12
Amount Allocated as the Fixed Component 13
Amount Allocated as the Variable Component 13
Legitimacy of Historical Practice 14
Converted Policies, Replacements, and Policy Exchanges 14
Supplemental Contracts and Settlement Options 15
Change in Policy Conditions Due to Update Programs 15
Non-Par Coverages Associated with Terminated Group Contracts 15
Data Problems 15
iii
June 2000

Actuarial Standards Board and Other Persons Interested in the Allocation of
Policyholder Consideration in Mutual Life Insurance Company Demutualizations
This booklet contains the final version of ASOP No. 37, Allocation of Policyholder
Consideration in Mutual Life Insurance Company Demutualizations.
Background
In the past decade, an increasing number of mutual life insurance companies have converted to
stock life insurance companies, sometimes including the formation of a mutual holding
company. Demutualizations present important actuarial issues, including the preservation of
reasonable policyholder dividend expectations, and the allocation among eligible policyholders
of the consideration that may be due them in exchange for their membership rights.
This ASOP deals with actuarial responsibilities with respect to the allocation of policyholder
consideration. Actuaries are often involved in many aspects of such allocation, including
advising on the actuarial aspects of eligibility of policies for consideration, as well as the
allocation of consideration to eligible policyholders.
Exposure Draft
The first exposure draft (published in May 1999) received eighteen comment letters. These
comments and the Task Force on Allocation of Policyholder Equity responses were summarized
in appendix 2 of the second exposure draft published in December 1999. Eight comment letters
were received on the second exposure draft. For a summary of the substantive issues contained in
these eight comment letters and the task force’s responses, please see appendix 2.
The key change from the second exposure draft was additional clarification regarding the
treatment of reinsurance in calculating the actuarial contribution (section 3.2.4(g)).
The Task Force on Allocation of Policyholder Equity and the Life Committee thank all those
who commented on the first and second exposure drafts.
The ASB voted in June 2000 to adopt this final standard.
iv
Task Force on Allocation of Policyholder Equity

Kenneth M. Beck Dale S. Hagstrom
Charles Carroll William C. Koenig
Sue Collins


v
ALLOCATION OF POLICYHOLDER
CONSIDERATION IN MUTUAL LIFE INSURANCE
COMPANY DEMUTUALIZATIONS
1.1 Purpose—The purpose of this standard is to give actuaries guidance in determining the
allocation of policyholder consideration when a mutual life insurance company or mutual
holding company demutualizes, or in reviewing, advising on, or opining on the actuarial
aspects of a proposed allocation; such aspects may include policyholder eligibility.
1.2 Scope—This standard of practice applies to actuaries who are determining, reviewing,
advising on, or opining on the allocation of policyholder consideration during the
demutualization of a U.S.–domiciled mutual company. The standard also applies to
actuaries performing this work in the demutualization of a non–U.S. mutual company
with respect to the U.S. operations of that company in the absence of authoritative
guidance in the company’s country of domicile.
If a conflict exists between this standard and applicable law or regulation, compliance
with applicable law or regulation is not considered a deviation from this standard.
1.4 Effective Date—This standard will apply to any actuarial work performed or opinions
issued on or after December 15, 2000.
2.1 Actuarial Contribution—The contribution a particular policy or class of similar eligible

policies has made to the company’s statutory surplus and the asset valuation reserve, plus
1
the present value of contributions that the same policy or class of similar eligible policies
is expected to make in the future.
2.2 Consideration—The consideration a policyholder receives in a demutualization in

exchange for relinquishing membership rights (sometimes referred to as policyholder
consideration).
2.3 Demutualization—The conversion of a mutual company to a stock company.
2.4 Eligibility Date—Date (or dates) as of which a policy must be deemed in force, according
to the plan of conversion, for the policyholder to be eligible to receive consideration.
2.5 Eligible Policyholder—The owner of one or more policies eligible to receive

consideration under the plan of conversion.
2.6 Historical Contribution—The contribution a particular policy or class of similar eligible

policies has made to the company’s statutory surplus and asset valuation reserve in a
given year.
2.7 Membership Rights—Any rights a member of a mutual company has by virtue of

ownership of an insurance policy, other than the contractual insurance rights under the
policy. Typical membership rights include voting rights and the rights, if any, the
member has upon liquidation of the company.
2.8 Mutual Company—A mutual life insurance company, or a mutual holding company
formed in conjunction with the demutualization of a mutual life insurance company.
2.9 Plan of Conversion—The plan under which a mutual company converts to a stock
company.
2.10 Policy—Unless otherwise specified, the term policy (and its plural form, policies) in this
standard includes both an insurance policy and an annuity contract. In some
demutualizations it may also include supplementary contracts.
2.11 Voting Rights—The right to elect members of the board of directors of the mutual
company and the right to vote on any proposed reorganization (including
demutualization).
The actuary may be requested to determine the allocation of policyholder consideration, or to

review, advise on, or opine on the actuarial aspects of policyholder consideration in a
demutualization. In doing so, the actuary should be guided by the following:
2
3.1 Policyholder Eligibility—Generally, eligible policyholders receive consideration in

exchange for relinquishing membership rights. The plan of conversion will define which
policies are eligible (which might include policies in subsidiaries under certain
circumstances). The actuary may be involved in drafting this aspect of the plan of
conversion. Sections 3.1.1–3.1.2 present issues the actuary should consider in
determining, reviewing, advising on, or opining on the actuarial aspects of policyholder
eligibility.
3.1.1 Components of Consideration—Plans of conversion generally express

consideration as the combination of a fixed component and a variable component.
A policyholder may be eligible for a fixed component, a variable component, or
both. Although eligibility for the fixed component may be related to eligibility to
vote in some plans, the fixed component is not necessarily allocated in proportion
to voting power. Although eligibility for the variable component may be related to
eligibility for dividends or for a distribution upon liquidation in some plans, the
variable component is generally not allocated in proportion to dividends or to
what would be paid upon liquidation.
3.1.2 Reinsurance—With regard to how reinsurance affects eligibility, the actuary

should note, in particular, the following:
a. Policies transferred to another company through assumption reinsurance

prior to the eligibility date generally are not eligible for any consideration
unless particular facts and circumstances indicate otherwise (for example,
if commitments were made to the policyholders or to regulators as part of
the assumption reinsurance transaction).
b. Policies transferred to the demutualizing company from another company

through assumption reinsurance or as part of a merger prior to the
eligibility date generally are eligible to receive consideration unless
particular facts and circumstances indicate otherwise.
c. Indemnity reinsurance, assumed or ceded, does not affect eligibility.
3.2 Basis of Allocation—The actuary is usually responsible for determining that eligible
policyholders are treated appropriately in the allocation of consideration. The share of the
fixed and variable components of consideration that any one policyholder receives should
reflect both equity and practicality. Equity requires that actuarial contributions of policies
be adequately recognized. Practicality requires that the proposed allocation take into
account both administrative feasibility and imperfections in available data. The actuary
should consider the following sections concerning the basis of allocation.
3
3.2.1 Basis for Allocating the Fixed Component—The fixed component of

consideration should be allocated on a basis that produces a reasonable result in
view of the specific circumstances of the converting company. Among other
factors, the actuary may consider the company’s voting policy. This may entail
the following: a review of the voting provisions contained in the company’s
bylaws, charter, or domiciliary state’s law; the way the company has managed
voting in practice; and the communications that have been made to policyholders.
These factors usually mean that the fixed component is allocated based on each
eligible policy (regardless of the size of the policy) or each eligible policyholder
(regardless of the number of policies or size of policies).
3.2.2 Amount Allocated as the Fixed Component—The actuary should ascertain

whether the amount allocated as the fixed component has been determined in a
reasonable manner. The determination of the amount to be allocated as the fixed
component is a matter in which judgment and practical considerations play a
significant role. The actuary should consider whether the total amount to be
allocated as the variable component (which is determined as the total amount of
consideration less the total amount allocated as the fixed component) is
reasonable in relation to the total actuarial contribution for eligible policies. The
actuary may also consider the percentages of total consideration that were
distributed as fixed consideration and the specific dollar values of fixed
consideration allocated to each policy or policyholder in prior demutualizations.
The following approaches to determining the fixed component would usually

produce a result that would be consistent with these concepts:
a. determining the aggregate dollar value to be allocated as the fixed

component so that the variable component approximates the value of the
total actuarial contribution for eligible policies; or
b. determining the aggregate dollar value to be allocated as the fixed

component so that it approximates the value of the total actuarial
contribution for policies not eligible for consideration, including
terminated policies.
3.2.3 Basis for Allocating the Variable Component—The variable component of

consideration should be allocated on the basis of the actuarial contribution. For
this purpose, actuarial contributions may be calculated on an individual policy
basis or for classes of similar eligible policies. When actuarial contributions are
calculated for classes of similar eligible policies, they should be allocated to
individual policies within classes using parameters that are reasonably obtainable
and that tend to drive the primary sources of contribution, such as face amount,
reserves, premium, or policy count.
4
When actuarial contributions are calculated for classes of similar eligible policies,
professional actuarial judgment is required in defining the classes. In this regard,
the company’s financial management practices should be given appropriate
weight. The actuary should consider the following in deciding whether to group
policies into one class:
a. Policies that have been priced and managed together should be grouped
into one class. For example, it may be appropriate to group all policies
within a given premium rate, dividend era, or valuation basis.
b. Policies that are priced on a contract-by-contract basis, such as group

contracts whose terms are individually negotiated between the insurance
company and the policyholder, should not be grouped with other policies.
3.2.4 Calculating the Actuarial Contribution—The actuary should design a practical

methodology for calculating the actuarial contribution that makes use of available
historical and current data. In most cases, there will be periods for which
historical studies or data are no longer available. The actuary will have to use
approximations for these periods. The actuary should consider what
approximations will be needed and the effect of such approximations on the
calculated actuarial contribution in designing an appropriate methodology.
The actuary should consider the following in calculating the actuarial

contribution:
a. Historical Contributions—The actuary should accumulate the historical

contributions with the historical after-tax investment returns on surplus
consistent with the way the company managed the assets corresponding to
surplus generated by each line of business.
b. Discount Rate—The actuary should calculate the value of future

contributions using an appropriate discount rate. The actuary may use the
net investment income rate on surplus (net of default cost, investment
expenses, and taxes), consistent with projections of future contributions to
surplus, or a risk-adjusted discount rate appropriate for the line of business
or type of policy involved. The actuary should explain in the actuarial
report or opinion the basis for selecting the rate.
c. Non-Par Lines—The actuary should consider the treatment of earnings on

non-par lines in the calculation of contributions made by par policies. One
factor to consider is the extent to which dividends on such par policies
reflect the earnings on non-par lines.
5
d. Individual Equity—The actuary should be mindful that the objective of the

calculation of the actuarial contribution is to address individual equity,
much like what is done in the determination of premiums and dividends.
This means that the actuary should consider techniques such as
interpolation within classes of business. It also means that all eligible
policies should be included.
e. Prior Mergers—If the mutual company that is demutualizing is itself the

result of a prior merger of two (or more) mutual companies, the actuary
should recognize the pre-merger contributions by current policyholders to
the prior merger partners. In deciding whether to recognize the relative
surplus positions of the prior companies at the time of merger, the actuary
should consider any relevant provisions in the merger agreement, the
length of time since merger, the amount and nature of new business since
merger, and the practice of the company as to commingling the interests of
policyholders of the predecessor companies.
f. Acquisition Price—Where blocks of business have been acquired through

assumption reinsurance, the actuary should consider the acquisition cost of
the block (as a negative contribution) when determining the actuarial
contribution.
g. Reinsurance—The characteristics of each reinsurance program should be

considered in light of the purpose of the program and the long-term
economic impact on a block of business and the company as a whole.
Reinsurance is usually reflected in the calculation of the actuarial
contribution if it is risk reinsurance. However, reinsurance whose primary
purpose is surplus relief is usually ignored.
3.2.5 Treatment of Negatives—Actuarial contributions may be positive or negative.

The actuary should consider the following:
a. Where the actuarial contribution for a policy is negative, it is set to zero

before performing the allocation so that the policy does not receive a
variable component of consideration. Where the actuarial contribution of
the policy is calculated in separate pieces (such as base policy and rider),
the pieces may be combined algebraically and any negative sum set to
zero, or negatives may be individually set to zero. The company’s
practices as to calculating dividends in pieces or in combination should
guide this choice.
b. Where two or more policies are linked for experience-rating purposes,

either prospective or retrospective, they are usually linked for allocation
purposes. Where one or more of such policies has terminated, the actuary
6
should be careful to determine the actuarial contribution of the remaining

policy since cross-subsidies usually will not have been recorded.
c. Where the total actuarial contribution for a line of business is negative

(before any adjustments described in section 3.2.5(a)), different practices
have been used. Most prior demutualizations have left any positive
actuarial contributions in that line unchanged (so those policies received a
variable component of consideration), but in certain circumstances no
variable consideration has been given to any policy in that line. In
deciding which approach to use, the actuary should consider the
company’s financial management of the line and the pooling of risks
across years. (Line of business is used here to reflect the way the company
has categorized its business for management purposes, as opposed to those
lines of business shown in the annual statement.)
3.3 Experience Factors—In calculating actuarial contributions, the actuary may use
experience factors determined for various classes of eligible policies. These experience
factors fall into two distinct categories: experience factors related to past experience,
which would be used to calculate historical contributions; and experience factors related
to anticipated future experience, which would be used to calculate prospective
contributions to surplus.
The actuary should bear in mind the guidance given by ASOP No. 23, Data Quality,
when performing this work. Establishing the appropriate historical experience may raise
issues that are not considered in ASOP No. 23. In these cases the actuary should obtain
appropriate data reasonably available under the circumstances.
3.3.1 Experience Factors Related to Past Experience—In selecting experience factors

related to past experience, the actuary should take into account the company’s
past practices with respect to determining the actual experience that served as the
basis for dividend allocations, or to determine other nonguaranteed elements. The
actuary should review available historical records of experience studies, actuarial
analyses, and other reliable information. The historical experience factors should
represent the actual experience of the company, without any implicit or explicit
margins for conservatism.
To the extent that reliable company data or the experience of a policy or block of
policies are not available, the actuary may have to refer to indirect sources of data
for guidance in the selection of historical experience factors. These might include
historical annual statements, reserve valuation tabulations, contemporaneous
pricing assumptions, or industry-wide experience studies. It is appropriate to
reflect the pooling of experience data across various classes of policies (such as
mortality experience data) in determining historical experience factors,
7
particularly if such pooling was used historically in the dividend allocation

process.
Generally, expenses, investment income, and federal income tax are allocated
items rather than items directly charged to lines of business. The actuary should
understand how the allocation was performed at different times in the past. The
actuary should generally accept the allocation to the annual statement line shown
in the annual statement, although in particular circumstances there may be reasons
to modify it. However, the actuary will still have to perform allocations within a
line. The actuary should try to determine how the company previously approached
allocation and use that approach within a line, unless there is reason to modify it.
3.3.2 Experience Factors Related to Anticipated Future Experience⎯The

considerations the actuary should use to select experience factors related to
anticipated future experience may differ between policies included in a closed
block and policies not included in a closed block, as noted below.
a. Experience factors for classes of policies included in a closed block should

be consistent with the assumptions used to calculate the funding of the
closed block (see ASOP No. 33, Actuarial Responsibilities with Respect to
Closed Blocks in Mutual Life Insurance Company Conversions). Actual
experience will almost certainly be different from that assumed in funding
the closed block.
To the extent that such differences accrue to the closed block

policyholders (because of the closed block mechanism), the funding
assumptions should be used without change for the actuarial contribution
assumptions. Examples of these assumptions include anticipated future
mortality, morbidity, termination, investment income rates, and
policyholder dividends.
To the extent that such differences do not accrue to the closed block
policyholders, best-estimate assumptions should be used for the actuarial
contribution assumptions. An example is expenses, because actual
expenses are often not charged to the closed block. Income tax is an
assumption that might fall into either category depending on how the
closed block was constructed.
b. For policies not included in a closed block, the actuary should generally
select experience factors that are best-estimate assumptions for anticipated
future experience. (For a discussion of the meaning of best-estimate
assumptions, see ASOP No. 10, Methods and Assumptions for Use in Life
Insurance Company Financial Statements Prepared in Accordance with
GAAP.) Where applicable, anticipated future experience should be based
8
on recent experience and expected trends in experience in the company

that is demutualizing (or in the industry in general, if the company’s own
experience is not credible).
For lines of business that exhibit cyclical trends in experience, the

anticipated future experience should reflect past results over at least one
complete experience cycle. The calculation of the value of future
contributions to surplus should take into account any material restrictions
on future profits or margins imposed as part of the plan of conversion or
otherwise.
3.3.3 Other Approaches—In some circumstances, the actuary may calculate the present
value of historical or future contributions to surplus directly, using a formula for
calculating annual or cumulative contributions to surplus that reflects the
company’s approach to assessing risk or profit charges in its pricing or dividend
allocation methodology.
Such an approach might be appropriate, for example, in the case of a class of

large group policies where explicit risk or profit charges have been made at the
individual contract experience fund level. In such circumstances it will not be
necessary for the actuary to select specific experience factors other than those
needed prospectively to project the persistence and growth of such charges.
However, the actuary should consider whether the company has used credible and
realistic experience data to reflect the actual cost of claims and expenses in
determining policyholder experience funds.
3.4 Continuity Issues—When addressing eligibility and calculating actuarial contributions,

the actuary should take into account the effect of status changes for any policy that has
changed status since its original issue date. Some companies effect these changes in
status by amending a policy, and others by terminating one policy and issuing a new
policy. Subject to the limits of practicality and the availability of data, the actuary should
a. the current status (for example, participating or nonparticipating) and the prior
status;
b. the circumstances of any company-sponsored program allowing or encouraging

policyholders to change or replace their policies;
c. the issue date of the original policy and the issue date of the new policy, as
appropriate;
9
d. charges or assumptions specific to the type of policy change (for example, term
conversion costs or provisions for adverse mortality in the case of conversions, as
appropriate);
e. whether the new policy was issued at market price or reflected gains or losses in
the old policy; and
f. changes in coverage (for example, changes in death benefit, mandated changes to

individual health policies, or termination of part of a group contract).
who supply the data. However, the actuary should review the data for reasonableness and
consistency to the extent practicable. For further guidance, the actuary is directed to
ASOP No. 23.
4.2 Reliance on Asset Cash-Flow Projections Supplied by Others—The actuary may rely on
cash-flow projections or other analyses of assets supplied by others—for example,
projections of real estate or equity assets. In doing so, the actuary should disclose both
the fact and the extent of such reliance. The accuracy and soundness of projections
supplied by others are the responsibility of those who supply the projections. However,
the actuary should review the projections for reasonableness and consistency to the extent
practicable.
4.3 Law and Regulation—If applicable law or regulation conflicts with this standard, the
actuary should disclose in the actuary’s opinion or report the existence of such conflict
and the actuary’s compliance with applicable law or regulation. If applicable law or
regulation differs from, but does not conflict with, this standard, the actuary may choose
to practice in accordance with the law or regulation alone, but should disclose such
practice as a deviation from this standard in accordance with section 4.6 below.
4.4 Actuarial Report or Statement of Actuarial Opinion—An actuary who performs

professional services subject to this standard should issue a written actuarial report or
statement of actuarial opinion to the employer or client concerning the allocation of
policyholder consideration, unless another actuary advising the same entity is issuing
such a report or statement. This actuarial report or statement of actuarial opinion should
express an opinion on the appropriateness of the allocation, and may express an opinion
concerning the classes of policies deemed eligible to receive consideration in light of the
provisions of this standard.
10
4.5 Prescribed Statement of Actuarial Opinion—The actuarial communication described in

section 4.4 is a prescribed statement of actuarial opinion as described in the Qualification
Academy of Actuaries, whether or not it is issued for purposes of compliance with law,
regulation, or other standards. In addition, law, regulation, or accounting requirements
may also apply to another actuarial communication prepared under this standard, and as a
result, such other actuarial communication may be a prescribed statement of actuarial
opinion.
11
Appendix 1
practice.
Background
When a mutual life insurance company demutualizes fully (rather than converting to a mutual
holding company structure), or when a mutual holding company demutualizes, the value of the
mutual entity, generally in its entirety and before any external investment, is distributed in some
form to the eligible policyholders or members of that entity. The Society of Actuaries Task Force
on Conversion of Mutual Life Insurance Companies identified the allocation of policyholder
consideration as an actuarial matter in its 1987 report, “Report of the Task Force on Mutual Life
Insurance Company Conversion” (Society of Actuaries, Transactions 39 (1988): 295–391)
(hereafter referred to as the Garber Committee Report). The Garber Committee Report
considered the determination of the aggregate amount of policyholder consideration to be a
nonactuarial matter. A number of U.S. life insurance companies have demutualized fully to date,
and several more have announced their intent to do so. In almost all of these demutualizations, an
actuary has been responsible for the allocation of policyholder consideration and has provided an
opinion that the allocation is fair.
This actuarial standard of practice (ASOP) reflects what is considered good practice used in the
allocation of policyholder consideration up until this time. The unique circumstances and
characteristics of each mutual company, however, make it impossible to state with confidence
that the goal of determining an equitable allocation can be met in all future transactions without
deviating from this standard in some way as yet unforeseen. The actuary is best qualified, of all
participating professionals, to assess and analyze the particular circumstances and operating
philosophies of the mutual company, as demonstrated over its history, in determining what
actually constitutes adequate recognition of a policy’s contribution to company value and to
recommend an allocation with due recognition of all pertinent facts.
Current Practices
Actuarial Contribution—Some early demutualizations calculated the actuarial contribution on a

historical basis only; most recent demutualizations have used the historical plus prospective basis
for the actuarial contribution.
Eligibility—To be eligible to receive any policyholder consideration, a policy must be in force

on a specific date (or dates) or be in force within a specific range of dates. The date or dates will
12
be defined in the plan of conversion and may be influenced by any applicable state statute.
Typical examples of eligibility dates include the following:
1. The policy must be in force on the date that the board of directors adopts the plan of
conversion.
2. The policy must be in force on the effective date of conversion.
3. The policy must be in force on both the date that the board of directors adopts the plan
and on the effective date of conversion.
4. The policy must be in force on the date that the board of directors adopts the plan or must
have been in force on any prior date within a fixed period (for example, two years).
Unless the eligibility date is defined in a manner similar to that in (4) above, terminated policies
do not usually qualify as eligible.
Amount Allocated as the Fixed Component—Virtually all past demutualizations in the U.S. have
featured an allocation of policyholder equity in part based on a fixed amount per policy or per
policyholder. The fixed or per capita component of consideration in past demutualizations has
had values ranging from approximately $25 to over $1,000 per policy or per policyholder. The
total value of the portion of consideration allocated as a fixed component has represented from
about 10% to about 25% of the total value of the consideration in these same demutualizations.
The fixed component of consideration has often been considered to be compensation for the loss
of the policyholders’ right to vote for directors and to vote on other important matters, such as a
merger with another mutual company. The Garber Committee Report noted that “these values
[i.e., membership values] might reflect some compensation for the cancellation of the less
tangible attributes of membership, the right to vote for directors, and so on.” In mentioning
compensation for less tangible membership rights, the Garber Committee Report clearly referred
to the concept of the fixed component. Nevertheless, there has not always been an exact
proportional relationship between a policyholder’s voting power and the amount of fixed
component he or she receives. Moreover, eligibility for the fixed component may not be directly
related to eligibility to vote in some plans.
Amount Allocated as the Variable Component—The variable component of consideration has

often been considered to be compensation for policyholder rights, other than voting rights, that
are relinquished in a demutualization. This would include the right to receive a share of the net
value of the company in the event of a liquidation. Probably the most significant right that
participating policyholders have is the right to receive dividends as declared by the board of
directors. This right is generally contractual and is not canceled as the result of a
demutualization.
13
Legitimacy of Historical Practice—The calculation of the actuarial contribution by dividend

class is often accomplished by calculation of historical asset share accumulations. These
calculations typically have been made for pivotal issue years and issue ages. Until recently, these
calculations have not differentiated between such factors as gender, smoking status, or premium
band, on the implicit assumption that the contribution principle would tend to equalize profit
results over time for the various dividend classes. Generally, an existing dividend class has not
been split for the purposes of calculating the actuarial contribution in the context of
demutualization to recognize factors that have not been recognized historically by the company
in determining dividends.
Even though asset shares calculated to set dividend scales for individual participating business
normally reflect lapses and other terminations in all years, the effects of past lapses generally
have been ignored or removed from the calculation of actuarial contributions for all lines of
business. This follows from a general feeling among practitioners who have worked with
demutualizations that survivorship gains and losses from the past should not accrue to a
particular policy, but rather should be spread over all eligible policies. Some other considerations
that led to deciding not to recognize past lapses in such calculations include the following:
1. the unavailability of accurate and detailed historical lapse studies;
2. the anomalous pattern of actuarial contributions by issue age, issue year, plan, and rate
book that would result; and
3. the precision and uniformity, over time, of class delineations, the lack of which might
result in significant variations between adjacent cells.
Converted Policies, Replacements, and Policy Exchanges—In calculating actuarial contributions,

actuaries have generally considered some or all of the following aspects of converted policies,
replacements, and exchanges:
1. the nature of the current policy;
2. charges assessed by the company in connection with the conversion, replacement, or

exchange; and
3. any differences in experience (for example, mortality or morbidity) that are observed or
expected as a result of the conversion, replacement, or policy exchange.
If the current policy has been promised dividends and related treatment accorded an otherwise
similar policy that did not result from a conversion, replacement, or exchange, the actuarial
contribution generally will have reflected only (1) above, and not (2) or (3).
14
Supplemental Contracts and Settlement Options—In calculating actuarial contributions, actuaries

have generally considered the status of the current policy (participating or nonparticipating) and
the date the current policy was issued. If no new policy was issued when the supplemental
contract or settlement option was purchased, actuaries have sometimes considered the
appropriateness of using a basis that considers the original policy.
Change in Policy Conditions Due to Update Programs—In calculating actuarial contributions,

actuaries have generally considered the changes to policy conditions as a result of update
programs and, where practicable, reflected them, as appropriate, in the actuarial contribution
calculations.
Non-Par Coverages Associated with Terminated Group Contracts—In calculating actuarial

contributions, actuaries have generally considered the status of the original group contract, the
owner of the contract, the company’s approach for calculating actuarial contributions for current
group contracts, and the beneficiary of the actuarial contribution associated with current group
contracts. In some cases, actuaries have decided that no actuarial contribution should be
calculated with respect to run-off coverages on terminated group contracts.
Data Problems—Some of the particular data problems that actuaries have encountered include
the following:
1. Group annuity policies may have been in force for fifty years or more, but detailed
records in some cases have not been available back to the issue date of the older policies.
Actuaries have had to determine some equitable method of estimating actuarial
contributions for periods before individual policy records were available.
2. The problem of unavailable records in some cases has been extensive with group term
and health insurance, where it is not necessary to keep a long-term history of asset fund
build-ups. Although group insurance policies will usually have an experience fund (if the
policy is dividendable), companies may not have retained the history of this fund for
more than five to ten years.
3. In some cases, the experience studies to support mortality and pricing philosophy have
been difficult to find.
15
Appendix 2
Comments on the Second Exposure Draft

The second exposure draft of the proposed standard was circulated for review in December 1999,
with a comment deadline of May 1, 2000. Eight letters of comment (two from the same person)
were received. The Task Force on Allocation of Policyholder Equity carefully reviewed each
comment letter. Summarized below are the significant issues or questions contained in the
comment letters, printed in roman type. The task force’s responses appear in boldface.
General Comments
One commentator took issue with the statement in appendix 1, which was quoted from the
Garber Committee Report, that the determination of the aggregate amount of policyholder
consideration is a nonactuarial matter. The task force notes that the aggregate amount of
policyholder consideration in most demutualizations has been set by the marketplace. In
any event, the task force believes that the determination of the aggregate value to be
distributed to policyholders is beyond the scope of this standard.
One commentator suggested that the ASB is not qualified to determine whether a method of
allocation is “fair and equitable.” The task force believes that actuaries are the appropriate
professionals to form and state an opinion as to whether a plan of conversion is appropriate
from an actuarial perspective, and the ASB is the proper body to set standards for
actuaries performing this role.
One commentator questioned the use of the word “reasonable” in the context of “reasonable
dividend expectations.” The task force believes that the term “reasonable dividend
expectations” is generally well understood as defined in ASOP No. 33.
Section 2.1, Actuarial Contribution—One commentator questioned whether the phrase

“contribution…to the company’s surplus” should be clarified to indicate that this is the amount
remaining in the current surplus account and is, thus, net of all previous policyholder dividends
paid or apportioned. The task force agrees that this is the proper meaning, but did not
believe that further clarification was necessary.
16
Section 3.1, Policyholder Eligibility⎯One commentator noted that the proposed standard did not
include any discussion of the fact that some policyholders may purchase a policy from a mutual
company that has announced its intention to demutualize solely or primarily to receive
consideration. Noting that such activity could have the impact of diluting the value of the
consideration paid to other policyholders, this commentator suggested that this would be
inequitable and that the proposed standard might be revised to specify that the actuary should
consider this in setting the allocation basis. Specifically, the commentator suggested that only
policies issued prior to the announcement of the company’s intent to demutualize would be
eligible for a fixed component. The task force recognizes that the question of which
policyowners are eligible to receive consideration is frequently addressed in the
demutualization statutes of the states. Such statutes often specify particular eligibility
dates. If policies are in force on these dates, they are eligible to receive consideration. The
task force notes that policyholders receive consideration in exchange for relinquishing their
membership rights and that newly issued policies generally have membership rights similar
to policies that have been in force for longer periods of time. Moreover, as the
commentator acknowledges, it would not be appropriate to attempt to classify
policyholders by their intent in purchasing their policies, even if it were feasible. The task
force believed that the standard should not be amended to address the situation pointed out
by the commentator.
Section 3.2.3, Basis for Allocating the Variable Component⎯One commentator recommended
that the proposed standard require the actuary to obtain an opinion of counsel as to whether the
actuarial contribution method as defined in the proposed standard violates applicable law. In
particular, this commentator focused on the fact that the definition of actuarial contribution in the
proposed standard includes both a historical and a prospective component. The task force is
aware that there has been controversy over the correct interpretation of certain state
statutes with respect to whether or not it is appropriate to take future expected profits into
account in the allocation of consideration. In cases where such controversy could
potentially arise, the task force expects that the actuary would act with appropriate
professional discretion to assure that the methodology used complied with applicable law.
A number of state statutes are quite clear about the issue, and there is substantial
precedent in certain states sanctioning the methodology set forth in the standard.
Therefore, the task force does not believe that a blanket requirement for the actuary to
obtain opinion of counsel on this issue is necessary. Furthermore, the task force notes that
section 1.2, Scope, provides that “if a conflict exists between this standard and applicable
law or regulation, compliance with applicable law or regulation is not considered a
deviation from this standard.” Thus, the actuary is not required to apply the methodology
in section 3.2.3 when, in the actuary’s professional judgment, this method conflicts with
applicable law or regulation.
17
Three commentators offered the opinion that the inclusion of a prospective component in the
definition of actuarial contribution per se violated the contractual rights of mutual company
policyholders. One of the bases cited for this opinion was the belief that mutual insurers operated
on a basis in which insurance is provided “at cost” and, therefore, over their entire life, mutual
company policies do not make a permanent contribution to surplus. If this was the case, the
actuarial contribution, including both prospective and retrospective components, would be zero,
and thus there would be no basis for the allocation of variable shares. These commentators point
out that if the actuarial contribution were calculated with reference only to the historical
component, on the other hand, there would presumably be a non-zero result for the typical
company with positive surplus. One of these commentators expressed the opinion that use of
both historical and prospective components in the calculation of the actuarial contribution defeats
the expectation that the mutual policyholder will obtain insurance at cost.
The task force believes that the definition of actuarial contribution contained in the
standard is appropriate. The standard takes no position on whether the “entity capital”
model, where policies make permanent contributions to surplus, or the “revolving fund”
model, where all contributions to surplus are returned over a policy’s life, is preferable as a
philosophy for setting dividends for a mutual company. The task force does note, however,
that different opinions on this issue have been expressed in actuarial literature over the
years. (See, for example, “Some Actuarial Considerations for Mutual Companies,” TSA,
XXXI (1979) by Robin B. Leckie.) The rationale for the definition of actuarial contribution
as including both a historical and a prospective component is not based on adherence to
one or the other of these theoretical models. It is predicated, rather, on the concept that the
allocation of consideration should be based, in part, on the relative economic value of the
policy to the company. The task force believes that actuarial contribution, as defined in the
standard, represents a fair estimate of this economic value and is preferable to an
alternative definition that ignores the value of future expected contributions to surplus.
The task force notes that the definition of actuarial contribution in the standard has
resulted in positive actuarial contributions over a broad range of policies in the several
actual demutualizations where it has been applied. The task force also notes that the
adoption of such a definition of actuarial contribution has no impact on a mutual
company’s dividend-setting practices or pricing philosophy, either before or after
demutualization (and thus does not affect the expectation that the mutual policyholder may
obtain insurance at cost).
Section 3.2.4(g), Reinsurance⎯One commentator, while agreeing in general with the distinction
between risk and surplus relief reinsurance, noted that the complexity of some agreements will
require consideration of both their structure and purpose. The task force agreed, and added a
sentence to that effect.
18
Section 4.1, Reliance on Data Supplied by Others, and section 4.2, Reliance on Asset Cash-Flow
Projections Supplied by Others⎯One commentator opined that the actuary should be required to
review data and projections of others, and that the modifying phrase “when practicable” in
sections 4.1 and 4.2 was unduly lenient. The task force notes that practical limitations do
exist as to what can be reviewed. Nevertheless, the language in both sections was modified
to make it clear that the actuary should perform this review “to the extent” practicable.
Prior Commentary and Responses from the First Exposure Draft
One commentator repeated the earlier suggestion that there should be a statement of policy or
policies that will guide the demutualization, similar to that required by ASOP No. 1, The
Redetermination (or Determination) of Non-Guaranteed Charges and/or Benefits for Life
Insurance and Annuity Contracts, for redetermination of nonguaranteed elements. In contrast to
determination of nonguaranteed elements, the allocation of policyholder consideration
occurs at a point in time and does not involve the ongoing application of consistent policies
over a period of time. Observers are thus able to assess the appropriateness of the single
result of the allocation process without reference to some additional statement of principles
put forth by the converting company. In any case, the standard does not prevent a
converting company from putting forth such principles. The task force still does not believe
that a requirement for a statement of principles of allocation is necessary.
19
Actuarial Standard
of Practice
No. 38
Using Models Outside the Actuary’s Area of Expertise

(Property and Casualty)
Developed by the
Task Force on Complex Models of the
Adopted by the
June 2000
(Doc. No. 071)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Expert 2
2.2 Model 2

3.1 Introduction 2
3.2 Appropriate Reliance on Experts 2
3.3 Understanding of the Model 3
3.3.1 Model Components 3
3.3.2 User Input 3
3.3.3 Model Output 3
3.4 Appropriateness of the Model for the Intended Application 3
3.5 Appropriate Validation 4
3.5.1 User Input 4
3.5.2 Model Output 4
3.6 Appropriate Use of the Model 4
3.7 Reliance on Model Evaluation by Another Actuary 4

4.1 Documentation 5
4.2 Proprietary Information 5
4.3 Disclosure 5
ii
APPENDIXES

Background 6
Current Practices 7
iii
June 2000

Actuarial Standards Board and Other Persons Interested in the Use of Models
Outside the Actuary’s Area of Expertise in Property and Casualty Insurance
SUBJ: Actuarial Standard of Practice (ASOP) No. 38.
This booklet contains the final version of ASOP No. 38, Using Models Outside the Actuary’s
Area of Expertise (Property and Casualty).
Background
The Casualty Practice Council of the American Academy of Actuaries requested that the ASB
consider drafting an actuarial standard of practice concerning the use of complex models. In
submitting to the ASB its proposal for a new ASOP, the council expressed concern over the use
of catastrophe models when estimating catastrophe costs. Catastrophe models are developed by
groups of scientists, engineers, and actuaries working together to simulate catastrophic events.
While most actuaries conceptually agree that catastrophe models may provide more realistic
measures of catastrophic risk than those provided by analyzing the latest twenty to fifty years of
catastrophe losses, most actuaries are not experts in many of the underpinnings of these models.
Of course, catastrophe models are not the only models with which actuaries work. Actuaries also
may utilize interest rate models, investment return models, credit scoring models, asbestos and
pollution models, and dynamic financial analysis models, to name a few. The standard would not
apply to models that incorporate specialized knowledge within the actuary’s own area of
expertise, since working with these components is part of the normal actuarial effort and is
covered by other ASOPs.
In order to feel comfortable with relying on models that incorporate specialized knowledge
outside the actuary’s area of expertise, actuaries seek guidance in defining their duty of care in
understanding and relying upon these models. This was another reason for the development of
the standard, and why the ASB created the Task Force on Complex Models, under its Casualty
Committee, to initiate the project.
The task force intended that the standard should define the guidelines that an actuary should
follow when working with models outside of the actuary’s own area of expertise. In providing
such guidance, the standard makes it clear that an actuary may rely upon a model evaluation by
another actuary who has performed his or her evaluation in accordance with this standard, and
iv
that the standard is not intended to discourage the use of new methodologies in advancement of
the profession.
The first draft of a proposed standard, titled The Use of Models with Nonactuarial Components,
was exposed for review in a document dated May 1998. As originally proposed in this first
exposure draft, the standard would have applied to models in all areas of actuarial practice. In
response to the fifty-two comment letters and forty-two comment postcards received, the scope
of the standard was narrowed to apply only to property and casualty practice. In addition, the
standard was refocused to apply to models that incorporate specialized knowledge outside the
actuary’s own area of expertise. Each actuary must determine what this boundary means to him
or her. The title of the standard was changed accordingly. The significant issues and questions
contained in the comment letters on the first exposure draft as well as the task force’s responses
to them are summarized in appendix 2 of the second exposure draft titled Using Models Outside
the Actuary’s Area of Expertise (Property and Casualty) dated September 1999.
The second draft of the standard was exposed for review in a document dated September 1999,
with a comment deadline of March 1, 2000. Ten comment letters were received. The task force
considered the issues and questions raised in these letters and made some editorial changes to the
text, but no substantive changes were necessary. For a summary of the issues contained in these
ten comment letters and the task force’s responses, please see appendix 2.
The Task Force on Complex Models and the Casualty Committee thank everyone who took the
time to contribute comments and suggestions on both exposure drafts.
The Casualty Committee would like to thank Godfrey Perrott and Kurt Reichle for their
assistance in the initial drafting of this standard.
v
Task Force on Complex Models of the Casualty Committee
Karen F. Terry, Chairperson

Kay A. Cleary Jeffrey F. McCarty
Alice H. Gannon Daniel M. Scheibenreif
Paul E. Kinson A. Eric Thorlacius
Ronald T. Kozlowski Joan M. Weiss
David A. Lalonde

Ronald T. Kozlowski Alfred O. Weller
Robert S. Miccolis

vi
USING MODELS OUTSIDE THE ACTUARY’S AREA OF EXPERTISE

(PROPERTY AND CASUALTY)
1.1 Purpose—The purpose of this standard is to provide guidance to the actuary in using
models that incorporate specialized knowledge outside of the actuary’s own area of
expertise when developing an actuarial work product. This guidance addresses the
actuary’s obligation to review the model and make appropriate disclosures.
1.2 Scope—This standard applies to actuaries who use models that incorporate specialized
knowledge outside of the actuary’s own area of expertise when performing professional
services in connection with property and casualty insurance coverages (including risk
financing systems, such as self-insurance and securitization products, that provide similar
coverages). This standard applies to the use of all models whether or not they are
proprietary in nature.
law is not considered to be a deviation from this standard.
1.4 Effective Date—This standard will be effective for work performed on or after
December 15, 2000.
1
2.1 Expert—One who is qualified by knowledge, skill, experience, training, or education to

render an opinion concerning the matter at hand.
2.2 Model—An information structure, such as a set of mathematical equations, logic, or

algorithms, that is used to represent the behavior of specified phenomena.
3.1 Introduction—In performing actuarial work, an actuary may find it appropriate to use
models that incorporate specialized knowledge outside of the actuary’s own area of
expertise. When using such a model, the actuary should do all of the following:
a. determine appropriate reliance on experts;
b. have a basic understanding of the model;
c. evaluate whether the model is appropriate for the intended application;
d. determine that appropriate validation has occurred; and
e. determine the appropriate use of the model.
The actuary’s level of effort in understanding and evaluating a model should be

consistent with the intended use of the model and its materiality to the results of the
actuarial analysis.
3.2 Appropriate Reliance on Experts—An actuary may rely on experts concerning those
aspects of a model that are outside of the actuary’s own area of expertise. The experts
relied upon may either be the experts who provided the model or other experts. In
determining the appropriate level of reliance, the actuary should consider the following:
a. whether the individual or individuals upon whom the actuary is relying are
experts in the applicable field;
b. the extent to which the model has been reviewed or opined on by experts in the
applicable field, including any known significant differences of opinion among
experts concerning aspects of the model that could be material to the actuary’s use
of the model; and
2
c. whether there are standards that apply to the model or to the testing or validation
of the model, and whether the model has been certified as having met such
standards.
3.3 Understanding of the Model—The actuary should be reasonably familiar with the basic
components of the model and understand both the user input and the model output, as
discussed below.
3.3.1 Model Components—The actuary should be reasonably familiar with the basic
components of the model and have a basic understanding of how such
components interrelate within the model. In addition, the actuary should identify
which fields of expertise were used in developing or updating the model, and
should make a reasonable effort to determine if the model is based on generally
accepted practices within the applicable fields of expertise. The actuary should
also be reasonably familiar with how the model was tested or validated and the
level of independent expert review and testing.
3.3.2 User Input—Certain user input may be required to produce model output for the
specific application. The actuary should understand the user input that is required
to produce the model output. This understanding includes the level of detail
required in the user input to produce results that are consistent with the intended
use of the model.
3.3.3 Model Output—The actuary should determine that the model output is consistent
with the actuary’s intended use of the model.
3.4 Appropriateness of the Model for the Intended Application—The actuary should evaluate
whether the model is appropriate for the particular actuarial analysis, and consider
limitations of the model, modifications to the model, and the assumptions needed in order
to apply the model output.
Some additional considerations include the following:
a. Applicability of Historical Data—To the extent historical data are used in the
development of the model or the establishment of model parameters, the actuary
should consider the adequacy of the historical data in representing the range of
reasonably expected outcomes consistent with current knowledge about the
phenomena being analyzed.
b. Developments in Relevant Fields—The actuary should make a reasonable effort

to be aware of significant developments in relevant fields of expertise. The
3
actuary should evaluate whether such developments are likely to materially affect
the current actuarial analysis.
3.5 Appropriate Validation—The actuary should evaluate the user input and the
reasonableness of the model output, as discussed below.
3.5.1 User Input—With respect to the quality and availability of the user input data to
be used in the model, the actuary should refer to ASOP No. 23, Data Quality.
3.5.2 Model Output—In view of the intended use of the model, the actuary should
examine the model output for reasonableness, considering factors such as the
following:
a. the results derived from alternate models or methods, where available and
appropriate;
b. how historical observations, if applicable, compare to results produced by

the model;
c. the consistency and reasonableness of relationships among various output

results; and
d. the sensitivity of the model output to variations in the user input and
model assumptions.
3.6 Appropriate Use of the Model—Having completed the analysis described in sections 3.2–
3.5 above, the actuary should use his or her professional judgment to determine whether
it is appropriate to use the model results, subject to any appropriate adjustments. The
actuary should disclose any such adjustments in accordance with section 4.3.
3.7 Reliance on Model Evaluation by Another Actuary—The actuary may rely on another
actuary who has, for a particular model, conducted some or all of the evaluations and
processes described in this standard. However, the relying actuary should be satisfied that
the other actuary’s evaluation was performed in accordance with this standard and is
appropriate for the intended application. The actuary should document the extent of such
reliance in accordance with section 4.1.
4
4.1 Documentation—This standard requires documentation whether or not a legal or

regulatory requirement exists. The actuary should maintain appropriate documentation on
the evaluation of the model and the use of the model output in the analysis.
Documentation should demonstrate how the actuary has met the requirements of sections
3.2–3.7 above.
4.2 Proprietary Information—If the model has proprietary aspects or contains proprietary
information, the actuary should document the steps taken to comply with this standard in
light of the proprietary aspects or information.
4.3 Disclosure—In communicating the results of actuarial work using a model that
incorporates specialized knowledge outside of the actuary’s own area of expertise, the
actuary should disclose the model(s) used and any adjustments made to the model results
as described in section 3.6.
5
Appendix 1
practice.
Background
Actuaries have always used models. Most of the models used by actuaries are developed using
expertise that is common to actuaries, and their use by actuaries is addressed by existing
standards of practice and statements of principles.
However, actuaries have also used models that contain components that are outside the actuary’s
own area of expertise. For example, certain catastrophe models, interest rate models, dynamic
financial analysis models, credit scoring models, and pollution models contain components that
are outside the expertise of many of the actuaries who use them. Although in retrospect the use
of models may have posed the need for a specific standard of practice, it was not until recently,
as actuaries grappled with the financial issues surrounding various natural catastrophes, that the
need for such a standard was recognized and acted on by the Actuarial Standards Board.
Specifically, Hurricane Andrew in 1992 and the Northridge Earthquake in 1994 led actuaries
involved in evaluating hurricane and earthquake exposures to recognize the severe inadequacy of
the traditional, empirical actuarial methods used for ratemaking for these exposures. In
recognition of the need to replace these methods, many actuaries began using stochastic
computer simulation models for their actuarial analysis of hurricane and earthquake exposure.
Computer simulation models had been commonly used for some time by actuaries and others for
the purpose of evaluating probable maximum loss but had not been widely used for ratemaking.
Computer simulation models are now widely used by actuaries for calculating expected losses
due to hurricane and earthquake perils. The accuracy of these models is heavily dependent on the
accuracy of meteorological, seismological, or engineering assumptions, areas clearly outside the
expertise of most actuaries.
Because models sometimes contain components that incorporate specialized knowledge outside
the actuary’s own area of expertise, this raises the question as to what is required of an actuary
before he or she makes use of model output in his or her actuarial analysis. This standard
addresses such requirements. Although the development of this standard originated with the
problem of providing accurate actuarial analysis of hurricane and earthquake exposure, the
standard applies to any model
6
that incorporates specialized knowledge outside the actuary’s own area of expertise used in
connection with property and casualty insurance coverages.
Current Practices
The use of output from models is an evolving area of actuarial theory and practice. To date,
current practices have been governed by the former Guides and Interpretative Opinions as to
Professional Conduct, and their successor documents, the Code of Professional Conduct and the
Qualification Standards for Prescribed Statements of Actuarial Opinion. Practices have varied
according to individual interpretations of the Guides and the Code.
7
Appendix 2
The second exposure draft of this actuarial standard of practice (ASOP) was exposed for review
in September 1999, with a comment deadline of March 1, 2000. Ten letters of comment were
received on the second exposure draft. Summarized below are the significant issues and
questions contained in the comment letters, printed in roman type. The task force’s responses
appear in boldface.
Two basic concerns were raised as general observations. One commentator believed the phrase
“outside an actuary’s area of expertise” was not clear enough to define when the standard applies
and when it doesn’t. An actuary has some training in econometric techniques but may not be
familiar with state of the art methods and protocols. Are econometric models outside the
actuary’s area of expertise or not? Does the standard apply?
The task force believes this example clearly shows the need for this standard. Actuaries
performing professional services must determine if they are qualified to practice in that
area. As such, they are making a determination of their area of expertise and if using
models should then determine if this standard applies. Since the situation will differ for
every individual actuary, the task force believes the ASOP can not be made more specific
and no changes were made.
The other commentator making a general observation questioned if the ASOP applies when
“commercial models” such as @Risk, BestFit, and Evolver are used. The commentator asked “is
it not enough to know that these are commercially available products...and have general
acceptance as tools...without contacting the vendor to ask questions about the fields of expertise
used to develop these models?”
This standard applies when using any model outside the actuary’s area of expertise. The
extent of the effort applied will be dependent on the individual circumstances and
application of each model. The task force does not believe an unreasonable effort is
required on the part of the actuary to apply this standard to the use of “commercial
models.” In fact, the task force believes that in most cases, the actuary is probably already
complying with the standard with perhaps the exception of the documentation
requirement.
8
Section 1.2, Scope—Some commentators questioned the application of the standard to health
companies and some forms of health coverages. They implied the standard should define
property and casualty. The ASOP does not apply to companies but rather to actuaries
“performing professional services in connection with property and casualty insurance
coverages.” The task force does not believe a definition of property and casualty is possible
since it is not static and will tend to change over time. Actuaries will have to determine if
the work they are doing is “in connection with property and casualty insurance coverages.”
One commentator questioned the intent of the phrase “if a conflict exists between this standard
and applicable law.” If a regulator requires something that is not either a regulation or a law,
does this fall under section 4.5, Deviation from Standard [clause] or is it exempt because of the
conflict clause? The task force believes this depends on the individual circumstances of the
situation and made no changes to the text.
Section 3.1, Introduction—One commentator believed the use of the word “basic” in section
3.1(b) sets too high of a standard and suggested replacing it with “general.” The task force
discussed this issue and determined that the requirement to have a basic understanding of
the model is appropriate. No change was made.
Section 3.2, Appropriate Reliance on Experts—Some commentators were concerned with this
section. One believed it was confusing and did not provide the actuary with sufficient guidance,
others believed it was unreasonable to expect the actuary to know “the extent to which
significant differences of opinion exist among experts....” The task force reviewed the
suggested changes from these commentators and made two changes to this section. A
sentence was added to clarify that “experts relied upon may either be the experts who
provided the model or other experts.” Secondly, the reference to “differences of opinion
among experts” was deleted as a separate item and included with section 3.2 (b), “the
extent to which the model has been reviewed or opined on by experts in the applicable
field.”
Section 3.3, Understanding of the Model—Some commentators believed the requirement in

section 3.3.1, Model Components, stating “The actuary should be aware of the extent to which
the model is based on contested or new theory” is unnecessary. They believed is was duplicative
since the actuary is required in section 3.2(b) to consider “whether the model has been reviewed
or opined on by expert....” and consider “the extent to which significant differences of opinion
9
exist.” The task force agrees that the language in section 3.2 provides sufficient guidance
and deleted the sentence
from section 3.3.1 that read, “The actuary should be aware of the extent to which the model
is based on contested or new theory.”
Section 3.4, Appropriateness of the Model for the Intended Application—In section 3.4(b), a few
commentators believed it was unreasonable to expect the actuary to “[make a reasonable effort
to] be aware of significant developments in relevant fields of expertise.” The task force
disagrees with this concern and made no changes to the text.
Section 3.5, Appropriate Validation—Section 3.5.2, Model Output, provides a list of items to
consider when checking the model output for reasonableness. One commentator believed the list
was not necessary as it implies that the actuary must perform all checks on the list. The task
force believes the list of examples provides valuable guidance with regard to the intent of
the statement. The task force modified the introductory language to clarify that the list of
examples is illustrative. The actuary, however, is not relieved from the duty to check for
reasonableness.
In section 3.5.2(d), one commentator expressed concern that considering “the sensitivity of the
model output to variations in the assumptions” was too broad of a requirement. The task force
revised the section to narrow the scope of the sensitivity consideration to “variations in the
user input and model assumptions.”
Section 4.1, Documentation—One commentator was confused by the intent of the

documentation requirement. The task force clarified that the “documentation should
demonstrate how the actuary met the requirements of sections 3.2–3.7.”
Section 4.2, Proprietary Information—One commentator offered alternative language for this
section to clarify the intent. The task force shortened the wording without changing the
intent or meaning of the section.
Section 4.3, Disclosure—To clarify the disclosure requirement, wording was added to this
section specifying that the actuary should disclose the model(s) used and any adjustments
made to the model results as described in section 3.6.
10
Actuarial Standard
of Practice
No. 39
Treatment of Catastrophe Losses in

Developed by the
Adopted by the
June 2000
(Doc. No. 072)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Catastrophe 2
2.2 Catastrophe Ratemaking Procedures 2
2.3 Contagion 2
2.4 Demand Surge 2

3.1 Identification of Catastrophe Perils or Events 2
3.2 Identification of Catastrophe Losses 2
3.3 The Use of Data in Determining a Provision for Catastrophe Losses 3
3.3.1 Use of Historical Insurance Data 3
3.3.2 Use of Noninsurance Data and Models 4
3.4 Using a Provision for Catastrophe Losses 5
3.5 Loss Adjustment Expenses 5

4.1 Conflict with Law or Regulation mentation and Disclosure 5
4.2 Documentation and Disclosure 5
APPENDIXES

Background 7
Current Practices 8
Appendix 2⎯Comments on the 1999 Exposure Draft and Subcommittee Responses 10
ii
June 2000

Actuarial Standards Board and Other Persons Interested in the Treatment of
Catastrophe Losses in Property/Casualty Insurance Ratemaking
This booklet contains the final version of Actuarial Standard of Practice No. 39, Treatment of
Catastrophe Losses in Property/Casualty Insurance Ratemaking.
Background
Many property/casualty insurance products are, by their nature, subject to large aggregate losses
resulting from relatively infrequent events or natural phenomena, i.e., from catastrophes. These
losses can cause extreme volatility in historical insurance data and generally require separate and
different treatment from other losses in ratemaking methodologies. Historically, the most
common method was to calculate the ratio of actual catastrophe losses to noncatastrophe losses
over a longer experience period, and apply that ratio to expected noncatastrophe losses in the
ratemaking formula.
In 1992 and 1994, two events occurred that changed the actuarial profession’s view of
catastrophe losses. The Hurricane Andrew and Northridge Earthquake catastrophes clearly
demonstrated the limitations of relying exclusively on historical insurance data in estimating the
financial impact of potential future events. In addition, property/casualty insurers (including self-
insurers) and their actuaries began to focus on the impact that large individual events or
sequences of events could have on the insurers’ solvency, cash flow, and earnings.
This actuarial standard of practice is intended to provide guidance to actuaries in evaluating

catastrophe exposure and in determining a provision for catastrophe losses and loss adjustment
expenses in property/casualty insurance ratemaking.
Exposure Draft
This standard was exposed for review in February 1999, with a comment deadline of June 15,
1999. Fourteen comment letters were received. The Subcommittee on Ratemaking reviewed all
the comments carefully, and many of the suggestions were incorporated in the final standard. In
particular, the subcommittee did the following: (1) revised the title and the scope of the standard
to more explicitly recognize that the standard applied to ratemaking; (2) revised the text to
iii
indicate that the actuary was estimating a catastrophe provision not estimating actual catastrophe
losses; and (3) more explicitly recognized that, in the end, the procedure that the actuary uses
must reflect the expected frequency and severity distribution of catastrophes, as well as the
anticipated class, coverage, geographic and other relevant exposure distributions. For a summary
of the substantive issues contained in these fourteen comment letters and the task force’s
responses, please see appendix 2.
The subcommitee and Casualty Committee thank all those who commented on the exposure
draft.
The subcommittee also thanks former member Robert W. Gossrow for his contributions during
the development of this proposed ASOP.
Subcommittee on Ratemaking of the Casualty Committee
Patrick B. Woods, Chairperson

Mark S. Allaben R. Michael Lamb
Charles H. Boucek Marc B. Pearl
Frederick F. Cripe Jonathan White
Gregory L. Hayward Paul E. Wulterkens

Christopher S. Carlson Robert S. Miccolis
Anne Kelly Karen F. Terry
Ronald T. Kozlowski William J. VonSeggern

vi
TREATMENT OF CATASTROPHE LOSSES IN

PROPERTY/CASUALTY INSURANCE RATEMAKING
1.1 Purpose—The Statement of Principles Regarding Property and Casualty Insurance

Ratemaking of the Casualty Actuarial Society states that consideration should be given to
the impact of catastrophes and that procedures should be developed to include an
allowance for catastrophe exposure in the rate. The purpose of this actuarial standard of
practice (ASOP) is to provide guidance to actuaries in evaluating catastrophe exposure
and in determining a provision for catastrophe losses and loss adjustment expenses in
property/casualty insurance ratemaking.
1.2 Scope—This standard provides guidance to actuaries when performing professional

services in connection with ratemaking for property/casualty insurance coverages
including property/casualty risk financing systems, such as self-insurance or
securitization products, which provide similar coverage.
If a conflict exists between this standard and applicable law or regulation, the actuary
should comply with the requirements of the law or regulation and make the disclosures
specified in section 4.1 of this ASOP. Compliance with applicable law or regulation is
not considered to be a deviation from this standard.
reference includes the referenced document as it may be amended or restated in the
future, and any successor to it, by whatever name called. If the amended or restated
1.4 Effective Date—This standard will be effective for work performed on or after
December 15, 2000.
1
2.1 Catastrophe—A relatively infrequent event or phenomenon that produces unusually large
aggregate losses.
2.2 Catastrophe Ratemaking Procedures—Ratemaking procedures that adjust for the impact
of catastrophe losses in the experience data and determine a provision for catastrophe
losses and loss adjustment expenses.
2.3 Contagion—A lack of independence between the occurrence of losses among different
entities.
2.4 Demand Surge—A sudden and usually temporary increase in the cost of materials,
services, and labor due to the increased demand for them following a catastrophe.
In evaluating catastrophe exposure and in determining a provision for catastrophe losses and loss
adjustment expenses in property/casualty insurance ratemaking, the actuary should be guided by
the following sections.
3.1 Identification of Catastrophe Perils or Events—The actuary should take reasonable steps
to identify the perils or events that have the potential to generate catastrophe losses that
differ materially from the expected aggregate losses or the expected distribution of losses.
These perils or events have at least one of the following characteristics:
a. The Potential to Display Contagion—Examples of perils that display contagion

include windstorms, earth movement, and freezing.
b. Infrequent Occurrence—Some events that occur infrequently have the potential to

produce losses that can significantly distort the historical experience. An example
of such an event is an explosion that results in the release of toxic material. If the
experience data contain such events, using this experience data without
adjustment may overstate the catastrophe provision in the rates. If the experience
data do not contain such events, using this experience data without adjustment
may understate the catastrophe provision in the rates.
3.2 Identification of Catastrophe Losses—The actuary should identify, where practicable, the
catastrophe losses in the historical insurance data. In doing so, the actuary should
consider how accurately the catastrophe losses can be identified, and the extent to which
they may have a material impact on the results of the analysis.
2
3.3 The Use of Data in Determining a Provision for Catastrophe Losses—The actuary may
use historical insurance data and noninsurance data, as described in sections 3.3.1 and
3.3.2 below.
3.3.1 Use of Historical Insurance Data—The actuary should consider the following
when using data available from insurance sources:
a. Evaluating Historical Insurance Data—The actuary should consider

comparing historical insurance data to noninsurance data to determine the
extent to which the available historical insurance data are fully
representative of the long-term frequency and severity of the perils or
events identified in section 3.1 that produced the catastrophe losses. Thus,
in determining a provision for catastrophe losses, the actuary should
consider the sensitivity of the provision to changes in the historical
insurance data relating to the following: (1) the frequency of catastrophes;
(2) the severity of catastrophes; and (3) the geographic location of
catastrophes.
b. The Applicability of Historical Insurance Data—The actuary should

consider the applicability of historical insurance data for the insured
coverage. This includes determining (1) whether catastrophe losses are
likely to differ significantly among elements of the rate structure, such as
construction type and location; (2) whether such differences should be
reflected in the ratemaking procedures; and (3) how to reflect such
differences, taking into account both homogeneity and the volume of data.
In addition, the actuary should consider whether there is a sufficient
number of years of comparable, compatible historical insurance data.
c. Adjustments to Historical Insurance Data to Reflect Future Conditions—

The actuary should consider making adjustments to the historical
insurance data to reflect conditions likely to prevail during the period in
which the rate will be in effect. Such adjustments should take into account
the impact of changes in the exposure to loss, including coverage
differences, the underlying portfolio of insured risks, building codes and
the enforcement of these codes, and building practices; population shifts;
costs; and demand surge during both the historical period and the period
for which the rate will be in effect. These considerations become more
important when a longer experience period is used because they can have
a greater effect over longer time periods.
d. Stability of Outcomes Based on Historical Insurance Data—The actuary

should consider the extent to which the provision for catastrophe losses
would change if the catastrophe ratemaking procedure were to be carried
out using different historical experience periods. If, in the actuary’s
judgment, the procedure is too sensitive to the inclusion or exclusion of an
3
individual catastrophe or sets of years, the actuary should consider

modifying the procedure to reduce the sensitivity.
e. Differing Trends in Loss Data—Historical insurance data used to

determine a provision for catastrophe losses will often extend over much
longer time periods than data used in most other ratemaking procedures;
thus, the effect of small differences in annual trend rates will be
magnified. The actuary should consider the potential for catastrophe losses
to trend at a rate materially different than the noncatastrophe losses and
reflect such differences in the ratemaking process as appropriate.
f. Consistent Definition of a Catastrophe—In utilizing a catastrophe

ratemaking procedure, the actuary often uses two sets of historical
insurance data. The first set may be comprised of data from the
ratemaking experience period from which the catastrophe losses have been
removed. The second set may contain longer term experience for
catastrophe losses. Collecting a greater volume of data for this second data
set may be accomplished in various ways, such as by using a greater
number of relevant years or by using relevant data for a broader segment
of business.
The actuary should consider the catastrophe definition pertaining to, and
the catastrophe potential in, both of these data sets to ensure that the
definitions are not materially inconsistent. Specific areas to consider are
consistency of the thresholds used to determine catastrophe losses and
consistency in identifying specific catastrophes.
3.3.2 Use of Noninsurance Data and Models—If, after considering the items contained
in section 3.3.1(a–f), the actuary believes that the available historical insurance
data do not sufficiently represent the exposure to catastrophe losses, the actuary
should consider doing one of the following:
1. use noninsurance data to adjust the historical insurance data;
2. use noninsurance data (including models based thereon) as input to

ratemaking procedures; or
3. use models based on a combination of historical insurance data and

noninsurance data.
The actuary should be satisfied that the resulting ratemaking procedures

appropriately reflect the expected frequency and severity distribution of
catastrophes, as well as anticipated class, coverage, geographic, and other relevant
exposure distributions.
4
3.4 Using a Provision for Catastrophe Losses—In ratemaking, actuaries generally use
historical data or modeled losses to form the basis for determining future cost estimates.
The presence or absence of catastrophes in any historical data used to form future cost
estimates can create biases that diminish the appropriateness of using that data as the
basis for future cost estimates. The actuary should address such biases by adjusting the
historical data used to form future cost estimates and determining a provision for
catastrophe losses (after consideration of the issues and practices found in sections 3.1–
3.3).
The actuary may employ other considerations and methods to adjust for catastrophes
associated with casualty coverages. For example, such adjustments may include limiting
losses in the underlying data and using increased limits factors or excess loss factors
based on industry data or other sources, or adjusting for legislative changes, legal
decisions, changes in the distribution of policy limits, and coverage provisions. In
addition, other adjustments, such as supplementing state-specific data with countrywide
data or company-specific data with industry information, may be appropriate.
3.5 Loss Adjustment Expenses—The actuary should be aware that the relationship of loss
adjustment expense to incurred loss can be significantly different for catastrophe losses
and for noncatastrophe losses. In some cases, the historical relationships of overall loss
adjustment expense to overall incurred losses may produce inappropriate loss adjustment
expense estimates for catastrophe losses. Similarly, the historical relationship of overall
loss adjustment expense to overall incurred losses may produce inappropriate loss
adjustment expense estimates for noncatastrophe losses if the historical period was
impacted by catastrophe losses. The actuary should modify the loss adjustment expense
procedure where necessary to develop a reasonable estimate of prospective loss
adjustment expense for both catastrophe and non-catastrophe losses.
4.1 Conflict with Law or Regulation—If a law or regulation conflicts with the provisions of
this standard, the actuary should develop a rate in accordance with the law or regulation,
and disclose any material difference between the rate so developed and the actuarially-
determined rate to the client or employer.
4.2 Documentation and Disclosure—The actuary should be guided by the provisions of

ASOP No. 9, Documentation and Disclosure in Property and Casualty Insurance
Ratemaking, Loss Reserving, and Valuations. If the actuarial work product includes
mathematical modeling developed by someone other than the actuary, the documentation
should include the source of the model and how the model was used in the analysis. In
addition, if the model is outside the actuary’s area of expertise, the actuary should be
guided by the documentation and disclosure requirements of ASOP No. 38, Using
Models Outside the Actuary’s Area of Expertise.
5
6
Appendix 1
practice.
Background
Historical Procedures—Prior to Hurricanes Hugo and Andrew, the predominant ratemaking

procedures used to determine a catastrophe provision involved calculating the long-term ratio of
such losses to noncatastrophe losses over a twenty- to thirty-year span. Catastrophes were
identified either by some industry-dollar or loss-ratio threshold, and typically represented
weather-related perils such as hurricanes, tornadoes, or snow storms. Other physical catastrophes
such as floods and earthquakes were usually covered by separate policies designed to specifically
include such perils. A provision for casualty-related catastrophes was typically not included
separately in the rates, but was implicitly included with the contingency provision.
Issues—In the late 1980s and early 1990s, catastrophes produced record levels of damage, and it
became evident that adjustments to historical ratemaking procedures were necessary. Hurricanes
Hugo, Andrew, and Iniki produced aggregate losses exceeding previously expected possibilities.
These huge losses brought to light other issues such as population shifts, non-adherence to
building codes, and exposure concentration, none of which had been addressed previously. In
addition, the occurrence of earthquakes in both San Francisco and Northridge, and a major flood
in the Midwest during this period heightened the need for development of improved ratemaking
procedures for these perils. Finally, catastrophes that had not been contemplated previously, such
as the World Trade Center bombing and the Oakland Hills fires, raised other questions
concerning how to provide for such losses in the rate.
In addressing these issues, catastrophe models, which previously were used by companies to
determine their probable maximum loss under various scenarios, were adjusted for use in
ratemaking. However, since these models were often multidisciplinary in nature or proprietary, it
was often difficult to (1) ascertain the underlying assumptions of the model, and (2) obtain
regulatory approval of rates based on these models.
Other issues have also emerged, making assessment of catastrophe exposure even more difficult.
Examples of such issues include coverage changes, such as the greater use of guaranteed
replacement cost on homeowner policies or the use of separate wind deductibles; the emergence
of state-run catastrophe funds; and the availability of catastrophe options.
7
Current Practices
Subsequent to Hurricanes Hugo and Andrew, numerous enhancements and alternatives have
been developed that improve on the traditional, long-term catastrophe ratemaking procedure.
One procedure uses the traditional excess wind approach but supplements or replaces the
historical insurance data with hypothetical losses from an infrequent event (for example, a fifty-
year event) as calculated by a catastrophe simulation model. Historical events of greater severity
than the modeled fifty-year event are eliminated. Separate excess factors are calculated from the
historical insurance data and for a hypothetical year constructed to include the modeled fifty-year
event. The excess factor is calculated as a weighted average of those two separate factors.
A second procedure involves loading catastrophe reinsurance costs into the rate calculation. With
this procedure, the rates are initially calculated using losses net of the catastrophe reinsurance.
The company’s overall catastrophe reinsurance costs are allocated to state and line, and those
allocated costs are added to the calculated rate net of reinsurance.
A third procedure separates catastrophes into hurricane and nonhurricane components and treats
each separately. This enables the actuary to focus on the particular difficulties, low frequency
and high severity, in estimating hurricane losses. One specific procedure that is used for
nonhurricane catastrophes is to relate catastrophe losses to amount of insurance years. A long-
term ratio of catastrophe losses to amount of insurance years is calculated and used to load the
ratemaking experience period for expected catastrophe losses. This procedure has also been used
for hurricanes, using noninsurance data such as long-term hurricane frequencies to adjust the
historical insurance data.
A fourth procedure that has been used for nonhurricane catastrophes is based on frequency. With
this procedure, daily frequencies are calculated over a long period and each day is ranked using
that frequency. A set percentage of days with the highest frequencies is considered excess. The
losses incurred on those excess days are compared to the losses incurred on all other days in
order to calculate an excess factor.
In considering earthquakes and hurricanes, the predominant approach currently used to calculate
expected catastrophe losses is computer simulation models. These models make extensive use of
noninsurance data to estimate the overall frequency of these events, as well as the frequency of
the key defining characteristics of these events. Based on these estimated frequencies, a large
number of catastrophes are simulated across a broad geographic area. For each simulated
catastrophe, the model translates the event or phenomenon into a specific “hazard” parameter,
such as wind speed or ground shaking, at all locations impacted by the event. Based on
engineering analysis and prior catastrophe losses, the hazard parameter is translated into a
damage ratio, i.e., ratio of losses to amount of insurance. These damage ratios are applied to the
current or projected amounts of insurance and, when adjusted by the estimated frequencies of the
specific catastrophes, produce the expected catastrophe losses.
Since our knowledge of catastrophes is not complete and is still evolving, computer simulation
models are also evolving. The expected catastrophe losses calculated from these models can be
8
subject to significant variation, since different models (i.e., both models from different
developers and different versions of models from the same developer) will obviously provide
different answers.
All of these procedures may or may not be supplemented with a risk load calculated in
accordance with ASOP No. 30, Treatment of Profit and Contingency Provisions and the Cost of
Capital in Property/Casualty Insurance Ratemaking.
9
Appendix 2
Comments on the 1999 Exposure Draft and Subcommittee Responses
The exposure draft of this actuarial standard of practice (ASOP)—formerly titled Treatment of
Catastrophe Losses in Property/Casualty Insurance—was issued in February 1999, with a
comment deadline of June 15, 1999. Fourteen comment letters were received. The Subcommittee
on Ratemaking carefully considered all comments received. Summarized below are the
significant issues and questions contained in the comment letters, printed in roman type. The
subcommittee’s responses are printed in boldface.
General Comments
One commentator notes that, in the end, the definition of a catastrophe is driven by frequency.
High frequency loss processes should produce credible estimates of future losses without
adjustment. Low frequency events do not provide these estimates and adjustments are needed.
The subcommittee disagrees and believes that the most important facts are that the event
or phenomenon not only should be relatively infrequent but should also produce unusually
large aggregate losses.
Two commentators suggested that the title of the standard should be Treatment of Catastrophe
Losses in Property/Casualty Insurance Ratemaking. The subcommittee agreed and changed
the title.
Two commentators believed that the standard too often specified what the actuary should do,
suggesting the use of may as more appropriate. The subcommittee disagrees, since the
standard generally is specifying what the actuary needs to consider. The standard does not
say the actuary needs to do something after the consideration if the item has no material
impact on the results. In performing this work, the actuary needs to consider all items that
may materially impact or bias the results.
One commentator noted that the standard permits the actuary to rely on the work of nonactuaries
without proper review and disclosure, particularly as it pertains to models developed by others.
The subcommittee disagrees that an actuary can rely on the work of a nonactuary without
review and disclosure. The subcommittee prepared this standard fully aware of ASOP
No. 38, Using Models Outside the Actuary’s Area of Expertise (Property and Casualty), which
was being exposed concurrently.
One commentator suggested that the definitions and explanations should be phrased more in
statistical terms whenever possible. The subcommittee believes that, given the wide variation
in available methodologies, a statistically-based definition would too narrowly restrict
current acceptable practices.
10
Another commentator suggested that the term procedures should be replaced by models. The
subcommittee believes that procedures is appropriate, particularly since models, in this
case, could be too narrowly read to mean computer models.
One commentator stated that the standard does nothing to help an actuary who uses a computer
model to develop estimated catastrophe losses and is challenged by individuals who refuse to
accept the validity of these models. The subcommittee disagrees. The standard provides the
analytical steps that the actuary should follow in examining the available data. Based on
the analysis, the actuary can determine and demonstrate to others whether the data need to
be supplemented by additional data or, alternatively, whether models that consider various
sources of data should be used.
The transmittal memorandum of the exposure draft asked readers to address several key
questions. One question asked, “Is the application of the standard to casualty (i.e., nonproperty)
insurance appropriate, and has the subject been addressed adequately?” One commentator stated
that catastrophes should be limited to first party coverages, particularly since the considerations
listed in 3.3.1 and 3.3.2 were property related in nature. The commentator also noted that the
methodologies referenced were predominantly for property coverages. The commentator did
suggest, that if the standard were to apply to casualty coverages, it would need to include
considerations such as limiting losses to basic limits; using excess loss factors; adjusting for
changes in limits, coverages, or reinsurance; and supplementing state data with countrywide
data. The subcommittee intends that the requirements of this ASOP should also apply to
casualty catastrophe losses when such a catastrophe is identified. The subcommittee has
included the suggested language for casualty catastrophes in section 3.4.
The subcommittee also drew its readers’ attention to several provisions in particular: section 2.1,
Catastrophe; section 3.1, Identification of Catastrophe Perils or Events; section 3.3.2, Use of
Noninsurance Data; and section 4.1, Conflict with Law or Regulation. Please see those sections
below for discussion of any pertinent readers’ comments and subcommittee responses.
Section 1.1, Purpose—One commentator stated that no guidance has been given regarding a
unique or separate loss adjustment expense for catastrophe. The commentator suggested that the
standard delete reference to loss adjustment expenses or provide explicit guidance on this aspect.
The subcommittee agreed and added section 3.5, Loss Adjustment Expenses, to address the
issues surrounding loss adjustment expenses.
Section 1.2, Scope—One commentator noted that the purpose section specifically makes
reference to insurance ratemaking, but the scope section says that the standard applies to many
more professional services. The commentator asked, “Does this standard apply to those entities
cited in the scope section, only when they are related to property/casualty ratemaking?” The
11
standard has been retitled to specify that it applies to property/casualty insurance

ratemaking. The services referred to for risk financing systems, such as self-insurance and
securitization products, are considered to be ratemaking when estimates for future costs
are being determined.
Section 2.1, Catastrophe—One commentator believed that the definition of catastrophe should
relate to how the event or phenomenon violated the general insurance ratemaking model
assumption of independent events. The subcommittee believes that the use of a qualitative
definition is more broadly applicable and useful in terms of current accepted practices.
Another commentator believed that the phrase “or natural phenomenon”should be removed, as
the phrase “relatively infrequent events” included natural and manmade phenomena. The
subcommittee agreed and deleted the word “natural” from the definition.
Another commentator believed that “relatively” should modify high amounts, instead of
infrequent events. The subcommittee believes that it is more important to emphasize the
frequency aspects of the definition as opposed to the amount of loss dollars.
Another commentator stated that serious damage to a very large risk would be considered a
catastrophe according to the definition. In the commentator’s view, this did not seem appropriate
since a large number of claims might not have resulted. The subcommittee does not believe
that the event needs to produce a large number of claims in order for it to be defined as a
catastrophe.
One commentator believed that the definition need not include the adjective “insured” to modify
losses. The subcommittee agrees and removed it.
Another commentator suggested the definition eliminate the phrase, “the potential to” produce,
as an event either is or is not a catastrophe. The subcommittee agreed and eliminated the
phrase “the potential to” in the definition.
Section 2.2, Catastrophe Ratemaking Procedures—One commentator believed that the use of the
term “adjust” was defensive in nature and that the definition should be something like “to
provide a better expected value estimate than could be developed with the limited actual
history.” The subcommittee believes that the original definition is more descriptive of the
actual practices in use, while still being consistent with the more theoretical expression of
the commentator.
Another commentator expressed the concern that the current use of the word “adjust” would
limit the ability of the actuary to consider any method that includes supplementing or credibility-
weighting the losses. The subcommittee believes that the current wording does not limit the
ability of the actuary to use any techniques that, in the opinion of the actuary, produce
appropriate estimates of catastrophes losses.
12
Two commentators suggested editorial changes in the definition to clarify the timing of the
catastrophe losses. The subcommittee agreed with the suggestions and revised the definition.
Section 2.3, Contagion—One commentator expressed the concern that some casualty
catastrophes may result in claims against a single entity. The subcommittee is aware of this
issue and believes that the standard addresses the issue by providing guidance in
section 3.4.
Section 2.4, Demand Surge—Several commentators suggested editorial changes to sharpen the
definition. The subcommittee changed the definition to reflect the fact that demand surge is
a sudden and temporary increase, not only in material and labor but also in services.
Section 3.1, Identification of Catastrophe Perils or Events—Several commentators expressed

concern about the original language, which seemed to require the actuary to identify all perils or
events that might have the potential to generate insured catastrophe losses. The subcommittee
agreed and revised the language to include the idea that the actuary should take reasonable
steps to identify the perils or events that would generate material losses. Another
commentator believed that it was appropriate to add a condition of suddenness, either in the
discovery or occurrence of loss to the list of characteristics. The subcommittee did not think
that any additional characteristics were needed.
Some commentators suggested clarifications to section 3.1(b). One commentator suggested

replacing the last two sentences with the phrase “the presence or absence of such events in the
experience period may result in materially different perceptions of future loss estimates.” While
the subcommittee agrees that the original two sentences were awkward, the revision retains
the parallel treatment because the subcommittee believes that a more explicit explanation
of the impacts is appropriate. Another commentator suggested that infrequent occurrence
should be defined in terms like the frequency of the event over a longer time period than the
experience period. The subcommittee concluded that it was important for the actuary to be
able to evaluate the materiality of the loss and frequency of events relative to the long term
in the context of the methodology being used.
Section 3.2, Identification of Catastrophe Losses—Two commentators suggested that the

language should be clarified to indicate that the actuary may not be able to identify the
catastrophe losses in all the historical data used. The subcommittee agreed and modified this
section to reflect such a possible limitation. Another commentator believed that the standard
provided no guidance to the actuary as to how to identify catastrophe losses in the historical
insurance data. The subcommittee believes that the perils insured and the events covered
provide sufficient guidance for the identification of catastrophe losses.
Section 3.3, The Use of Data in Determining a Provision for Catastrophe Losses—The
subcommittee made an editorial revision to the order of the items (a), (b), (c) and (d). Item (d)
13
was placed first and relabeled as (a) to emphasize the importance of the frequency component of
historical data in making use of the historical data in determining a provision for catastrophe
losses. One commentator noted that computer simulations are not data. The subcommittee
agreed and revised this section. Another commentator believed that sections 3.3.1(b) and
3.3.1(a), and 3.3.1(c) and 3.3.1(e), could be combined. The subcommittee notes that 3.3.1(b)
refers to a comparison over time within the set of insurance data, whereas 3.3.1(a)
addresses a comparison of the insurance data to external sources. With regard to 3.3.1(c)
and 3.3.1(e), the subcommittee believes that 3.3.1(c) refers to the distribution of the
exposure to loss in the experience period, compared to the prospective period, whereas
3.3.1(e) refers to possible differing trends in the costs by peril over the available period.
Two commentators noted that the language in section 3.3.1(a) created an obligation that may not
be possible to satisfy in all cases. The subcommittee agreed and revised this section to say
that the actuary should consider comparing historical insurance data to noninsurance data.
Another commentator noted that this section implies that one uses historical data only if the data
give comparable results to modeling, since use of modeling will give the full spectrum of loss
distribution. The subcommittee notes that this section is alerting the actuary to be sure that
he or she believes that the data underlying his or her procedure sufficiently reflect the long-
term frequency and severity of events producing insured catastrophe losses. If the actuary
does not believe that the data are sufficient, section 3.3.2 states that the actuary should
consider using a modeling procedure.
In section 3.3.1(b), one commentator suggested changing the language to say “whether
catastrophe losses are likely to differ significantly among elements.” The subcommittee agreed
and made the change.
In section 3.3.1(c), one commentator suggested the use of a bullet-point list to highlight the
importance of each element, particularly items related to coverage, such as limits, co-insurance,
deductibles, etc. The subcommittee agrees that it is important to highlight aspects of
coverage and has explicitly mentioned changes in coverage as a consideration.
In section 3.3.1(d), one commentator believed that if the indicated rate change is sensitive to the
number of years in the historical experience period, then one should not use the historical period
at all. The commentator believed that this section implies one would modify the current
procedure, not switch to using computer simulation. The subcommittee disagrees. In fact, the
subcommittee views modifying procedures to include adopting computer simulation
models.
In section 3.3.1(e), one commentator noted that the section should be revised to say “when
noncatastrophe losses are expected to change at a rate materially different from that for
catastrophe losses.” The subcommittee agreed with this and revised the text to cover the
potential aspects as referring to past and future time periods.
Another commentator stated that the phrase “most catastrophe ratemaking procedures” should be
revised to “traditional catastrophe ratemaking procedures,” since generally the standard is
14
referring to procedures that have existed in the past. The subcommittee revised this section to
remove the reference to any specific type of procedure.
One commentator suggested several editorial changes for section 3.3.1(f) that generalized the
section as well as broadened the suggested conditions for increasing the amount of data in the
second set. The subcommittee agreed with this comment and revised the text.
Two commentators suggested that the term “consistent” be replaced by “not materially
inconsistent.” The subcommittee agreed with this suggestion and made the revision. Another
commentator suggested that the last sentence should be revised to remove the word “dollar” and
changing the “or” to “and.” The subcommittee agreed and revised the text.
Section 3.3.2, Use of Noninsurance Data—One commentator suggested that the standard is
giving the false impression that one should adjust past insurance data for all catastrophe perils.
This commentator suggests that the adjustments are impossible to do adequately, giving false
hope that meaningful results can be obtained. The commentator suggested that the standard be
restructured to separate the treatment of catastrophes, such as hurricanes and earthquakes, from
all others. The subcommittee disagrees with these comments. The standard provides the
actuary with a framework for evaluating the usability of the available data and developing
appropriate catastrophe treatments. The standard identifies the issues for the actuary and
gives sufficient freedom for the actuary to demonstrate the appropriateness of the
resolution of the issues.
The exposure draft contained sections 3.3.2(a) and (b). The revisions made as a result of
comments received combined parts (a) and (b). All responses to comments received in this
section refer to the original section references.
In section 3.3.2(a), one commentator suggested the addition of the phrase “and other relevant.”
The subcommittee agreed with this suggestion. The same commentator suggested that the
section be modified to say “expected” frequency and catastrophes “for the current or prospective
periods.” The subcommittee disagreed as the expected frequency and severity of
catastrophes was felt to be sufficiently descriptive.
In section 3.3.2(b), two commentators believed the section implied that the actuary was capable
of making decisions on when the historical insurance data best capture the range of frequency
and severity of catastrophes. The subcommittee recognizes that an actuary may not know
these facts without consultation with outside experts. The subcommittee believes that the
actuary could become aware of the issues by referring to such experts, and make intelligent
decisions about the representativeness of the data.
One commentator suggested that in section 3.3.2(b) the phrase “if the results of the simulation”
was inappropriate. The commentator’s point was that the process—not the results—was most
important here. The subcommittee agreed and has deleted any reference to results of the
simulation and has focused the actuary on addressing the appropriateness of the
procedures used.
15
Section 3.4, Using a Provision for Estimated Catastrophe Losses—One commentator believed
that the section demanded that the actuary always replace the actual data with estimated data, and
suggested that the phrase “should adjust” be changed to “may consider adjusting.” The
subcommittee disagrees and believes that if the actuary has biased data, the actuary needs
to estimate what the values should be excluding the bias.
Section 4.1, Conflict with Law or Regulation—Several commentators felt that the requirement
that the actuary disclose material differences between the rate developed in accordance with law
or regulation and the actuarially-determined rate was unnecessarily burdensome. One
commentator suggested that this disclosure burden was unique among all ASOPs. The
subcommittee believes that the potential range of differences could be so large that
disclosing the difference to the client or employer would be necessary. The subcommittee
also notes that this same requirement exists in ASOP No. 30, Treatment of Profit and
Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking.
16
Actuarial Standard
of Practice
No. 40
Compliance with the NAIC Valuation of Life Insurance Policies

Model Regulation with Respect to Deficiency Reserve Mortality
Developed by the
Task Force on XXX Regulation of the
Adopted by the
December 2000
Doc. No. 075

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Anticipated Mortality 2
2.2 Antiselection 2
2.4 Basic Reservess 2
2.5 Contract Segmentation Method 2
2.6 Credibility 2
2.7 Deficiency Reserves 2
2.8 Full Credibility 2
2.9 Model Select Mortality Factors 2
2.10 Policy 2
2.11 Ten-Year Select Factors 2
2.12 X Factor Class 2
2.13 X Factors 3
2.14 1980 CSO Valuation Tables 3

3.1 Regulatory Requirements 3
3.2 Actuarial Opinion 3
3.3 X Factor Requirements 3
3.4 Creation of X Factor Classes 4
3.5 Selection of X Factors 4
3.5.1 Relevant Company Experience 4
3.5.2 Deriving Anticipated Mortality 5
3.6 Periodic Assessment of Anticipated Mortality 5
3.7 Adjustments to X Factors 6
3.8. Basis of Exposure 6

4.1 Required Communications 6
4.1.1 Opinion 7
4.1.2 Actuarial Report 7
4.2 Documentation 8
ii
APPENDIXES

Background 10
Appendix 2Comments on the Second Exposure Draft and Task Force Responses 13
iii
December 2000

Actuarial Standards Board and Other Persons Interested in the Valuation of Life
Insurance Policies
This booklet contains the final version of ASOP No. 40, Compliance with the NAIC Valuation of
Life Insurance Policies Model Regulation with Respect to Deficiency Reserve Mortality.
Background
In March 1999, the National Association of Insurance Commissioners (NAIC) adopted a revised
version of the Valuation of Life Insurance Policies Model Regulation (hereinafter the Model),
often referred to as “Regulation XXX.” The Model specifies an effective date of January 1, 2000,
and does not apply to policies issued prior to the effective date. Certain types of plans are not
subject to the Model.
The Model specifies that the 1980 Commissioners’ Standard Ordinary mortality tables
(hereinafter the 1980 CSO valuation tables) are to be used as the minimum mortality standard for
basic reserves. The Model also includes several tables of select factors that may be applied to the
1980 CSO valuation tables during the first segment, as defined in the Model, for both basic
reserves and deficiency reserves. In addition, the Model allows the appointed actuary to apply
certain percentages (hereinafter X factors) to these select factors to modify the mortality basis for
deficiency reserves for the first segment. The choice of the X factors is subject to certain limiting
parameters and tests that are specified in the Model.
The Model specifies that if any X factor for any policy in a company is less than 100%, then the
standard actuarial opinion and memorandum for the company must be based on asset adequacy
analysis, and, in addition, the appointed actuary must annually opine, for all policies subject to
the Model, as to whether the mortality rates resulting from application of the X factors meet the
requirements of the Model. The Model provides that this additional opinion shall be supported by
an actuarial report, subject to appropriate actuarial standards of practice promulgated by the
Actuarial Standards Board.
Critical Issues
A key issue for the appointed actuary is ensuring that the X factors comply with the limiting
parameters and tests specified in the regulation, based on anticipated mortality during the first
iv
segment. This task is complicated by the number of different underwriting classes and plans for
which X factors may be determined. There is an additional danger that current X factors would
need to be increased at some future date, with the possibility of resultant large reserve increases
and shocks to surplus.
Sources of experience mortality data used as the basis for anticipated mortality are very
important, especially for smaller companies and for newer products or mortality classes with no
significant mortality experience upon which to draw. The appointed actuary will need to consider
how to treat data from different sources. Section 3.5.2 includes guidance as to the hierarchy of
preference for experience on which to base anticipated mortality. Data from reinsurers are
included as an acceptable source of data, among others, if the data are relevant and needed to
develop a credible basis for anticipated mortality.
The goal of demonstrating confidence in the anticipated mortality underlying the X factors is
very important. There are no specific rules to follow in the preparation of this demonstration.
However, approval of X factors by some state regulators will likely depend on their satisfaction
with these demonstrations and the implied amount of professionalism used in making the X
factor determinations. The form and content of the supporting actuarial report can be significant
to the regulator in considering approval of the X factors.
The use of mortality experience net of reinsurance was considered. The task force reached the
conclusion that a company’s own mortality experience on direct plus assumed business should
be used before any reduction of exposure or claims on reinsurance ceded. This conclusion is
stated in section 3.4.
Exposure Drafts
The first exposure draft of this standard was issued in September 1999 with a comment deadline
of March 31, 2000. The Task Force on XXX Regulation carefully considered the fifteen
comment letters received. A summary of the substantive issues contained in these comment
letters and the task force's responses are in appendix 2 of the second exposure draft of this
standard.
The second exposure draft was issued in June 2000 with a comment deadline of October 15,
2000. Four comment letters were received. The Task Force on XXX Regulation carefully
considered these comment letters and made the following changes to the final ASOP:
1. In section 3.4, Creation of X Factor Classes, the task force split the paragraph dealing
with reinsurance into two paragraphs to clarify the guidance with respect to reinsurance
assumed and reinsurance ceded. On reinsurance assumed, the task force clarified that
separate X factor classes should be considered if anticipated mortality on assumed
business is materially different from that on direct business.
v
2. In section 3.5.2, Deriving Anticipated Mortality, the task force clarified that reinsurance
should be considered in deriving anticipated mortality and that the anticipated mortality
on reinsured business should exclude the effect of experience refunds or other
adjustments contained in the reinsurance agreements.
3. In appendix 1, under the section on assessment of anticipated mortality, the cautionary

language associated with the discussion on hypothesis testing was rewritten and moved to
the end of the section as general guidance to the appointed actuary in applying any
approach.
For a summary of the substantive issues contained in these comment letters, please see appendix
2. The task force and Life Committee thank all those who commented on the first and second
exposure drafts.
Task Force on XXX Regulation
John W. Brumbach, Chairperson

Andrew F. Bodine Lew H. Nathan
Robert W. Foster Jr. Michael Palace
Stephen G. Hildenbrand Douglas L. Robbins
Robert G. Meilander


David G. Hartman Heidi Rackley
Ken W. Hartwell James R. Swenson
Roland E. King Robert E. Wilcox
vi
COMPLIANCE WITH THE NAIC

VALUATION OF LIFE INSURANCE POLICIES
MODEL REGULATION WITH RESPECT TO
DEFICIENCY RESERVE MORTALITY

guidance to appointed actuaries with respect to annual opinions and supporting actuarial
reports as to whether certain mortality rates for minimum reserves used to determine
deficiency reserves meet the requirements of the National Association of Insurance
Commissioners (NAIC) Valuation of Life Insurance Policies Model Regulation, as
amended by the NAIC in March 1999 (hereinafter the Model). On plans of life insurance
elected by the company, the Model allows the appointed actuary to adjust certain
mortality rates to reflect anticipated mortality, without recognition of mortality
improvement beyond the valuation date, for use in calculating deficiency reserves. This
standard provides guidance to the appointed actuary in selecting the adjustments to these
mortality rates and in assessing whether the rates meet the requirements of the Model.
1.2 Scope—This standard applies to appointed actuaries complying with the regulatory
requirements governing the mortality rates used for purposes of calculating deficiency
reserves on certain plans of insurance prepared in accordance with the Model.
The scope of this standard does not include compliance with state regulations that differ
materially from the Model with regard to the issues addressed in this standard. Appointed
actuaries complying with requirements of a regulation that differs materially from the
Model should consider the guidance in this standard to the extent that it is appropriate.
document differs materially from the originally referenced document, the appointed
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 all statements of actuarial opinion
provided for reserves with a valuation date on or after May 1, 2001.
1
2.1 Anticipated Mortality—The appointed actuary’s assumption about the mortality to be

experienced in the future on a group of policies.
2.2 Antiselection—The actions of individuals, acting for themselves or for others, who are
motivated directly or indirectly to take financial advantage of the risk classification
system.
2.3 Appointed Actuary—Any individual who is appointed or retained in accordance with the
requirements set forth in the model NAIC Actuarial Opinion and Memorandum
Regulation.
2.4 Basic Reserves—Reserves calculated in accordance with section 5 of the model NAIC
Standard Valuation Law.
2.5 Contract Segmentation Method—The method of dividing the period from issue to
mandatory expiration of a policy into successive segments, with the length of each
segment being defined as set forth in section 4 of the Model and using the assumptions as
set forth in section 4 of the Model.
2.6 Credibility—A measure of the predictive value in a given application that the actuary
2.7 Deficiency Reserves—The excess, if greater than zero, of minimum reserves calculated
in accordance with section 8 of the model NAIC Standard Valuation Law over basic
reserves.
2.8 Full Credibility—The level at which a particular body of data is assigned full predictive
value based on a selected confidence interval.
2.9 Model Select Mortality Factors—The select mortality factors in the appendix of the
Model.
2.10 Policy—Any life insurance policy subject to the Model.
2.11 Ten-Year Select Factors—The select factors adopted with the 1980 amendments to the
model NAIC Standard Valuation Law.
2.12 X Factor Class—A group of policies under one or more plans of insurance to which a
single set of X factors applies. An example of an X factor class could be a male preferred
nonsmoker underwriting class, having one set of X factors covering all issue ages and
durations for several plans of insurance.
2
2.13 X Factors—For durations in the first segment (only), as determined under the contract
segmentation method, the percentages that may be applied to the Model select mortality
factors for the purpose of calculating deficiency reserves. Subject to the requirements set
forth in section 5 of the Model, the X factors may vary by policy year, policy form,
underwriting classification, issue age, or any other policy factor expected to affect
mortality experience.
2.14 1980 CSO Valuation Tables—The Commissioners’ 1980 Standard Ordinary Mortality
Table without ten-year select factors, incorporated in the 1980 amendments to the model
NAIC Standard Valuation Law, and variations of the 1980 CSO valuation tables
approved by the NAIC, such as the smoker and nonsmoker versions approved in
December 1983.
3.1 Regulatory Requirements—Section 5 of the Model contains the requirements governing

the mortality rates to be used for the purpose of calculating deficiency reserves. The
appointed actuary should be familiar with the Model and any significant state variations,
and should be satisfied that applicable actuarial requirements have been met.
3.2 Actuarial Opinion—The Model contains requirements regarding the selection and
continued use of X factors to adjust certain mortality rates for purposes of calculating
deficiency reserves. If any X factor is less than 100% at any duration for any policy, the
appointed actuary should annually prepare an opinion and supporting actuarial report, as
required by the Model and in accordance with section 4 of this standard.
3.3 X Factor Requirements—The X factors may be used only for durations in the first
segment, as determined by the contract segmentation method. In determining compliance
with each requirement, the appointed actuary should take into account only the applicable
durations in the first segment. Certain requirements are relatively straightforward; for
example, no X factor can be less than 20%. Others call for professional judgment,
particularly requirements that involve an assessment of anticipated mortality.
Two requirements contain tests that directly or indirectly compare valuation mortality
rates, as adjusted by X factors, to a variant of anticipated mortality. The appointed
actuary should demonstrate that the X factors adopted satisfy these tests.
a. Section 5.B(3)(d) of the Model requires that, for the first segment, the actuarial
present value of future death benefits calculated using the mortality rates resulting
from the application of the X factors be greater than or equal to the actuarial
present value of future death benefits calculated using anticipated mortality
without recognition of mortality improvement beyond the valuation date. The
actuarial present values should be calculated using the valuation interest rate used
for basic reserves and the appropriate mortality for each situation.
3
b. Section 5.B(3)(e) of the Model requires that, for the first segment, the mortality
rates resulting from the application of the X factors be at least as great as
anticipated mortality, without recognition of mortality improvement beyond the
valuation date, in each of the first five years after the valuation date.
3.4 Creation of X Factor Classes—The appointed actuary should consider the composition
and characteristics of the policies issued under a plan of insurance in determining the
appropriate X factor classes that will be applicable within that plan. The policies that
comprise an X factor class generally should have similar underwriting or experience
characteristics. When X factor classes are similar across various plans of insurance, these
X factor classes may be combined into a common single X factor class.
The appointed actuary should consider the presence of reinsurance in creating X factor
classes. Anticipated mortality should be assessed and X factor classes should be created
on a gross basis (i.e., direct business plus reinsurance assumed, before deducting
reinsurance ceded). To the extent that anticipated mortality on reinsurance assumed is
materially different from that on direct business, the appointed actuary should consider
creating separate X factor classes.
With respect to reinsurance ceded, the anticipated mortality on ceded business should not
be materially different from the anticipated mortality of the X factor class from which the
business is ceded. If the difference is material, the appointed actuary should consider
creating separate X factor classes.
When creating X factor classes, the appointed actuary should be satisfied that mortality
studies of company experience for each X factor class and for all classes combined are
available, to the extent experience exists, or will be available as experience emerges in
the future.
3.5 Selection of X Factors—The Model allows the company to adjust the Model select
mortality factors by X factors for the purpose of calculating deficiency reserves for
specified plans of insurance elected by the company. The appointed actuary should select
the X factors for each X factor class, based on anticipated mortality for each class,
without recognition of mortality improvement beyond the valuation date. As uncertainty
concerning the level of anticipated mortality increases, the appointed actuary should
consider providing a margin for conservatism, such as by selecting higher X factors.
Anticipated mortality may, for some X factor classes, exceed the 1980 CSO valuation
tables with Model select mortality factors applied, resulting in X factors greater than
100%.
In determining anticipated mortality and in selecting X factors, the appointed actuary

should be guided by the following considerations:
3.5.1 Relevant Company Experience—The appointed actuary should take into account
the level and trend of actual company mortality experience in assessing
4
anticipated mortality for each X factor class. However, in accordance with the
Model, no recognition should be made of mortality improvement beyond the
valuation date.
The appointed actuary should use the most recent relevant company experience
that is practicably available. Consideration should be given to the length of the
observation period, recognizing the tradeoff between having insufficient data if
the period is too short and having data no longer relevant if the period is too long.
The results of the mortality studies should be reviewed for reasonableness.
3.5.2 Deriving Anticipated Mortality—If relevant company experience for a particular

X factor class is available and has full credibility, the appointed actuary should
use that experience as the basis for deriving anticipated mortality.
In situations where relevant company experience for a particular X factor class is

not available or does not have full credibility, the appointed actuary should derive
anticipated mortality in a reasonable and appropriate manner from actual
experience and past trends in experience of other similar types of business, either
in the same company, in other companies (including reinsurance companies), or
from other sources, generally in that order of preference.
If the relevant company experience for a particular X factor class and other
relevant experience are insufficient to form an assumption, the appointed actuary
should use professional judgment in assessing anticipated mortality, taking into
account where, in the spectrum of mortality experience, such business would be
expected to fall relative to the mortality experience for other X factor classes.
The appointed actuary should take into account the effect that lapsation or
nonrenewal activity has had or would be expected to have on mortality. The
appointed actuary should specifically take into account the adverse effect of any
anticipated or actual increase in gross premiums on lapsation, and the resultant
effect on mortality due to antiselection. The appointed actuary should also take
into account any known positive and negative changes in mortality due to the
environment in which the company operates and the possible net adverse impact
on mortality associated with those changes.
The appointed actuary should consider the presence of reinsurance in deriving

anticipated mortality, as noted in section 3.4. The anticipated mortality on
reinsured business, both assumed and ceded, should pertain to that on the
reinsured lives and exclude the effect of experience refunds or other adjustments,
however characterized in the reinsurance agreements.
3.6 Periodic Assessment of Anticipated Mortality—The appointed actuary should annually

review relevant emerging experience for the purpose of assessing the appropriateness of
anticipated mortality for each X factor class and, in aggregate, for all X factor classes
combined. If the appointed actuary chooses to continue to use the prior anticipated
5
mortality assumptions, then the appointed actuary should determine whether the prior
anticipated mortality assumptions are appropriate in light of any relevant emerging
experience. Statistical analyses may be useful in making this determination. Other
quantitative analyses may be used provided the appointed actuary can satisfactorily
support such analyses as being sufficient to assess the appropriateness of anticipated
mortality.
If the results of statistical or other testing indicate that previously anticipated mortality
for a given X factor class is inappropriate, then the appointed actuary should set a new
anticipated mortality assumption for the X factor class.
After analyzing the appropriateness of the anticipated mortality for each X factor class in
isolation and adjusting anticipated mortality as necessary, the appointed actuary should
analyze the appropriateness of the anticipated mortality assumptions at the aggregate
level. If analysis at the aggregate level indicates that aggregate anticipated mortality is
inadequate, then the appointed actuary should adjust the anticipated mortality assumption
for one or more X factor classes until the appointed actuary is satisfied that the
anticipated mortality assumptions are adequate at the aggregate level.
3.7 Adjustments to X Factors—The appointed actuary should use the anticipated mortality
(without recognition of mortality improvement beyond the valuation date) for each X
factor class, as adjusted for relevant emerging experience, for the purpose of determining
whether the X factors for the class meet the requirements of the Model. If any
requirement of the Model is not satisfied, the appointed actuary should adjust the X
factors for the class to the extent necessary to meet such requirement.
The appointed actuary should consider the trend in mortality when deciding whether to
adjust X factors, as permitted by the Model. The level and trend of mortality experience
on similar types of business in other companies, or from other sources, if available,
would be an important consideration in making this decision.
3.8 Basis of Exposure—The appointed actuary should analyze the level and trend of actual
mortality experience primarily by using exposures based on amounts or units of
insurance. These measures are most meaningful from the standpoint of financial impact
on the company. Other measures of exposure, such as number of lives, can also be useful
in analyzing experience.
4.1 Required Communications—The opinion required by section 3.2 applies to all policies on
specified plans of insurance for which the company has elected to apply Model select
mortality factors for purposes of calculating deficiency reserves. For policies (on such
specified plans) without X factors applied, the opinion should reflect implied X factors of
100%.
6
4.1.1 Opinion—The opinion should indicate, as of the valuation date, whether the
mortality rates resulting from the application of the company’s X factors meet the
requirements of the Model. If the mortality rates do not meet all the requirements,
a qualified opinion should be rendered, disclosing those requirements that are not
met.
4.1.2 Actuarial Report—An actuarial report should be prepared in support of the

opinion. The report should include at least the following items:
a. Purpose—The report should indicate its purpose and refer to the specific
opinion that it supports.
b. Specified Plans—The report should identify the specific plans of

insurance for which the company has elected to apply Model select
mortality factors for the purpose of calculating deficiency reserves. The
report should briefly describe each plan, including its markets and
underwriting bases, and indicate for each X factor class of business on the
plan the amount in force on the valuation date in terms of policy or rider
count, face amount, basic reserves, and deficiency reserves.
c. X Factor Compliance—The report should describe the process and key

results which demonstrate that the X factors for the specified plans of life
insurance comply with each of the requirements of the Model. The report
should describe, to the extent applicable, each of the following:
1. company experience studies, industry experience, and other

sources of information concerning relevant experience used as a
basis for determining anticipated mortality, including a summary
of the findings and results;
2. analyses performed to evaluate the credibility of relevant,

historical company experience when establishing anticipated
mortality for each X factor class, including a description of related
experience or a statement that professional judgement had been
used;
3. mortality projections made and reflected in anticipated mortality, if

any, from the period of exposure of relevant experience studies to
the valuation date;
4. statistical or other quantitative analyses performed in assessing the

continued appropriateness of the anticipated mortality assumption
for each X factor class and for all X factor classes in aggregate, in
light of relevant emerging company experience, and a summary of
changes made as a result of the analyses;
7
5. anticipated mortality, without recognition of mortality
improvement beyond the valuation date, for each X factor class
and for all X factor classes in aggregate;
6. results of the tests of X factors required by the Model, any

adjustments made to the X factors as a result of these tests, and the
effect on deficiency reserves resulting from any such adjustments;
and
7. any changes made in the approach or parameters applied to the

statistical analyses or tests performed compared to those performed
at the last annual valuation.
d. Schedule of X Factors—The report should include a schedule showing for

the specified plans of life insurance the X factors for each X factor class as
of the valuation date, with an indication as to which X factors are new or
have been changed since the last annual valuation.
4.2 Documentation—The appointed actuary should create records and other appropriate
documentation supporting the opinion required by section 3.2 and, to the extent
practicable, should take reasonable steps to ensure that this documentation will be
retained for a reasonable period of time (and no less than the length of time necessary to
comply with any statutory regulatory, or other requirements). The appointed actuary need
not retain the documentation personally; for example, it may be retained by the appointed
actuary’s employer. Such documentation should identify the data, assumptions, and
methods used by the appointed actuary with sufficient clarity that another actuary
qualified in the same practice area could evaluate the reasonableness of the appointed
actuary’s work. Unless the actuarial report required by section 4.1.2 reasonably satisfies
the need for documentation, such documentation should also be available to the
appointed actuary’s employer or client.
4.3 Reliance on Data Supplied by Others—The appointed actuary may rely on data supplied
by other persons. In doing so, the appointed actuary should disclose such reliance in the
opinion. The accuracy and completeness of data supplied by others are the responsibility
of those who supply the data. However, the appointed actuary should review the data for
reasonableness and consistency to the extent practicable. For further guidance, the
appointed actuary is directed to ASOP No. 23, Data Quality.
4.4 Prescribed Statement of Actuarial Opinion—The actuarial opinion described in section

4.1 is a prescribed statement of actuarial opinion as described in the Qualification
Academy of Actuaries. In addition, law, regulation, or accounting requirements may also
apply to another actuarial communication prepared under this standard, and as a result,
such other actuarial communication may be a prescribed statement of actuarial opinion.
8
4.5 Deviation from Standard—The actuary must be prepared to justify the use of any
9
Appendix 1
practice.
Background
On plans of life insurance elected by the company, the National Association of Insurance
Commissioners (NAIC) Valuation of Life Insurance Policies Model Regulation (Model) allows
the use of Model select mortality factors to be applied to the 1980 CSO valuation tables for
purposes of calculating deficiency reserves. The Model select mortality factors do not reflect the
underwriting classes that have evolved since the period of underlying experience. In light of this
consideration, the Model allows the appointed actuary to adjust the select factors via X factors to
reflect anticipated mortality, without recognition of mortality improvement beyond the valuation
date, taking into account relevant emerging experience. However, the Model requires the
appointed actuary to opine annually that the adjusted mortality rates meet certain requirements
set forth in the Model, and that such opinion be supported by an actuarial report, subject to
appropriate actuarial standards of practice promulgated by the Actuarial Standards Board.
Current Practices
Although there is no established current practice for complying with the requirements of the
Model, there are several current analytical procedures that the appointed actuary may find useful
in developing and reviewing anticipated mortality.
Developing Anticipated Mortality
The process of using a company’s relevant experience of the recent past to set an assumption for
future mortality experience can, when the exposure is large enough, proceed by using the
average level of the past experience, as modified by trend factors and known changes in the
environment. But often the exposure may not be large enough, either because the company is
small or because a small or newer segment of a large company is the subject of the assumption.
In such cases, actuaries frequently turn to the experience of other companies or other segments
(appropriately modified) to help set the assumption. Such procedures are specifically
recommended for forming mortality assumptions to be used in testing sales illustrations, as
specified in Actuarial Standard of Practice (ASOP) No. 24, Compliance with the NAIC Life
Insurance Illustrations Model Regulation.
Often the appointed actuary finds it necessary to blend the experience from two or more sources
in order to set the assumption. Sometimes a life actuary will consider the guidance, to the extent
10
relevant, set forth in ASOP No. 25, Credibility Procedures Applicable to Accident and Health,
Group Term Life, and Property/Casualty Coverages, even though that standard is not
specifically applicable to individual life actuarial practice.
For some purposes, such as selecting a valuation mortality rate that will stand up in the face of
moderate future fluctuations in mortality, the appointed actuary may wish to select an X factor
that yields a mortality rate higher than the appointed actuary’s assumption for anticipated
mortality, i.e., a level of assumed mortality that has a reasonably high probability of exceeding
the actual mortality that may emerge in the future. To accomplish this, the appointed actuary
needs an understanding of the underlying distribution of potential mortality results.
When mortality studies are based on lives or policies exposed, either the Normal distribution
(with 35 or more deaths) or the Poisson distribution (with fewer than 35 deaths) can provide a
satisfactory approximation of the distribution of deaths. However, neither of these
approximations accounts for varying experience across different policy sizes.
Monte Carlo methods overcome concerns about whether the experience contains a large enough
data set for the Poisson or Normal approximations to be sufficiently accurate, and are
particularly useful for analyses that are based on amounts of insurance or units of insurance
exposed. These methods produce results that converge to the underlying distribution given
enough trials.
Assessment of Anticipated Mortality
There are several methods for analyzing the appropriateness of anticipated mortality in light of
emerging company experience.
Hypothesis testing is one useful technique. The appointed actuary should be aware of two types
of errors associated with hypothesis testing. A Type I error is the false rejection of a correct null
hypothesis, while a Type II error is the failure to reject an incorrect null hypothesis. In terms of
the Model, the null hypothesis would presumably state that anticipated mortality is consistent
with emerging experience and would only be rejected if statistically significant data indicated
otherwise. In this setting, the Type I error is a company increasing anticipated mortality when it
is in fact adequate, while a Type II error is a company failing to increase anticipated mortality
when it is in fact inadequate. The Type I error rate can be controlled by the choice of
significance level. Type II error rates are largely beyond the control of the statistician and
difficult to assess, but are influenced by the choice of significance level, the amount of data
available, and the magnitude of the difference between the assumed and true values.
Another approach to analyzing anticipated mortality is to treat each review of the mortality
assumption as if it were the original development of the mortality assumption, making use of the
now more extensive experience base. For example, the appointed actuary could use the emerging
experience, plus any other experience considered relevant, to set a new assumption, and use that,
or a higher level based on selecting a high probability of adequacy, as the new assumption.
11
Credibility procedures are also available. Such procedures may be useful when blending data
from two or more sources. By extension, credibility procedures may be useful for incorporating
emerging experience into an existing body of experience.
This appendix does not provide an exhaustive list of possible approaches to analyzing anticipated
mortality. Actuarial literature and other sources of information provide specific guidance to the
appointed actuary on various analyses that may be useful in analyzing anticipated mortality. The
appointed actuary should be aware of the limitations of applying any statistical procedure to a
body of data. The appointed actuary should use reasonable judgment and consider modifying the
X factors if the level of emerging mortality experience is substantially greater than expected,
regardless of whether the anticipated mortality for the X factor class is deemed acceptable
through statistical testing. As current practices evolve, the appointed actuary should consider
whether the techniques used in prior analyses continue to be appropriate or can be improved.
12
Appendix 2
The second exposure draft of this actuarial standard of practice was issued in June 2000, with a
comment deadline of October 15, 2000. (Copies of the exposure draft and second exposure draft
are available from the ASB office.) Four comment letters were received. The Task Force on
XXX Regulation of the Life Committee of the ASB carefully considered all comments received.
Summarized below, printed in standard type, are the significant issues and questions contained in
the comment letters. The task force’s responses to these issues and questions appear in boldface.
Section 3.4, Creation of X Factor Classes—One commentator found the additional language in
this section regarding reinsurance to be helpful, clear, and provided uniformity of application,
while another commentator believed further clarification was necessary. The task force added
clarification with respect to reinsurance.
Section 3.5.2, Deriving Anticipated Mortality—One commentator believed that a reference in

this section to ASOP No. 25, Credibility Procedures Applicable to Accident and Health, Group
Term Life, and Property/Casualty Coverages, would be appropriate. The task force disagreed,
based on the fact that ASOP No. 25 is not specifically applicable to life insurance. ASOP
No. 25 is mentioned in appendix 1.
One commentator felt that clarification is needed with respect to experience refunds and other
adjustments under reinsurance agreements. The task force agreed and provided clarification
at the end of section 3.5.2.
Section 3.6, Periodic Assessment of Anticipated Mortality—One commentator made a general

comment about the need to apply actuarial judgment when evaluating the anticipated mortality
assumption. Although this is a general statement, the task force changed the second
sentence in the first paragraph to clarify that the appointed actuary is making a decision
whether to continue using the existing anticipated mortality assumption.
Appendix 1. Background and Current Practices
One commentator noted that cautionary language was part of the discussion of hypothesis testing
but not used in the discussion of other possible approaches for analyzing anticipated mortality.
This commentator also mentioned that the appointed actuary needs to use professional judgment
regarding methods and data. The task force agrees with these comments. The cautionary
language was rewritten and moved from the hypothesis testing discussion to the last
paragraph of this appendix. At the same time, the task force made some additional wording
changes to provide more consistency and readability with respect to the terminology used
in the appendix.
13
Actuarial Standard
of Practice
No. 41
Actuarial Communications
Supersedes Interpretative Opinion No. 3
Developed by the
Adopted by the
March 2002
(Doc. No. 086)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.2 Actuarial Findings 1
2.4 Actuarial Services 2
2.5 Intended Audience 2
2.6 Other User 2
2.7 Principal 2

3.1 General Requirements for Actuarial Communications 2
3.1.1 Principal and Scope of Engagement 3
3.1.2 Form and Content 3
3.1.3 Timing of Communication 3
3.1.4 Identification of Responsible Actuary 3
3.1.5 Non-Independence 3
3.1.6 Reliance on Other Sources 3
3.1.7 Advocacy 4
3.1.8 Methods or Assumptions Prescribed by a Principal 4
3.1.9 Obligations Imposed by Law, Regulation, or Another Profession’s
Requirements 4
3.2 Actuarial Communication Requirements within Other Applicable ASOPs 4
3.3 Requirements for Specific Types of Actuarial Communications 4
3.3.1 Oral Communications 4
3.3.2 Communication of Significant Actuarial Findings 4
3.3.3 Actuarial Report 4
3.4 Prescribed Actuarial Communications 5
3.5 Responsibilities to Other Users 5
3.5.1 Use of Actuarial Communications by Others 5
ii
3.5.2 No Obligation to Communicate with Other Users 5
3.6 Documentation 5

APPENDIXES

Background 7
Current Practices 7
Appendix 2—Comments on the 2001 Exposure Draft and Committee Responses 8
iii
March 2002

Actuarial Standards Board and Other Persons Interested in Actuarial
Communications
This booklet contains the final version of ASOP No. 41, Actuarial Communications.
Background
This ASOP supersedes Interpretative Opinion No. 3, Professional Communications of Actuaries.

Two exposure drafts of this actuarial standard of practice were presented.
The first exposure draft was issued in November 1998, with a comment deadline of March 1,
1999 (this exposure draft is available from the ASB office). The General Committee of the ASB
carefully considered the twenty-three comment letters received and made certain changes.
Coordination with the Code of Professional Conduct
At the same time that the General Committee of the ASB was reviewing the comment letters
received on the first exposure draft, the Joint Committee on the Code of Professional Conduct
was developing proposed revisions to the Code of Professional Conduct, including requirements
with respect to actuarial communications. The second exposure draft of this proposed ASOP was
deliberately delayed for over a year until the revised Code of Professional Conduct was adopted.
It is very important that any standard of practice not conflict with the Code of Professional
Conduct (which applies to practice in all countries, whereas actuarial standards of practice
promulgated by the ASB are specific to practice in the United States). To prevent inconsistency
between this proposed ASOP and the newly adopted Code of Professional Conduct, repre-
sentatives of the General Committee and of the Joint Committee on the Code of Professional
Conduct met in January 2000 to discuss the proposed ASOP and what was then the proposed
new Code of Professional Conduct.
The new Code of Professional Conduct was adopted by the five U.S.-based organizations
representing actuaries, effective January 1, 2001, enabling the General Committee to proceed
iv
with the second exposure draft.
The second exposure draft of this ASOP was issued in March 2001, with a comment deadline of
September 15, 2001. Eighteen comment letters were received. Many commentators agreed with
the changes made to the first draft. Most of the comments made with respect to the second draft
dealt with language details. The General Committee carefully considered all comments received
and made clarifying changes to the language in several sections. For a summary of the sub-
stantive issues contained in the second exposure draft comment letters and the committee’s
responses, please see appendix 2.
The most significant changes from the second exposure draft were as follows:
1. Earlier iterations of the Code of Professional Conduct and the proposed standard made
reference to “direct” and “indirect users.” The new Code of Professional Conduct uses
only the term “principal.” The committee revised the proposed standard to be consistent
with the new Code of Professional Conduct’s terminology, and added definitions of
“intended audience” and “other user.”
2. Several commentators suggested the standard should apply to oral as well as written
communications, while others felt that oral communications should be excluded. To
conform with the new Code of Professional Conduct, the committee expanded the scope
of the proposed standard to apply to oral communications as well as written ones. Fur-
ther, the committee expanded the standard to provide additional guidance for specific
types of actuarial communications, including the requirement that significant actuarial
findings be in written or electronic form.
The General Committee thanks everyone who took the time to contribute the particularly helpful
comments and suggestions on both exposure drafts.
The General Committee would also like to thank former members Donald F. Behan, Robert V.
Deutsch, Bruce D. Moore, Patricia L. Scahill, Lee R. Steeneck, Robert W. Stein and Paul B.
Zeisler for their contributions to this standard.
v
William C. Cutlip, Chairperson

William Carroll Donna C. Novak
Janet M. Carstens William H. Odell
Ethan E. Kra Robert A. Potter

vi
ACTUARIAL COMMUNICATIONS
(Supersedes Interpretative Opinion No. 3)
1.1 Purpose—This actuarial standard of practice (ASOP) provides guidance to actuaries with
respect to written, electronic, or oral actuarial communications. It supersedes Interpretative
Opinion No. 3, Professional Communications of Actuaries (adopted 1970, revised 1981).
1.2 Scope—This standard applies to actuaries issuing actuarial communications. However, when
the actuary is providing testimony in a regulatory, judicial, or legislative environment, the
actuary’s ability to satisfy the requirements of this standard may be limited by the constraints
of that forum. When providing testimony in such a forum, the guidance in this standard
nevertheless applies to the actuary to the extent practicable in the particular circumstances.
1.4 Effective Date—This standard will be effective for any actuarial communication dated or
occurring on or after July 15, 2002.
2.1 Actuarial Communication—A written, electronic, or oral communication to a principal or

member of the intended audience by an actuary with respect to actuarial services.
2.2 Actuarial Findings—The results of the actuary’s work, i.e., the actuary’s professional
conclusions, recommendations, or opinions.
2.3 Actuarial Report—A written or electronic presentation prepared as a formal means of

conveying the actuary’s findings that records and communicates the actuary’s methods,
procedures, and assumptions. Unless so designated by the actuary, communications such as
1
the following are not actuarial reports:
a. transcripts or summaries of an oral communication of actuarial findings;
b. internal communications, for example within a company, organization, firm, or

government agency; and
c. communications, during the course of an assignment, among those providing

actuarial services.
2.4 Actuarial Services—Services provided to a principal by one acting as an actuary. Such

services include the rendering of advice, recommendations, findings, or opinions based upon
actuarial considerations.
2.5 Intended Audience—The persons to whom the actuarial communication is directed and with
whom the actuary, after discussion with the principal, intends to communicate. Unless
otherwise specifically agreed, the principal is always a member of the intended audience. In
addition, other persons or organizations, such as regulators, policyholders, plan participants,
investors, or others, may be designated by the principal, with consent of the actuary, as
members of the intended audience.
2.6 Other User—Any user of an actuarial communication who is not a principal or member of
the intended audience.
2.7 Principal—The actuary’s client or employer. In situations where the actuary has both a client
and an employer, as is common for consulting actuaries, the facts and circumstances will
determine which is the principal. When the actuary is issuing actuarial communications
directly to the external client, the client will generally be the principal. When the actuary is
working in an internal capacity and someone other than the actuary is communicating the
results of the actuary’s work to the client, for example, where such communication by others
is primarily concerned with nonactuarial matters, the actuary’s employer will generally be
the principal. In this latter case, any actuary who subsequently communicates to the client
will be guided by this standard.
3.1 General Requirements for Actuarial Communications—The completion of a specific

actuarial engagement or assignment typically requires significant and ongoing
communications between the principal and the actuary regarding the following: the scope of
the requested work; the methods, assumptions, data, and other information required to
complete the work; and the development of the actuarial communication of the actuary’s
work product. The requirements of this standard should be applied to the cumulative
communications with respect to each specific engagement or assignment so that all of the
2
communications, taken together, satisfy this standard even though individual
communications may not.
3.1.1 Principal and Scope of Engagement—The actuarial communication should, as

appropriate, identify the principal(s) for whom the actuarial findings are made and
should make clear the scope of the assignment, including any limitations or
constraints.
3.1.2 Form and Content—The actuary should take appropriate steps to ensure that the form
and content of the actuarial communication are clear and appropriate to the particular
circumstances, taking into account the intended audience. To accomplish these
actuarial communication objectives, the actuary should consider whether such
actuarial communication should be made in an actuarial report. Factors to consider in
making such a determination include the complexity of the actuarial engagement or
assignment; the actuary’s perception of the significance of the actuarial findings; and
relevant communication guidance in other ASOPs. Information included in previous
actuarial communications that are available to the intended audience may be
incorporated by reference, by the actuary, into an actuarial communication issued
under this standard.
3.1.3 Timing of Communication—The actuary should issue an actuarial communication

within a reasonable period following completion of the actuarial analysis underlying
the engagement, assignment, or other work product, unless other arrangements,
mutually satisfactory to the parties, have been made.
3.1.4 Identification of Responsible Actuary—The actuary issuing an actuarial

communication should ensure that the actuarial communication clearly identifies the
actuary as being responsible for it whenever that responsibility is not already
apparent. When two or more actuaries jointly issue an actuarial communication, the
communication should identify all responsible actuaries. The name of an
organization with which each actuary is affiliated also may be included in the
communication, but the actuary’s responsibilities are not affected by such
identification.
3.1.5 Non-Independence—An actuary who is not financially and organizationally

independent concerning any matter related to the subject of an actuarial
communication should disclose in the actuarial communication any pertinent
relationship that is not apparent. However, the disclosure is limited in accordance
with Precept 6 of the Code of Professional Conduct to sources of material
compensation that are known to or are reasonably ascertainable by the actuary.
3.1.6 Reliance on Other Sources—An actuary who makes an actuarial communication

assumes responsibility for it except to the extent the actuary disclaims responsibility
by stating reliance on other sources. Reliance on other sources means making use of
3
those sources without assuming responsibility therefor. An actuarial communication
making use of any such reliance should define the extent of reliance, for example by
stating whether or not checks as to reasonableness have been applied. An actuary
may rely upon other sources for information except where limited or prohibited by
applicable standards of practice or law or regulation.
3.1.7 Advocacy—When the actuary acts, or may appear to be acting, as advocate for a
principal, the nature of that relationship, unless readily apparent, should be disclosed
in the actuarial communication.
3.1.8 Methods or Assumptions Prescribed by a Principal—If the actuary performs a

service using methods or assumptions prescribed by a principal, the actuary should
disclose the source of the prescribed methods or assumptions in the actuarial
communication.
3.1.9 Obligations Imposed by Law, Regulation, or Another Profession’s Requirements—

When methods or assumptions are prescribed by law, regulation, or another
profession’s requirements, the actuary should disclose that his or her work has been
performed in compliance with such requirements unless this is apparent from the
form and content of the communication.
3.2 Actuarial Communication Requirements within Other Applicable ASOPs—This general

standard on actuarial communications establishes minimum requirements for all such
communications. If other ASOPs contain communication requirements that are additional to
or inconsistent with this standard, the requirements of such other ASOPs supersede the
requirements of this ASOP. Any disclosures or additional communication requirements
imposed by this standard that are not inconsistent with such ASOPs should be included in the
actuarial communication.
3.3 Requirements for Specific Types of Actuarial Communications—The following sections

give the actuary guidance regarding specific types of actuarial communications.
3.3.1 Oral Communications—The actuary’s oral communications should not conflict with
the actuary’s written or electronic communications of related actuarial findings.
3.3.2 Communication of Significant Actuarial Findings—Actuarial findings that the

actuary considers to be significant should be in written or electronic form, and when
appropriate, they should be incorporated into an actuarial report, unless otherwise
agreed to by the principal and the actuary.
3.3.3 Actuarial Report—In addition to the actuarial findings, an actuarial report should
identify the data, assumptions, and methods used by the actuary with sufficient
clarity 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
4
actuary’s report. To the extent the data, assumptions, and methods used have been
described in a previous actuarial report that is available to the intended audience, the
actuary may, if appropriate under the circumstances, incorporate this information by
reference into the actuarial report.
3.4 Prescribed Actuarial Communications—Law, regulation, or another profession’s standards

may prescribe the form and content of a particular actuarial communication (such as a
preprinted government form). In such situations, compliance with the applicable law,
regulation, or standard, and with any practice-specific ASOP governing the actuarial services
that are the subject of the actuarial communication shall be deemed in compliance with this
standard.
3.5 Responsibilities to Other Users—The following sections give the actuary guidance regarding
the use of actuarial communications by other users and the actuary’s responsibility to such
other users.
3.5.1 Use of Actuarial Communications by Others—An actuarial communication may be

used in a way that may influence persons who are not part of the intended audience.
The actuary should recognize the risks of misquotation, misinterpretation, or other
misuse of such communication and should take reasonable steps to ensure that the
actuarial communication is clear and presented fairly. To help prevent misuse, the
actuary may include language in the actuarial communication, which may limit its
distribution to other users, for example, by stating that it may only be provided to
such parties in its entirety or only with the actuary’s consent.
3.5.2 No Obligation to Communicate with Other Users—Nothing in this standard creates

an obligation for the actuary to communicate with any person other than the intended
audience.
3.6 Documentation—The actuary should create records and other appropriate documentation
supporting an actuarial communication and, to the extent practicable, should take reasonable
steps to ensure that this documentation will be retained for a reasonable period of time (and
no less than the length of time necessary to comply with any statutory, regulatory, or other
requirements). The actuary need not retain the documentation personally; for example, the
actuary’s employer may retain it. Such documentation should identify the data, assumptions,
and methods used by the actuary with sufficient clarity that another actuary qualified in the
same practice area could evaluate the reasonableness of the actuary’s work. Unless the
actuary has issued an actuarial report that reasonably satisfies the need for documentation,
such documentation should also be available to the principal.
5
that depart materially from those set forth in this standard. If a conflict exists between this
standard and applicable law or regulation, compliance with applicable law or regulation is
not considered to be a deviation from this standard.
6
Appendix 1
practice.
Background
This standard is adapted from and supersedes Interpretative Opinion No. 3, Professional
Communications of Actuaries, adopted by the American Academy of Actuaries in 1981. This
standard conforms to the format adopted by the Actuarial Standards Board in May 1996 for all
actuarial standards of practice, and while this standard generally follows Interpretative Opinion
No. 3, it also expands upon, clarifies, and eliminates portions of that opinion. Additionally, this
standard offers guidance to complement the requirements imposed by the recently revised Code
of Professional Conduct. It is intended to help actuaries apply the Code of Professional Conduct
when making professional communications, by written, electronic, or oral means, to clients,
employers, regulators, policyholders, pension plan participants, investors, and other users of
actuarial services.
Current Practices
Actuaries are currently guided by the Code of Professional Conduct and, in the past, have been
guided by Interpretative Opinion No. 3. They are also guided by other actuarial standards of
practice, depending on the nature of the work at hand.
Actuarial communications may be made available to a variety of users of actuarial work products
including clients, employers, regulators, shareholders, and policyholders as well as external
audiences such as the general public. Actuarial communications may be delivered in many
forms, including statements of opinion, memoranda, and correspondence, written, electronic or
oral, singular or part of a broader pattern of communication. In preparing and conveying
actuarial communications, actuaries seek to satisfy their responsibility to their principals, i.e.,
clients or employers, while being mindful of the potential impact of their communication upon
other parties.
7
Appendix 2
Comments on the 2001 Exposure Draft and Committee Responses
The second exposure draft of this actuarial standard of practice (ASOP), titled Actuarial
Communications, was issued in March 2001, with a comment deadline of September 15, 2001.
Eighteen comment letters were received. The General Committee carefully considered all
comment letters and the committee’s responses to each.
GENERAL COMMENTS
Comment Several commentators agreed that the inclusion of “oral communications” was appropriate. Another
suggested that the way in which “oral communications” was included would prove to be unmanageable
in practice.
Response The committee believes that including “oral communications” should not be unmanageable, particularly
when viewing them as part of “the cumulative communications” described in section 3.1.
Comment One commentator believed that, with respect to “oral communications,” the proposed ASOP went well
beyond the requirements of the Code of Professional Conduct.
Response The previous Code of Professional Conduct was not as clear as the revised Code of Professional
Conduct with respect to applicability to oral communications. Further, the Code of Professional Conduct
applies to practice anywhere in the world, and offers general guidance on actuarial communications
without reference to nation-specific practice. The language in this standard was revised after the current
Code of Professional Conduct was adopted. The standard is intended to offer more specific guidance on
actuarial communications and applies only to practice in the U.S.
Comment Two commentators suggested that the standard include a section dealing specifically with materiality.
Response The committee believes that the issue is broader than the scope of Actuarial Communications. The issue
of materiality is being explored by the American Academy of Actuaries.
Comment One commentator suggested that the standard include a section dealing specifically with peer review.
Response The committee believes that the issue is broader than the scope of Actuarial Communications. The
committee is planning an exploration of this issue.
Comment One commentator was concerned about the coordination of this standard with other standards.
Response The committee believes that section 3.2 appropriately addresses this issue.
Comment One commentator was concerned with the lack of definition of the word “significant” throughout the
standard.
Response The committee believes that significance must be left to the judgment of the actuary within the context
of the assignment.
8
Comment One commentator suggested that this standard as written would impose communication standards upon
actuaries which are significantly more stringent than those established by other professions.
Response The committee believes that this standard is appropriate for actuaries. Actuaries provide specialized
services for which they are uniquely qualified and the standards of other professions are not applicable
to actuarial services.
Comment One commentator was concerned that the notification of one’s “advocacy” was not well enough
addressed.
Response The committee believes that sections 3.1.1, 3.1.5, and 3.1.7 adequately address this issue.
Comment Several commentators questioned whether communications at specific points in an assignment must be
considered and have the standard applied to them individually.
Response The committee had addressed this with the language of section 3.1: “The requirements of this standard
should be applied to the cumulative communications with respect to each specific engagement or
assignment so that all of the communications, taken together, satisfy this standard even though
individual communications may not.” This language was provided specifically to help actuaries meet
their obligations in a practical manner.
Comment Several commentators suggested various wording changes.
Response The committee implemented such suggestions if they enhanced clarity and did not alter the intent of the
section.
Comment One commentator suggested that the language describing “communications” was too limiting, citing a
film as an example.
Response The committee was at first inclined to adopt the commentator’s suggestion, but after discussion with the
ASB it was determined that any film or similar medium was included as either a written or an electronic
communication. Accordingly, no change was made.
Comment Another commentator suggested that “actuaries” needed to be defined.
Response The committee believes that this is adequately covered by the Code of Professional Conduct.
Section 1.2, Scope
Comment One commentator questioned whether a statement should be added addressing conflicts with other
ASOPs.
Response The committee believes that sections 3.1.2 and 3.2 adequately address this issue.
Comment Another commentator suggested that the phrase “either in full, or” be deleted.
Response The committee agreed and modified the language.
9
Section 2.1, Actuarial Communication
Comment One commentator questioned whether drafts of actuarial communications should be explicitly excluded.
Response The committee believes that the definition is appropriate. Any draft, unless withdrawn, must be
considered in the context of the complete work product.
Comment The same commentator also questioned whether oral presentations such as those at professional actuarial
meetings should be explicitly excluded.
Response The committee believes that the part of the definition in 2.1 limiting communications to “a principal or
member of the intended audience by an actuary with respect to actuarial services” sufficiently excludes
the types of presentations mentioned.
Comment One commentator questioned how the standard would apply to a CEO who is an actuary commenting on
the work of a consulting actuary to another executive.
Response The committee believes that typically this type of communication would fall outside the standard when
in a business context. However, if the CEO is acting as an actuary for a principal, the standard would
apply.
Section 2.2, Actuarial Findings
Comment One commentator agreed with the inclusion of this definition but believed that it overlapped with section
2.4, Actuarial Services.
Response The committee believes that sections 2.2 and 2.4 are appropriate as written.
Section 2.3, Actuarial Report
Comment One commentator believed that the examples given in this section needed to be deconstructed to redefine
other definitions. Another believed that certain specific types of reports (for example, reports to audit
partners or appointed actuaries) should be included.
Response The committee disagreed that the definition needed to be revised. Not all actuarial communications are
actuarial reports and the examples were provided as guidance.
Comment Another suggested specifically noting these as examples and adding “organizations” to the list.
Response The committee agreed and changed the language of section 2.3(b) to read “internal communications, for
example, within a company or organization, firm or government agency….”
Section 2.5, Intended Audience
Comment Two commentators suggested that since regulators are included as part of the intended audience
supporting documentation should be made available to the regulator upon request.
Response The committee disagreed, believing that an actuary’s duty is to the principal. The question of availability
of documentation should be the subject of state regulation, not this standard.
Comment Another commentator questioned the need for the phrase “after discussion with the principal” as used in
the first sentence.
Response The committee believes that the phrase is appropriate in light of the fact that the principal has a
proprietary interest in the material and should know in advance of any communications with others.
10
Comment Another commentator suggested that the phrase “with consent of the actuary” should be removed.
Response The committee disagreed, given the requirement in section 3.1.2 that the actuary take into account the
intended audience. Without this phrase in the definition, the actuary would not be able to comply with
section 3.1.2.
Section 2.8, Statement of Actuarial Review for Public Use or Reliance
Comment Two commentators presented observations. One commented that the word “public” implied “public at
large.” The other commentator suggested that the phrase “usually a regulatory or legislative body” be
inserted after “third party.” Another commentator suggested changes to section 3.3.4, which relates to
this definition.
Response After considerable discussion, the ASB deleted this entire section as well as section 3.3.4 as being too
specific for a general standard.
Section 3.1, General Requirements for Actuarial Communications
Comment One commentator questioned whether this section made an actuary responsible for all communications
relating to any engagement and suggested that clarification is needed.
Response The committee believes that definitions 2.1 and 2.7 make this clear.
Section 3.1.2, Form and Content

Comment One commentator suggested that the phrases “and understanding” and “and experience” be eliminated.
Response The committee agreed that the phrases placed an inappropriate burden upon the actuary and removed
them as well as the phrase “the knowledge of.”
Comment The same commentator further suggested eliminating verbiage from the last sentence including the
phrase “by the actuary” and all the verbiage following “actuarial communication.”
Response The committee disagreed in part but did eliminate the requirement that previous communications comply
with this standard.
Comment Another commentator objected to giving the requirements of other ASOPs precedence over the
requirements of this ASOP.
Response The committee disagreed and made no change to this section nor to section 3.2.
Section 3.1.3, Timing of Communication
Comment One commentator suggested eliminating the phrase “engagement, assignment, or other” and all the
verbiage following “work product.” Another suggested that the communication should be released
“simultaneously” with the issuance of the analysis.
Response The committee disagreed because timing may need to be coordinated with other actions of the principal.
Comment A third commentator suggested that “reasonable period” should be defined.
Response The committee disagreed, believing that the nature of the assignment and the judgment of the actuary
should prevail.
Section 3.1.4, Identification of Responsible Actuary
Comment One commentator questioned the clarity of the last sentence, which contained reference to “the
organization.”
Response The committee agreed and removed the phrase “and those of the organization.”
11
Comment Another believed that the standard as written was weaker than Precept 5 of the Code of Professional
Conduct.
Response The committee disagreed.

Section 3.1.5, Non-Independence
Comment One commentator questioned whether this was in conflict with Precept 6 of the Code of Professional
Conduct. Another believed that disclosure should be required only when the actuary was “aware” that he
or she is not financially and organizationally independent.
Response The committee concluded that the first commentator raised a good point, in that the final sentence of
Precept 6 of the Code of Professional Conduct was not explicitly recognized. Accordingly, the
committee decided to add clarifying language so that the revised section gives relatively complete
guidance, obviating the need to consult the Code of Professional Conduct simultaneously. The language
added addresses the “financially independent” portion of the second commentator’s observations; but the
committee disagreed with respect to organizational independence, which is not referenced in either
Precept 6 or Precept 7 of the Code of Professional Conduct. Further, the committee believes the actuary
has a duty to address the matter of organizational independence.
Comment A third commentator believed the placement of the phrase “in the actuarial communication” was
confusing.
Response The committee agreed and moved the phrase to modify “disclosure in the actuarial communication….”
Section 3.1.6, Reliance On Other Sources
Comment Three commentators believed that the requirement imposed by the last sentence was too burdensome and
that the language should be changed.
Response The committee agreed and removed the last sentence but added, as an example, a reference to
reasonableness checks. In this connection, section 5.3 of ASOP No. 23, Data Quality, contains helpful
guidance.
Section 3.1.7, Advocacy
Comment One commentator suggested that the phrase “to the intended audience” be inserted after the word
“apparent.”
Response The committee disagreed, believing that the suggested language was too narrow.
Section 3.1.8, Methods or Assumptions Prescribed by a Principal
Comment Two commentators offered additional language, which would have required the actuary to be in
agreement with the principal.

Section 3.1.9, Obligations Imposed by Law, Regulation, or Another Profession’s Requirements
Comment One commentator offered additional language which would have required only that work has been
performed “in accordance with the actuary’s understanding of” such requirements.

Section 3.3.1, Oral Communications
Comment One commentator praised the language. Another suggested adding language to cover nuances in an oral
communication.
Response The committee believed the section was sufficiently clear.
12
Section 3.3.2, Communication of Significant Actuarial Findings
Comment Two commentators believed that the section was too far reaching. Another believed that it left a
loophole.
Response
The committee believed the existing language and approach were sufficiently clear and appropriate.
Section 3.3.3, Actuarial Report
Comment One commentator suggested that this language did not address the validity of a report and the
methodology used.

Section 3.5, Responsibilities to Other Users
Comment One commentator suggested that this section might result in language limiting distribution of actuarial
communications.
Response The committee noted that many are already using such language to minimize misuse and agrees that such
an approach is appropriate.
Section 3.5.1, Use of Actuarial Communications by Others
Comment One commentator believed that this put an unreasonable burden on the actuary. This commentator and
another suggested language changes.
Response The committee disagreed and made no change.

Section 3.5.2, No Obligation to Communicate with Other Users
Comment One commentator questioned the clarity of the section and suggested dropping it.
Response The committee believed that this was needed and that the language was sufficiently clear.
Comment One commentator believed that this implies that a full report would be needed for each individual
communication.
Response The committee disagreed, believing the language was sufficiently clear and appropriate.
Comment Another was concerned that this duplicated ASOP No. 9, Documentation and Disclosure in Property and
Casualty Insurance Ratemaking, Loss Reserving, and Valuation.
Response ASOP No. 9 applies only to Property & Casualty work, while this standard covers all practice areas.
Comment A third questioned why an actuary should document oral communications.
Response The committee believes this is generally accepted actuarial practice when the oral communication is an
actuarial communication as defined in section 2.1.
APPENDIX 1
Comment One commentator believed that the language should indicate that while the exposure draft expands upon
and explicates portions of Interpretative Opinion No. 3, it also eliminates a number of portions and
applicability of that opinion.
Response The committee agreed and added the phrase “and eliminates.”
13
Actuarial Standard
of Practice
No. 42
Determining Health and Disability Liabilities

Other Than Liabilities for Incurred Claims
Developed by the
Adopted by the
March 2004
(Doc. No. 091)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Block of Business 2
2.2 Capitation Arrangement 2
2.3 Carve-Outs 2
2.4 Contract Period 2
2.5 Contract Reserve 2
2.6 Exposure Unit 3
2.8 Incentive Payment 3
2.9 Premium Deficiency Reserve 3
2.10 Providers 3
2.11 Provider-Related Liability 3
2.12 Risk-Assuming Entity 3
2.13 Risk-Sharing Arrangement 3
2.14 Trends 3
2.15 Unpaid Claims Liability 3
2.16 Valuation Date 3

3.1 Introduction 4
3.2.1 Health Benefit Plan Provisions and Business Practices 4
3.2.2 Risk-Sharing Arrangement Provisions 4
3.2.3 Economic Influences 5
3.2.4 Risk Characteristics and Organizational Practices by Block of Business 5
3.2.5 Legislative Requirements 5
3.2.6 Carve-Outs 5
3.2.7 Special Considerations for Long-Term Products 5
3.2.8 Reinsurance Arrangements 5
3.2.9 Expenses 5
ii
3.2.10 Consistency of Bases 6

3.3 Considerations for Determining Contract Reserves 6
3.3.1 Assumptions 6
3.3.2 Premium Rate Changes 7
3.3.3 Previously Established Assumptions for Contract Reserves 7
3.3.4 Valuation Method 7
3.4 Considerations for Determining Premium Deficiency Reserves 7
3.4.1 General Considerations 7
3.4.2 Additional Considerations for Financial Reporting 9
3.5 Considerations when Determining Provider-Related Liabilities 9
3.5.1 Non-Provider Risk-Assuming Entities 9
3.5.2 Provider Risk-Assuming Entities 10
3.5.3 Risk-Sharing and Capitation Arrangements 10
3.5.4 Provider Financial Condition 10
3.5.5 Provider Incentive Payments 10
3.6 Claim Adjustment Expense Liabilities 10
3.7 Other Liabilities 10
3.7.1 Liabilities for Payments to State Pools 10
3.7.2 Reserves for Unearned Premiums 11
3.7.3 Liabilities for Dividends and Experience Refunds 11
3.8 Follow-Up Studies 11
3.9 Margin for Uncertainty 11
3.10 Data Requirements 11

4.2 Reliance on Others 12
APPENDIXES

Background 13
Appendix 2Comments on the Exposure Draft and Task Force Responses 14
iii
March 2004

Actuarial Standards Board and Other Persons Interested in Determining Health
and Disability Liabilities Other Than Liabilities for Incurred Claims
This booklet contains the final version of ASOP No. 42, Determining Health and Disability
Liabilities Other Than Liabilities for Incurred Claims.
Background
ASOP No. 5, Incurred Health and Disability Claims, specifically excluded liability items other
than incurred claims, such as contract reserves, premium deficiency reserves, claim settlement
expense reserves, and various reserves related to provider contracts.
This ASOP has been developed to provide guidance to actuaries regarding determination of
these other liabilities. The Health Committee and the ASB determined that it is more
appropriate to address these items in this standard, rather than in ASOP No. 5, because they are
more diverse than claim liabilities.
The Health Committee believes that the practice of actuaries varies widely and that there may
be significant differences of opinion regarding generally accepted actuarial practice for actuaries
involved in determining liabilities other than incurred health and disability claims. The
committee believes that this actuarial standard of practice is necessary to provide guidance on
the areas of analysis that actuaries should consider. The standard is not meant to be prescriptive
of specific methods or procedures, nor is it intended to require in and of itself that specific
liabilities be established.
The first exposure draft of this ASOP, then titled Determining Health and Disability Liabilities
Other Than for Incurred Claims, was issued in June 2002 with a comment deadline of
December 15, 2002. Twenty-five comment letters were received and considered in developing
modifications that were reflected in the second exposure draft.
iv
The second exposure draft of this ASOP was approved for exposure in October 2003 with a
comment deadline of January 31, 2004. Seventeen comment letters were received and considered
in developing the final standard. These letters showed thoughtful insight of the issues and were
considered in developing the final standard of practice. A summary of the substantive issues
contained in the second exposure draft comment letters and the Health Committee’s responses
are provided in appendix 2.
The most significant changes from the second exposure draft were as follows:
1. Several commentators pointed out that the standard might be considered to apply to the work
of actuaries on health benefits provided under pension plans and other retiree benefit plans
and to certain self-insured plans. The Health Committee does not intend that this standard
apply when such work is covered by another standard of practice, and added language to
section 1.2, Scope, to address the issue. The Health Committee does not intend for this
standard to apply to actuarial work on medical or disability benefits provided under pension
plans, or to calculations for SFAS No. 106, Employers’ Accounting for Postretirement
Benefits Other Than Pensions, or SFAS No. 112, Employers’ Accounting for
Postemployment Benefits, where the determination of a liability is subject to another ASOP.
The committee does intend that this standard apply to self-insured health benefit plans in the
same manner as ASOP No. 5, Incurred Health and Disability Claims, with respect to the
determination of liabilities. For these plans, the standard applies only to the determination of
the liabilities and not to the funding of the plans.
2. The Health Committee made some modifications to clarify further that this standard is not
intended to require that certain liabilities be established, but rather provides guidance to the
actuary if those liabilities are established. Similarly, language related to follow-up studies
was modified to clarify that such studies are not required by this standard.
The Health Committee would like to thank all those who commented on both exposure drafts.
The Health Committee would also like to thank Steven J. Abood, Michael S. Abroe,
Janet M. Carstens, Robert B. Cumming, and David F. Ogden for their contribution to the
development of this ASOP.
v
Alan D. Ford, Chairperson

Gary L. Brace John M. Friesen
Robert G. Cosway Mary J. Murley
Paul R. Fleischacker John W.C. Stark

vi
DETERMINING HEALTH AND DISABILITY

LIABILITIES OTHER THAN LIABILITIES FOR INCURRED CLAIMS

determining health and disability liabilities other than liabilities for incurred claims. This
ASOP complements ASOP No. 5, Incurred Health and Disability Claims.

connection with determining health and disability liabilities, other than liabilities for incurred
claims, associated with a health benefit plan, as defined in section 2.7 of this standard, or a
risk-sharing arrangement, as defined in section 2.13 of this standard. Such liabilities are
described in sections 3.3–3.7, and include contract reserves, premium deficiency reserves,
provider-related liabilities, claim adjustment expense liabilities, and other liabilities of
insurance entities, insured or noninsured risk-assuming entities, managed care entities, health
care providers, government-sponsored health benefit plans, or risk contracts. This standard
also applies to actuaries determining liabilities for self-insured plans (including voluntary
employees’ beneficiary association (VEBA) plans) that are not subject to other standards
such as those referenced below.
This standard does not apply when such liabilities are determined in accordance with other
ASOPs, such as ASOP No. 4, Measuring Pension Obligations, and ASOP No. 6, Measuring
Retiree Group Benefit Obligations. Furthermore, this standard does not apply in situations
where a benefit is included within a plan subject to another standard, such as a disability
benefit under a life plan or a 401(h) account that is part of a pension plan.
Liabilities may be determined for purposes of financial reports, claims studies, ratemaking,
or other actuarial communications. This standard does not interpret statutory or generally
accepted accounting principles.
Throughout this standard, any reference to determining liability includes establishing or

reviewing the liability.
1
compliance with such law, regulation, or other binding authority shall not be deemed a
deviation from this standard, provided the actuary discloses that the actuarial work was
performed in accordance with the requirements of such law, regulation, or other binding
authority.
1.4 Effective Date—This standard will be effective for all actuarial work involving health and
disability liabilities, other than liabilities for incurred claims, performed on or after
September 30, 2004.
2.1 Block of Business—All contracts of a common coverage type, demographic grouping,

contract type, or other segmentation useful for estimating liabilities for actuarial purposes, or
useful to a risk-assuming entity for evaluating its business.
2.2 Capitation Arrangement—An arrangement that calls for periodic payments to a provider to
cover specified services to certain members of a health benefit plan regardless of the number
or types of such services provided.
2.3 Carve-OutsCarve-outs are designated services provided by specified providers, such as

prescription drugs or dental, or condition-specific services such as cancer, mental health, or
substance abuse treatment. Carve-outs are often provided by a separate entity specializing in
that type of designated service.
2.4 Contract Period—The time period for which a contract is effective.
2.5 Contract Reserve—A liability established when a portion of the premium due prior to the
valuation date is designed to pay all or a part of the claims expected to be incurred after the
valuation date (sometimes referred to as an active life reserve or policy reserve). A contract
reserve may or may not include a provision for the reserve for unearned premiums.
2
2.6 Exposure Unit—A unit by which the cost for a health benefit plan is measured. For example,
an exposure unit may be a contract, an individual covered, $100 of weekly salary, or $100 of
monthly benefit.
2.7 Health Benefit Plan—A contract or other financial arrangement providing medical,
prescription drug, dental, vision, disability income, accidental death and dismemberment,
long-term care, or other health-related benefits, whether on a reimbursement, indemnity, or
service benefit basis, regardless of the form of the risk-assuming entity, including health
benefit plans provided by self-insured or governmental plan sponsors.
2.8 Incentive Payment—A bonus payment to a provider, typically used to motivate efficiency or
quality in patient care management, or to encourage retention of providers in a network.
2.9 Premium Deficiency Reserve—A liability established when, for a period of time, the value
of future premiums, current reserves, and unpaid claims liability are less than the value of
future claim payments and expenses plus the anticipated liabilities at the end of the period.
2.10 Providers—Individuals, groups, or organizations providing health care services, including

doctors, hospitals, physical therapists, medical equipment suppliers, etc.
2.11 Provider-Related Liability—A liability established to cover expected future incentive or non-
claim payments or to cover the possibility of a change in the relationship between the risk-
assuming entity and a provider.
2.12 Risk-Assuming Entity—The entity with respect to which the actuary is determining
liabilities associated with health benefit plans or risk-sharing arrangements.
2.13 Risk-Sharing Arrangement—An arrangement involving a provider, calling for payments to

or from the provider where the payment is not related to a specific service performed by that
provider, and the payment is contingent upon certain financial or operational goals being
achieved. Examples of risk-sharing arrangements include provider incentives, bonuses, and
withholds.
2.14 Trends—Measures of rates of change, over time, of the elements affecting the determination
of certain liabilities.
2.15 Unpaid Claims Liability—The value of the unpaid portion of incurred claims includes
(a) unreported claims; (b) reported but unprocessed claims; and (c) processed but unpaid
claims. For a risk-assuming entity’s balance sheet, the unpaid claims liability includes
provision for all unpaid claims incurred during the contract period as of the current valuation
date.
2.16 Valuation Date—The date as of which the liabilities are determined.
3
3.1 Introduction—The determination of liabilities is fundamental to the practice of health

actuaries. It is necessary for the completion of financial statements; for the analysis and
projection of claim trends; for the analysis or development of premium rates; and for the
development of various management reports, regardless of the type of risk-assuming entity.
3.2 General ConsiderationsWhen determining liabilities under this standard, the actuary
should consider relevant provisions of the health benefit plans or risk-sharing arrangements,
business practices, and environmental factors that, in the actuary’s professional judgment,
are likely to materially affect liabilities or claim trends, including those highlighted in the
sections below.
When, in the actuary’s professional judgment, a representation from management is

reasonable and management is an appropriate source of information about a specific item,
the actuary may rely on the representation of management with respect to such item. The
actuary should disclose such reliance in an appropriate actuarial communication.
3.2.1 Health Benefit Plan Provisions and Business Practices—The actuary should consider
the health benefit plan provisions, including any special practices known to the
actuary that are imposed by group requirements and provider arrangements and
which, in the actuary’s professional judgment, materially affect the cost and
frequency of claims; the level and schedule of premium rates; the ability to change
premium rates; and renewability provisions. These include, for example, elimination
periods, deductibles, pre-existing condition limitations, maximum service payment
allowances, and managed-care restrictions.
The actuary should compare internal business practices, as described by an

appropriate source, to plan provisions to determine whether there are material
differences between the plan provisions and actual operation of the plan, such as
differences in definitions of payment allowances, incurral dating methods, and
benefit interpretations, and consider how such differences are likely to affect the
determination of claim costs and claim liabilities.
3.2.2 Risk-Sharing Arrangement ProvisionsThe actuary should consider the risk-sharing

arrangement provisions, including any special requirements for networks or
providers, which are known to the actuary and, in the actuary’s professional
judgment, are likely to materially affect the financial results of the arrangement.
These include, for example, allowances for number of enrolled lives included, the
results of membership satisfaction surveys, and actual usage of certain facilities. The
actual payments may be defined by internal business practices, contracts, and plan
provisions.
4
3.2.3 Economic Influences—Economic conditions may affect the frequency and cost of
claims. The actuary should consider such factors as changes in expected trends,
managed-care contracts, provider networks, provider fee schedules, and medical
practices to the extent such changes, in the actuary’s professional judgment, are
material individually or in the aggregate. In addition, economic conditions may
influence such factors as continuation of disability, cost shifting, and frequency of
elective procedures performed in recessionary periods or prior to plan termination.
3.2.4 Risk Characteristics and Organizational Practices by Block of Business—The

actuary should consider how marketing, underwriting, and other business practices
can influence the types of risks accepted. Furthermore, the pattern of growth or
contraction and relative maturity of a block of business can influence liabilities.
Claims administration practices can influence claim rates and trends and in turn
influence liabilities.
3.2.5 Legislative Requirements—Governmental mandates can influence the provision of

new benefits, risk characteristics, care management practices, rating and
underwriting practices, or claims processing practices. The actuary should consider
relevant legislative and regulatory changes as they pertain to determination of
liabilities.
3.2.6 Carve-Outs—The actuary should consider the pertinent benefits, payment

arrangements, and separate reporting of those benefits subject to carve-outs in trend
analysis and determination of a risk-assuming entity’s liabilities.
3.2.7 Special Considerations for Long-Term Products—Certain health benefit plans

provide for long-term medical or disability benefits. Some examples are cancer,
long-term care, and long-term disability policies. The actuary should consider the
benefits available in these health benefit plans, such as lump-sum, fixed, or variable
payments for services; provisions such as cost of living adjustments and inflation
protections; payment differences based on institutional or home-based care; social
insurance integration; and the criteria for benefit eligibility.
3.2.8 Reinsurance Arrangements—The actuary should appropriately reflect the effect of

reinsurance arrangements in determining liabilities. In particular, the actuary should
take into account the extended reporting or recovery periods and delayed
collectibility often associated with certain types of reinsurance.
3.2.9 Expenses—The actuary should consider whether an explicit liability for expenses
should be established, or whether a particular liability implicitly provides for future
expenses.
5
3.2.10 Consistency of Bases—The actuary should use consistent bases for determining
related liabilities and reserves, including those not covered by this standard, such as
incurred health and disability claims, unless it would be inappropriate to do so.
3.3 Considerations for Determining Contract Reserves—The actuary should establish a contract
reserve when such a reserve is required. For example, contract reserves are typically
established for entry-age-rated health benefit plans (where premium rates are based on entry
age and may be level over the lifetime of the contract), or where flat premium rate guarantees
or premium rate change limitations apply for multiple-year periods. The actuary may
perform the valuation on a seriatim basis, using grouping techniques, or a combination of
both. When determining contract reserves, the actuary should consider the following:
3.3.1 Assumptions—The actuary should use assumptions that are reasonable in the
aggregate. The actuary should take into account the following assumptions and any
other assumptions that the actuary deems appropriate:
a. Interest Rates—The actuary should use interest rates in the present value
calculation that are reasonable and consistent with the purpose for which the
reserve is being calculated.
b. Morbidity—The actuary should use morbidity assumptions that reflect the

underlying risk. These assumptions may reflect factors such as age, gender,
and marital status of the insured as well as the elimination period and
dependent status. In addition, the actuary should take into account the
wearing away of durational effects such as risk selection and pre-existing
condition limitations, changes in health benefit plans, changes in provider
agreements, adverse selection due to premium rate increases and plan design,
and other factors that, in the actuary’s professional judgment, materially
affect future claim payments. The impact of these items may be recognized
by a set of assumptions that varies over time.
c. Persistency—The actuary should consider using persistency or termination

assumptions that include both involuntary terminations, such as deaths and
disablements and voluntary terminations, as appropriate. Voluntary
termination assumptions, if any, should reflect the expected impact of future
premium rate increases.
d. ExpensesThe actuary should consider whether an assumption is

appropriate for expenses such as maintenance, acquisition, and claim
settlement, depending on the purpose for which the reserve is being
calculated.
6
e. TrendThe actuary should consider trend assumptions for inflation,

utilization, morbidity, and expense rates that are consistent with the purpose
for which the reserve is being calculated.
3.3.2 Premium Rate Changes—The actuary should consider whether an assumption may
be appropriate to reflect premium rate changes in the reserve calculation. The actuary
should use a premium rate change assumption that is reasonable in relation to the
projected claims costs and the manner in which the rate change will be implemented
(for example, on a given date for an entire block of business or on the next policy
anniversary). This assumption should take into account factors such as market
conditions, regulatory restrictions, and rate guarantees.
3.3.3 Previously Established Assumptions for Contract Reserves—The actuary may

determine that previously established assumptions are not appropriate and may
change them in accordance with the standards of the financial statements in which
the reserves are reported. The actuary should follow the process set forth in
section 3.3.1 when establishing new contract reserve assumptions for future valuation
dates.
3.3.4 Valuation Method—For a new policy form, in addition to the assumptions discussed
above, the actuary may need to determine the valuation method. The most common
valuation methods are the gross premium method, the net level premium method and
the full preliminary term (one- or two-year) method. Except where the valuation
method is prescribed, the actuary should choose an appropriate method for the
intended use of the reserve, such as in statutory financial statements or analysis of
operating income. When not using a net level premium method, the actuary should
consider the expense structure, such as higher first-year costs, in selecting the
valuation method.
3.4 Considerations for Determining Premium Deficiency Reserves—The actuary should

establish a premium deficiency reserve when such a reserve is required. Premium deficiency
reserves are typically established for financial reporting purposes. They may also be
established for other purposes such as management reporting. The actuary commonly
performs a gross premium valuation in order to determine whether or not a deficiency exists.
3.4.1 General Considerations—When determining deficiency reserves, the actuary should

take into account the following:
a. Assumptions in the AggregateThe actuary should use assumptions that are

reasonable in the aggregate.
b. Exposure—The actuary should consider reasonable increases and decreases

in exposure units over the time period of the calculation in the premium
7
deficiency reserve calculation. This parameter should reflect changes due to

such factors as mortality, lapses, and the impact of expected premium rate
changes.
c. Premium Rate Changes—The actuary should use a premium rate change

assumption that is reasonable in relation to the projected claims costs and the
risk-assuming entity’s expectations. This assumption should take into
account factors such as market conditions, regulatory restrictions, and rate
guarantees.
d. Claim Trend—The actuary should take into account the wearing away of
durational effects such as risk selection and pre-existing condition
limitations, changes in provider agreements, adverse selection due to
premium rate increases and plan design, and other factors that affect future
claim payments.
e. Risk-Sharing Arrangements—The actuary should take into account risk-

sharing arrangements. If the actuary anticipates there will be a payout for
risk-sharing arrangements associated with a block of business that is being
tested for premium deficiency, the actuary should treat the amount of the
payout as an expense. Some of these arrangements require providers to share
in losses as well as gains. If such an agreement is in effect and the actuary
anticipates there will be losses associated with the block of business being
tested, the actuary should include the amount due from the providers to offset
the losses only to the extent that the actuary reasonably expects the amount
due to be collectible.
f. Interest Rates—The actuary should use interest rates in the present value
calculation that are reasonable and consistent with the purpose for which the
reserve is being calculated.
g. Reinsurance—The actuary should consider the expected effects of

reinsurance and changes in reinsurance premiums in determining the
premium deficiency reserve.
h. Taxes—The actuary should consider the effect of losses assumed in the

calculation of the premium deficiency reserve on the risk-assuming entity’s
taxes and may include a tax credit in the calculations where appropriate.
i. Expenses—The actuary should consider total expenses of the risk-assuming

entity in establishing a premium deficiency reserve and should consider
whether the expenses allocated to the block of business are reasonable for the
purpose of determining premium deficiency reserves.
8
3.4.2 Additional Considerations for Financial ReportingWhen determining premium

deficiency reserves for financial reporting, the actuary should consider the following:
a. Blocks of Business—In order to determine whether or not a premium

deficiency exists, the actuary should consider blocks of business in a manner
consistent with applicable financial reporting requirements. The
characteristics of a block of business may include, but are not limited to,
benefit type (for example, major medical, preferred provider organization, or
capitated managed care), contract type (for example, group or individual
policies), demographic grouping (for example, group size or geographical
area), and length of rate guarantee period. Whatever criteria are used, a block
of business should be large enough so that its financial results are material
relative to the risk-assuming entity as a whole. The actuary may need to
establish a premium deficiency reserve for a block of business where a
premium deficiency exists even if the contract period has not started.
b. Time Period—The actuary should take into account any applicable law,
regulation, or other binding authority in establishing the time period of the
calculation. The valuation date is the beginning of the time period used to
project losses from a block of business. The end of the time period is
generally the earlier of the end of the contract period or the point at which the
block no longer requires a premium deficiency reserve.
3.5 Considerations When Determining Provider-Related Liabilities—Provider-related liabilities

may arise for a risk-assuming entity as a provider or a non-provider. Risk-sharing
arrangements create potential liabilities for both parties while provider incentive payments
create potential liability to the risk-assuming entity offering such provisions to their
providers. Finally, capitation arrangements may create a provider-related liability for either
party. When determining provider-related liabilities, the actuary should consider the
following:
3.5.1 Non-Provider Risk-Assuming EntitiesThe actuary should consider the relevant

contractual arrangements with providers to determine whether the contractual
arrangements require a liability to be held by the risk-assuming entity.
The actuary should consider whether a provider-related liability for contracts in

effect or not fully settled as of the valuation date should be determined. In
determining the liability, the actuary should consider any amounts due from the
provider, the overall financial condition of the provider, and the likelihood of
collecting amounts due.
Similarly, the actuary should consider whether the risk of a provider failing or
leaving a network creates a need to determine a liability for the contingency of the
9
payment by the risk-assuming entity of higher capitations or fees for services while a
replacement provider is identified and suitable arrangements are concluded.
3.5.2 Provider Risk-Assuming Entities—The actuary should consider relevant contractual

arrangements with other providers as well as non-provider risk-assuming entities to
determine whether the contractual arrangements require a liability to be held. One
primary source of potential liability between providers is the receipt of capitation by
one provider with payments due to other providers using fee-for-service.
3.5.3 Risk-Sharing and Capitation Arrangements—The actuary should consider the nature
of any risk-sharing and capitation arrangements in determining whether to establish
a provider-related liability. The actuary should consider stop-loss provisions, if any,
included in the risk sharing or capitation arrangements when establishing a
provider-related liability.
3.5.4 Provider Financial ConditionWhen a risk-assuming entity shares risk with a

provider under a risk-sharing or capitation arrangement, the actuary should
determine, to the extent practical, whether the provider’s overall financial condition
will allow it to meet its obligations, and, if not, adjust the liability accordingly. To
the extent that these liabilities are not otherwise included in the claim liabilities of
the risk-assuming entity, such liabilities should be included in the provider-related
liabilities.
3.5.5 Provider Incentive Payments—If a provider agreement calls for incentive payments
to be made to a provider if certain conditions are met, such as quality of care
standards or claim targets, the actuary should consider whether the risk-assuming
entity should hold a liability for those payments.
3.6 Claim Adjustment Expense Liabilities—The actuary should determine a liability for claim
adjustment expenses associated with unpaid claims, unless such liabilities are included in the
liability for unpaid claims or otherwise provided for appropriately.
3.7 Other Liabilities—The actuary may not always be responsible for determining certain other
liabilities. However, the actuary may be asked to assist in the determination of or opine on
the adequacy of certain of these other liabilities. The following are examples of such
liabilities:
3.7.1 Liabilities for Payments to State Pools—When involved in determining liabilities for
payments to state pools, the actuary should consider whether adequate provision has
been made for payments due under state assessment pools, such as insolvency pools,
risk-sharing pools, or other arrangements.
10
3.7.2 Reserves for Unearned Premiums—When involved in determining reserves for

unearned premiums, the actuary should consider whether adequate provision has
been made for liabilities associated with coverage during the period when the
premium will be earned.
3.7.3 Liabilities for Dividends and Experience Refunds—When involved in determining

liabilities for dividends and experience refunds, the actuary should consider whether
adequate provision has been made for dividends or experience refunds payable under
the provisions of a health benefit plan.
3.8 Follow-Up Studies—The actuary may be called upon to conduct follow-up studies that
involve performing tests of reasonableness of the prior period liability estimates and the
methods used over time. When conducting such follow-up studies, the actuary should, to the
extent practical, do the following:
a. collect sufficient data to perform such studies;
b. perform studies in the aggregate or for appropriate blocks of business; and
c. utilize the results, if appropriate, in preparing current liability estimates.
3.9 Margin for Uncertainty—Recognizing the fact that liabilities are an estimate of the true
liabilities that will emerge, the actuary should consider what margin for uncertainty, if any,
might be appropriately included.
3.10 Data Requirements—The expansion of health benefit coverages and the variety of
organizations offering health benefit coverages have increased the volume, type, detail, and
the frequency of data needs by the actuary. The actuary should refer to ASOP No. 23, Data
Quality, when dealing with data requirements.
3.11 Documentation—The actuary should document the methods, assumptions, procedures, and
the sources of the data used. The documentation should be in a form such that another
actuary qualified in the same practice area could assess the reasonableness of the actuary’s
work.
11
4.1 Communications and DisclosuresWhen issuing actuarial communications under this

standard, the actuary should refer to ASOP No. 41, Actuarial Communications. In particular,
such actuarial communications should disclose the following items:
a. the sources of information;
b. the extent of reliance on information supplied by others;
c. limitations on the use of the actuarial work product;
d. the need for any follow-up studies;
e. any unresolved concerns the actuary may have about the information that could have
a material effect on the actuarial work product; and
f. any conflicts arising from the application of law, regulation, or other binding
authority.
4.2 Reliance on OthersThe actuary may rely on information, including data, supplied by
others. In doing so, the actuary should disclose both the fact and the extent of such reliance
in an appropriate actuarial communication. The accuracy and comprehensiveness of the
information are the responsibility of those who supply it.
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Appendix 1
practice.
Background
Health and disability liabilities other than incurred claims are important to many lines of health
and disability business. New forms of these liabilities arose during the 1980s and especially the
1990s with the rapid increase in managed care provider risk arrangements. The increasing
attention to financial statements has enhanced the importance of other liabilities such as contract
reserves and premium deficiency reserves.
Current Practices
Actuaries have been able to obtain guidance on when statutory reserves are required, how to
reserve for health coverages and how to document those reserves from various publications of
the National Association of Insurance Commissioners. The primary publications are the
Accounting Practices and Procedures Manual, the Health Insurance Reserves Model Regulation
and the Health Reserves Guidance Manual. Similar guidance on when liabilities are required by
generally accepted accounting principles is available in Statements of Financial Accounting
Standards. Determining liabilities may be necessary or useful in situations other than financial
statement reporting, such as the acquisition of a block of a business or in experience analysis.
13
Appendix 2
Comments on the Second Exposure Draft and Committee Responses
The second exposure draft of this standard, Determining Health and Disability Liabilities Other
Than Liabilities for Incurred Claims, was exposed for review in October 2003, with a comment
deadline of January 31, 2004. Seventeen comment letters were received. The Health Committee
of the ASB carefully considered all comments received. Many helpful ideas and suggestions
were offered in the comment letters and are reflected in the standard as appropriate. Summarized
below are the significant issues and questions contained in the comment letters, and the
committee’s responses to these issues and questions. Unless otherwise noted, the section
numbers and titles used below refer to those in the second exposure draft.
GENERAL COMMENTS
Comment One commentator observed that the term “liability” appeared to be used synonymously with the term
“reserve.” The commentator suggested a number of changes throughout the standard to reflect this comment.
Response The committee believes that the use of the term “liability” is appropriate and is reflective of common usage.
Where the term “reserve” is used, it applies to a specific terminology recognized in regulation and practice,
such as “premium deficiency reserve,” “contract reserve,” or “unearned premium reserve.”
Comment Several commentators questioned whether this standard was intended to cover situations such as disability and
medical benefits provided through pension plans, benefits provided through voluntary employees’ beneficiary
association’s (VEBAs), calculations under SFAS No. 106, Employers’ Accounting for Postretirement Benefits
Other Than Pensions, and SFAS No. 112, Employers’ Accounting for Postemployment Benefits, 401(h)
accounts, and incidental health benefits provided under other plans.
Response The committee considered these questions and added clarifying language to section 1.2, Scope, which states
that this standard does not apply to actuaries determining liabilities in accordance with other standards of
practice. This standard does not apply for liabilities determined in accordance with standards of practice such
as ASOP No. 4, Measuring Pension Obligations, and ASOP No. 6, Measuring Retiree Group Benefit
Obligations. Furthermore, this standard does not apply in situations where a benefit is included within a plan
subject to another standard, which may include a disability benefit under a life plan, or to a 401(h) account that
is part of a pension plan. The committee believes that this standard does apply to self-insured plans (including
VEBA plans) that are not subject to other standards such as those referenced above. This is specifically noted
in the definition of health benefit plan, and is identical to the treatment of ASOP No. 5, Incurred Health and
Disability Claims.
Comment One commentator observed that the standard uses the term “premium” frequently, and also uses the term
“policy form,” and asked whether the standard was to apply to non-insured arrangements.
Response The standard does apply to certain self-insured health plans, and the committee believes that the terms noted by
the commentator are appropriate.
Comment One commentator observed that contract reserves are merely a special case reserve that is defined at issue and
cannot be subsequently recalculated unless shown to be inadequate. The commentator suggested a number of
changes to the definition of contract reserve and the assumptions to be used.
Response The committee believes that the standard provides appropriate flexibility to the actuary, and that any further
descriptive definition would be prescriptive and limiting.
14

Comment One commentator suggested that adding, “This ASOP is not intended to be prescriptive of specific methods or
procedures, nor is it intended to require that specific liabilities can be established,” would clarify the intent of
the section.
Response The committee believed the existing language was appropriate and made no change.
Section 1.2, Scope
Comment One commentator suggested changing, “This standard applies to actuaries when they…”to “This standard
applies when actuaries.…”
Comment One commentator suggested deleting everything starting with “provided the actuary discloses.…”
Response The committee disagreed, and believed the existing language was appropriate.
Comment One commentator suggested that this section could be taken to mean this standard does not apply to work
performed for statutory or GAAP reporting.
Response The committee confirms that the standard does apply to work performed for statutory or GAAP reports, and
believed the language was sufficiently clear.
Comment One commentator suggested that the language detailing the meaning of “determining” may more logically fit in
section 2, Definitions.
Response The committee believed this sentence was appropriately included in section 1.2, Scope.
Comment One commentator suggested that the ASOP define “incurred claims.”
Response The committee believed this term was of common usage and did not need further definition for purposes of this
standard.
Section 2.4, Contract Period
Comment One commentator suggested the phrase “contract is effective” should be replaced with “coverage is effective.”
Response The committee believed the existing definition was appropriate and made no change.
Section 2.5, Contract Reserve
Comment One commentator suggested that the definition of contract reserve and section 3.3, Considerations for Contract
Reserves, were either wrong or poorly worded. Specifically, the commentator believed that the statement did not
adequately address the difference between a contract reserve and a premium deficiency reserve. The commentator
believed that contract reserves are a special case of premium deficiency reserve, even though the actuarial language
has not evolved in this way. Contract reserves are created by the difference in slope in premiums over time relative
to the slope of the claims. Only in the NAIC statutory reserve model laws is the term actually defined.
The ASOP as drafted, unfortunately, gave so much more latitude to the actuary in calculating the reserve, and even
defining what the liability is, as not to make it very valuable in practice.
In summary, a contract reserve is nothing more than a special case reserve that is defined at time of issue, and
cannot be recalculated for changes in future periods, unless a gross premium reserve calculation shows an
inadequacy. Even in that case, one can argue the contract reserve stays the same, and an additional reserve is put up
as a deficiency reserve. The definitions should reflect this, as should the entire standard.
15
Response The committee notes that this ASOP does not supersede existing GAAP or statutory requirements, and that the
actuary should comply with these requirements. The committee believed that contract reserves are not unique in
that their determination is based solely on benefit and does not consider expenses. This ASOP is not intended to
prescribe how the actuary should so comply, and is intended to provide guidance on what the actuary should
consider in determining liabilities. Further, the committee believed these aspects of the definitions of contract
reserves and premium deficiency reserves in the ASOP were sufficiently clear for the purpose of providing
such general guidance.
The committee did clarify that a contract reserve may or may not include a provision for an unearned premium
reserve in response to a comment on section 3.7.2.
Section 2.9, Premium Deficiency Reserve
Comment One commentator suggested that the definition should be changed to “when, for the remainder of the contract,
the value of future premiums….”
Section 2.12, Risk-Assuming Entity
Comment One commentator suggested that this definition should be more specific. There are situations in which the
entity for which the actuary’s work is being performed is not the risk-assuming entity (for example, when the
work is an analysis of a potential acquisition or an analysis performed for a regulatory agency). This would be
especially true when the actuary is evaluating the adequacy of the reserves of a risk-assuming entity.
Response The committee modified the language for clarification.

Section 2.13, Risk-Sharing Arrangement
Comment One commentator suggested that the words “related to a specific service” be replaced by “directly for a specific
service” or “associated with a specific service” because risk sharing arrangements are “related to” (the
aggregate of) all specific services.
Section 2.14, Trends
Comment One commentator suggested changing “of the elements affecting the determination of certain liabilities” to “of
certain elements affecting the determination of liabilities.”
Section 2.15, Unpaid Claims Liability
Comment One commentator suggested that many of the ASOPs are inconsistent in the use of the term claim liability. In the
definition of “unpaid claims liability,” the phrase “unpaid portion of incurred claims” could be construed to mean
future benefits on incurred claims. It might help to clarify the language by referring to the “due and unpaid” portion
of incurred claims.
Section 3.2, General Considerations
Comment One commentator suggested removing “or claim trends” as they are one of several environmental factors that
can affect liabilities.
Response The committee did not make a change, as claim trends may be a significant source of the need to establish a
liability.
16
Comment One commentator suggested deleting wording that suggests a need to determine if “management is an
appropriate source of information about a specific item,” as well as disclosure of reliance in this section.
Response The committee believed that there may be situations where management may not be the best source (for
example, where certain types of health benefit plans are handled by a separate TPA), and it is appropriate for
the actuary to consider the appropriateness of each source. While disclosure requirements are consolidated in
section 4, ASOPs may note them in other sections as well.
Section 3.2.1, Health Benefit Plan Provisions and Business Practices
Comment One commentator suggested revising the third sentence to clarify that the actuary is to consider “material
differences between the plan provisions and actual operation of the plan,” and noted that the remainder of the
sentence contains examples, such as differences in definitions of payment allowances, etc.
Response The committee agreed and made the proposed change.

Comment Another commentator suggested removing the last sentence, as it is included in ASOP No. 5.
Response The committee believed the sentence was appropriate for this ASOP.
Section 3.2.3, Economic Influences
Comment One commentator suggested wording to clarify that “to the extent changes are material” should be a view of
the future by changing to “to the extent such changes, in the actuary’s judgment, are likely to be material.”
Response The committee agreed and made the proposed change.

Section 3.2.10, Consistency of Bases
Comment One commentator was concerned with a blanket requirement for consistency, and that immaterial differences
may be interpreted as violating the standard.
Response The committee believed that the language did not dictate that the assumptions be identical, and allowed for
some differences.
Section 3.3.1, Assumptions
Comment One commentator expressed concern that contract reserve assumptions, which are changed at the time of
acquisition of a block, might not reflect experience prior to the acquisition, and proposed adding a new second
sentence to say that “assumptions used must be reasonable relative to the entire block or blocks of business from
issue.”
Response The committee believed that the existing first sentence requiring the use of “assumptions that are reasonable in
the aggregate” would include the use of reasonable assumptions for prior periods and no change.
Comment One commentator suggested adding additional examples of factors specific to disability plans in section 3.3.1(b).
Response The committee did not feel additional examples were necessary.
Section 3.4, Considerations for Determining Premium Deficiency Reserves
Comment Several commentators suggested that the first sentence was not clear as to the basis for “when necessary.”
Response The committee revised the wording in sections 3.4 and 3.3 to clarify the basis as an outside requirement. The
next two sentences in 3.4 remain as the principal sources of an “outside requirement” on the actuary.
Section 3.4.1, General Considerations
Comment Regarding section 3.4.1(e), one commentator suggested that amounts due from providers would normally be
considered a receivable from a non-insurance entity and, therefore, problematic.
Response The committee made no change. It does understand that some receivables may have special rules applied to
them under some financial reporting rules. The ASOP, being more general, recognizes the potential for value.
17
Comment Regarding section 3.4.1(h), one commentator expressed concern that the ASOP would not be consistent with the
NAIC Health Reserves Guidance Manual.
Response The committee believed that the existing language was appropriately broad and recognized that “applicable
law, regulation or other binding authority” may be more restrictive.
Comment Regarding section 3.4.1(i), one commentator noted that the treatment of expense allocation in calculating
deficiency reserves is frequently different than for financial reporting in general and asked if the ASOP should
address this.
Response The committee agreed with the comment and added “for the purpose of determining premium deficiency
reserves” at the end of this section.
Section 3.4.2, Additional Considerations for Financial Reporting
Comment Regarding section 3.4.2(a), one commentator suggested that certain blocks of business (for example, group
conversions) are never intended (or allowed by law) to be profitable and that this would then require a premium
deficiency reserve.
Response The committee believed that defining a block of business will vary. If there are no other sources than the
premiums, the policy form may need contract or additional reserves at issue. In some situations, other sources
of revenue (for example, conversion charges) may be a source of funding such reserves. In some situations it
may be appropriate to combine these forms into a larger block that is intended to support the unprofitable
forms. The ASOP allows for reasonable approaches subject to applicable financial reporting requirements.
Comment Regarding section 3.4.2(b), several commentators expressed concern that the time period language was not clear,
especially with respect to the end of the period. Of particular concern were examples like conversion policies,
blocks that “wander in and out of year-by-year profitability” and situations involving contracts committed to (new
or renewal) by the risk-assuming entity that will result in a loss.
Response The committee removed the wording requiring some level of profitability as the basis for the end of the period
and revised the wording to clarify that the end of the period would normally be the date in the future, under
the assumptions used to determine the reserve currently, when no premium deficiency reserve would then be
required, including new business written at a loss. This will generally result from premium changes,
increasing contract reserves or adding additional reserves or a combination. During such a period some
portion of the block may be expected to produce profits before the entire block reaches the “end.” Expected
profits during this period, but not later periods, are a reasonable offset to the reserve.
Section 3.5.1, Non-Provider Risk-Assuming Entities
Comment Several commentators expressed concern that the actuary may not have sufficient information to determine a
liability relating to added costs following a provider failing or leaving a network. One suggested that the ASOP
make it clear that “it is not the actuary’s responsibility to review the financial soundness” of providers. Others
requested examples.
Response The committee did not believe examples were appropriate for the ASOP but could be a part of a practice note.
The committee did revise the language to require the actuary to “consider whether” there is a material risk
relating to providers failing or leaving the network so that a liability should be determined. Such
considerations would not normally involve the financial review of providers just for this purpose. Financial
analyses of providers, if completed for other reasons, should be reviewed. The committee revised the prior
paragraph to be consistent with this approach.
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Section 3.6, Claim Adjustment Expense Liabilities

Comment One commentator suggested that, in practice, the actuary may not determine this liability, and that in such
situations this liability is similar to those in section 3.7 and should be moved there.
Response The committee made no change but notes that the ASOP uses the word “determines” to encompass both
determining and reviewing liabilities, and within this concept, the actuary is required to determine a value of
the liability. The committee believed that the ASOP provided flexibility for the actuary, even if not the one to
calculate the liability, to be satisfied that the liability is covered in accordance with the financial reporting
rules applicable.
Comment Another commentator questioned whether implicit approaches should be allowed.
Response The committee believed that so long as the liability is determined, the manner of reporting should not be defined
by the ASOP. No change was made.
Section 3.7, Other Liabilities
Comment Several commentators noted that certain of these liabilities may be included in the liabilities subject to an actuarial
opinion. They were concerned that the language seemed to suggest that actuaries are not responsible.
Response The committee agreed with this concern and revised the second sentence to provide for two reasons for the
actuary to be involveda request to assist or where the liability is subject to the actuary’s opinion.
Section 3.7.2, Reserves for Unearned Premiums
Comment One commentator noted that the definition of contract reserve would normally include the unearned premium
reserve.
Response The committee did not intend to include premiums for the balance of the contract year, as of the valuation
date, in the basis for contract reserves. The committee intended to allow flexibility in the methodology of
calculating contract reserves, such that the contract reserve can be calculated with or without the provision for
unearned premiums. Section 2.5 was changed to reflect this. The committee believed that section 3.7.2
allowed the actuary to take this into account when determining reserves for unearned premiums.
Comment One commentator asked how one could match future liabilities with unearned premium.
Response The committee believed that the description of the unearned premium reserve was appropriate.
Section 3.7.3, Liabilities for Dividends and Experience Refunds
Comment One commentator asked if premium stabilization reserves were to be considered under this section.
Response The standard would cover premium stabilization reserves in this section, as stabilization reserves are usually
established for dividends or experience refunds.
Section 3.8, Follow-Up Studies
Comment Several commentators raised concerns about whether follow-up studies by the actuary were necessary. Some
provided alternative wording to clarify positions.
Response The committee believed that follow-up studies, while of great value, are the responsibility of the risk-
assuming entity. An actuary is frequently involved but may not be the same actuary as the one determining the
liability. The committee revised the wording to note that the responsibility of the actuary, under this ASOP,
begins when the actuary is required or is asked to conduct (or assist) in completing a follow-up study. A
disclosure statement was also added to section 4.1, Communications and Disclosures.
Section 4.2, Reliance on Others
Comment One commentator suggested that the sentence concerning disclosure be deleted from this section.
Response The committee disagreed and made no changes.
19
Actuarial Standard
of Practice
No. 43
Property/Casualty Unpaid Claim Estimates
Developed by the
Adopted by the
June 2007
(Doc. No. 106)

TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.1 Actuarial Central Estimate 2
2.2 Claim Adjustment Expense 2
2.3 Coverage 2
2.4 Event 2
2.5 Method 3
2.6 Model 3
2.7 Model Risk 3
2.8 Parameter Risk 3
2.9 Principal 3
2.10 Process Risk 3
2.11 Unpaid Claim Estimate 3
2.12 Unpaid Claim Estimate Analysis 3

3.1 Purpose or Use of the Unpaid Claim Estimate 3
3.2 Constraints on the Unpaid Claim Estimate Analysis 3
3.3 Scope of the Unpaid Claim Estimate 3
3.4 Materiality 4
3.5 Nature of Unpaid Claims 5
3.6 Unpaid Claims Estimate Analysis 5
3.6.1 Methods and Models 5
3.6.2 Assumptions 6
3.6.3 Data 6
3.6.4 Recoverables 7
3.6.5 Gross vs. Net 7
3.6.6 External Conditions 7
3.6.7 Changing Conditions 7
3.6.8 Uncertainty 7
3.7 Unpaid Claim Estimate 8
3.7.1 Reasonableness 8
3.7.2 Multiple Components 8
ii
3.7.3 Presentation 8
3.8 Documentation 8

4.2 Additional Disclosures 10
APPENDIXES

Background 11
Appendix 2—Comments on the Second Exposure Draft and Responses 13
Appendix 3—Comments on Actuarial Central Estimate 22

Background 22
Comments and Responses 24
iii
June 2007

Actuarial Standards Board and Other Persons Interested in Property/Casualty Unpaid
Claim Estimates
This booklet contains the final version of ASOP No. 43, Property/Casualty Unpaid Claim
Estimates.
Background
Currently, no ASOP exists to provide guidance to actuaries developing unpaid claim estimates.
ASOP No. 36, Statements of Actuarial Opinion Regarding Property/Casualty Loss and Loss
Adjustment Expense Reserves, provides guidance to the actuary in issuing a written statement of
actuarial opinion but not in developing an unpaid claim estimate. The Casualty Actuarial
Society’s Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment
Expense Reserves contains some guidance. However, that document is currently under review
and the revised document is expected to contain significantly less guidance than the current
version. Therefore, to address this issue, the ASB charged the Subcommittee on Reserving of
the ASB Casualty Committee with creating an ASOP to provide guidance to actuaries regarding
property/casualty unpaid claim estimates.
The first exposure draft of this ASOP was approved for exposure in February 2006 with a
comment deadline of June 30, 2006. Thirty-two comment letters were received and considered in
developing modifications that were reflected in the second exposure draft.
The second exposure draft of this ASOP was approved for exposure in February 2007 with a
comment deadline of May 1, 2007. The Subcommittee on Reserving carefully considered the
nine comment letters received and made changes to the language in several sections in response.
For a summary of the issues contained in these comment letters, please see appendix 2.
Due to the volume of comments received throughout the exposure period on the Actuarial
Central Estimate concept, an additional appendix (see appendix 3) was added to address the
comments.
iv
The Subcommittee on Reserving thanks everyone who took the time to contribute comments and
suggestions on both exposure drafts.
Subcommittee on Reserving of the Casualty Committee
Raji Bhagavatula, Chairperson

Ralph S. Blanchard Chandrakant Patel
Edward W. Ford David S. Powell
Louise A. Francis Jason L. Russ
Margaret Wendy Germani Lee R. Steeneck
Mary Frances Miller Chester J. Szczepanski
Terrence M. O’Brien
Patrick B. Woods, Chairperson

Steven Armstrong Claus S. Metzner
Raji Bhagavatula David J. Otto
Beth Fitzgerald Alfred O. Weller
Bertram A. Horowitz

v
PROPERTY/CASUALTY UNPAID CLAIM ESTIMATES
performing professional services relating to the estimation of loss and loss adjustment
expense for unpaid claims for property/casualty coverages. Any reference to “unpaid claims”
in this standard includes (unless explicitly stated otherwise) the associated unpaid claim
adjustment expense even when not accompanied by the estimation of unpaid claims.
1.2 Scope—This standard applies to actuaries when performing professional services related to
developing unpaid claim estimates only for events that have already occurred or will have
occurred, as of an accounting date, exclusive of estimates developed solely for ratemaking
purposes. This standard applies to the actuary when estimating unpaid claims for all classes
of entities, including self-insureds, insurance companies, reinsurers, and governmental
entities. This standard applies to estimates of gross amounts before recoverables (such as
deductibles, ceded reinsurance, and salvage and subrogation), estimates of amounts after
such recoverables, and estimates of amounts of such recoverables.
This standard applies to the actuary only with respect to unpaid claim estimates that are
communicated as an actuarial finding (as described in ASOP No. 41, Actuarial
Communications) in written or electronic form. Actions taken by the actuary’s principal
regarding such estimates are beyond the scope of this standard.
The terms “reserves” and “reserving” are sometimes used to refer to “unpaid claim
estimates” and “unpaid claim estimate analysis.” In this standard, the term “reserve” is
limited to its strict definition as an amount booked in a financial statement. Services
described above are covered by this standard, regardless as to whether the actuary refers to
the work performed as “reserving,” “estimating unpaid claims” or any other term.
This standard does not apply to the estimation of items that may be a function of unpaid
claim estimates or claim outcomes, such as (but not limited to) loss-based taxes, contingent
commissions and retrospectively rated premiums.
This standard does not apply to unpaid claims under a “health benefit plan” covered by
ASOP No. 5, Incurred Health and Disability Claims, or included as “health and disability
liabilities” under ASOP No. 42, Determining Health And Disability Liabilities Other Than
Liabilities for Incurred Claims. However, this standard does apply to health benefits
1
associated with state or federal workers compensation statutes and liability policies.
With respect to discounted unpaid claim estimates for property/casualty coverages, this
standard addresses the determination of the undiscounted value of such estimates. The
actuary should be guided by ASOP No. 20, Discounting of Property and Casualty Loss and
Loss Adjustment Expense Reserves, to address additional considerations to reflect the effects
of discounting.
An actuary may develop an unpaid claim estimate in the context of issuing a written
statement of actuarial opinion regarding property/casualty loss and loss adjustment expense
reserves. This standard addresses the determination of the unpaid claim estimate. The
actuary should be guided by ASOP No. 36, Statements of Actuarial Opinion Regarding
Property/Casualty Loss and Loss Adjustment Expense Reserves, to address additional
considerations associated with the issuance of such a statement.
applicable law (statutes, regulations, and other legally binding authority). If compliance with
applicable law requires the actuary to depart from the guidance set forth in this standard, the
actuary should refer to section 4.4 regarding deviation from standard.
1.4 Effective Date—This standard will be effective for any actuarial work product covered by
this standard’s scope produced on or after September 1, 2007.
2.1 Actuarial Central Estimate—An estimate that represents an expected value over the range of
reasonably possible outcomes.
2.2 Claim Adjustment Expense—The costs of administering, determining coverage for, settling,
or defending claims even if it is ultimately determined that the claim is invalid.
2.3 Coverage—The terms and conditions of a plan or contract, or the requirements of applicable
law, that create an obligation for claim payment associated with contingent events.
2.4 Event—The incident or activity that triggers potential for claim or claim adjustment expense
payment.
2
2.5 Method—A systematic procedure for estimating the unpaid claims.
2.6 Model—A mathematical or empirical representation of a specified phenomenon.
2.7 Model Risk The risk that the methods are not appropriate to the circumstances or the models
are not representative of the specified phenomenon.
2.8 Parameter Risk The risk that the parameters used in the methods or models are not
representative of future outcomes.
2.9 Principal The actuary’s client or employer. In situations where the actuary has both a client
and an employer, as is common for consulting actuaries, the facts and circumstances will
determine whether the client or the employer (or both) is the principal with respect to any
portion of this standard.
2.10 Process Risk The risk associated with the projection of future contingencies that are
inherently variable, even when the parameters are known with certainty.
2.11 Unpaid Claim Estimate The actuary’s estimate of the obligation for future payment resulting
from claims due to past events.
2.12 Unpaid Claim Estimate Analysis The process of developing an unpaid claim estimate.
3.1 Purpose or Use of the Unpaid Claim Estimate—The actuary should identify the intended
purpose or use of the unpaid claim estimate. Potential purposes or uses of unpaid claim
estimates include, but are not limited to, establishing liability estimates for external financial
reporting, internal management reporting, and various special purpose uses such as appraisal
work and scenario analyses. Where multiple purposes or uses are intended, the actuary
should consider the potential conflicts arising from those multiple purposes and uses and
should consider adjustments to accommodate the multiple purposes to the extent that, in the
actuary’s professional judgment, it is appropriate and practical to make such adjustments.
3.2 Constraints on the Unpaid Claim Estimate Analysis—Sometimes constraints exist in the
performance of an actuarial analysis, such as those due to limited data, staff, time or other
resources. Where, in the actuary’s professional judgment, the actuary believes that such
constraints create a significant risk that a more in-depth analysis would produce a materially
different result, the actuary should notify the principal of that risk and communicate the
constraints on the analysis to the principal.
3.3 Scope of the Unpaid Claim Estimate The actuary should identify the following:
3
a. the intended measure of the unpaid claim estimate;
1. Examples of various types of measures for the unpaid claim estimate include,
but are not limited to, high estimate, low estimate, median, mean, mode,
actuarial central estimate, mean plus risk margin, actuarial central estimate
plus risk margin, or specified percentile.
As defined in section 2.1, the actuarial central estimate represents an

expected value over the range of reasonably possible outcomes. Such range
of reasonably possible outcomes may not include all conceivable outcomes,
as, for example, it would not include conceivable extreme events where the
contribution of such events to an expected value is not reliably estimable. An
actuarial central estimate may or may not be the result of the use of a
probability distribution or a statistical analysis. This description is intended to
clarify the concept rather than assign a precise statistical measure, as
commonly used actuarial methods typically do not result in a statistical mean.
The terms “best estimate” and “actuarial estimate” are not sufficient
identification of the intended measure, as they describe the source or the
quality of the estimate but not the objective of the estimate.
2. The actuary should consider whether the intended measure is appropriate to

the intended purpose or use of the unpaid claim estimate.
3. The description of the intended measure should include the identification of

whether any amounts are discounted.
b. whether the unpaid claim estimate is to be gross or net of specified recoverables;
c. whether and to what extent collectibility risk is to be considered when the unpaid
claim estimate is affected by recoverables;
d. the specific types of unpaid claim adjustment expenses covered in the unpaid claim
estimate (for example, coverage dispute costs, defense costs, and adjusting costs);
e. the claims to be covered by the unpaid claim estimate (for example, type of loss, line
of business, year, and state); and
f. any other items that, in the actuary’s professional judgment, are needed to describe
the scope sufficiently.
3.4 Materiality—The actuary may choose to disregard items that, in the actuary’s professional
judgment, are not material to the unpaid claim estimate given the intended purpose and use.
The actuary should evaluate materiality based on professional judgment, taking into account
the requirements of applicable law and the intended purpose of the unpaid claim estimate.
4
3.5 Nature of Unpaid Claims The actuary should have an understanding of the nature of the
unpaid claims being estimated. This understanding should be based on what a qualified
actuary in the same practice area could reasonably be expected to know or foresee as being
relevant and material to the estimate at the time of the unpaid claim estimate analysis, given
the same purpose, constraints, and scope. The actuary need not be familiar with every aspect
of potential unpaid claims.
Examples of aspects of the unpaid claims (including any material trends and issues
associated with such elements) that may require an understanding include the following:
a. coverage;
b. conditions or circumstances that make a claim more or less likely or the cost more or
less severe;
c. the underlying claim adjustment process; and
d. potential recoverables.
3.6 Unpaid Claim Estimate Analysis—The actuary should consider factors associated with the
unpaid claim estimate analysis that, in the actuary’s professional judgment, are material and
are reasonably foreseeable to the actuary at the time of estimation. The actuary is not
expected to become an expert in every aspect of potential unpaid claims.
The actuary should consider the following items when performing the unpaid claim estimate
analysis:
3.6.1 Methods and Models—The actuary should consider methods or models for
estimating unpaid claims that, in the actuary’s professional judgment, are
appropriate. The actuary should select specific methods or models, modify such
methods or models, or develop new methods or models based on relevant factors
including, but not limited to, the following:
a. the nature of the claims and underlying exposures;
b. the development characteristics associated with these claims;
c. the characteristics of the available data;
d. the applicability of various methods or models to the available data; and
e. the reasonableness of the assumptions underlying each method or model.
The actuary should consider whether a particular method or model is appropriate in

light of the purpose, constraints, and scope of the assignment. For example, an
unpaid claim estimate produced by a simple methodology may be appropriate for an
5
immediate internal use. The same methodology may be inappropriate for external
financial reporting purposes.
The actuary should consider whether, in the actuary’s professional judgment,

different methods or models should be used for different components of the unpaid
claim estimate. For example, different coverages within a line of business may
require different methods.
The actuary should consider the use of multiple methods or models appropriate to the
purpose, nature and scope of the assignment and the characteristics of the claims
unless, in the actuary’s professional judgment, reliance upon a single method or
model is reasonable given the circumstances. If for any material component of the
unpaid claim estimate the actuary does not use multiple methods or models, the
actuary should disclose and discuss the rationale for this decision in the actuarial
communication.
In the case when the unpaid claim estimate is an update to a previous estimate, the
actuary may choose to use the same methods or models as were used in the prior
unpaid claim estimate analysis, different methods or models, or a combination of
both. The actuary should consider the appropriateness of the chosen methods or
models, even when the decision is made not to change from the previously applied
methods or models.
3.6.2 Assumptions—The actuary should consider the reasonableness of the assumptions

underlying each method or model used. Assumptions generally involve significant
professional judgment as to the appropriateness of the methods and models used and
the parameters underlying the application of such methods and models. Assumptions
may be implicit or explicit and may involve interpreting past data or projecting future
trends. The actuary should use assumptions that, in the actuary’s professional
judgment, have no known significant bias to underestimation or overestimation of the
identified intended measure and are not internally inconsistent. Note that bias with
regard to an expected value estimate would not necessarily be bias with regard to a
measure intended to be higher or lower than an expected value estimate.
The actuary should consider the sensitivity of the unpaid claim estimates to
reasonable alternative assumptions. When the actuary determines that the use of
reasonable alternative assumptions would have a material effect on the unpaid claim
estimates, the actuary should notify the principal and attempt to discuss the
anticipated effect of this sensitivity on the analysis with the principal.
When the principal is interested in the value of an unpaid claim estimate under a
particular set of assumptions different from the actuary’s assumptions, the actuary
may provide the principal with the results based on such assumptions, subject to
appropriate disclosure.
3.6.3 Data—The actuary should refer to ASOP No. 23, Data Quality, with respect to the
6
selection of data to be used, relying on data supplied by others, reviewing data, and
using data.
3.6.4 Recoverables—Where the unpaid claim estimate analysis encompasses multiple

types of recoverables, the actuary should consider interaction among the different
types of recoverables and should adjust the analysis to reflect that interaction in a
manner that the actuary deems appropriate.
3.6.5 Gross vs. Net—The scope of the unpaid claim estimate analysis may require
estimates both gross and net of recoverables. Gross and net estimates may be viewed
as having three components, which are the gross estimate, the estimated
recoverables, and the net estimate. The actuary should consider the particular facts
and circumstances of the assignment when choosing which components to estimate.
3.6.6 External Conditions—Claim obligations are influenced by external conditions, such

as potential economic changes, regulatory actions, judicial decisions, or political or
social forces. The actuary should consider relevant external conditions that are
generally known by qualified actuaries in the same practice area and that, in the
actuary’s professional judgment, are likely to have a material effect on the actuary’s
unpaid claim estimate analysis. However, the actuary is not required to have detailed
knowledge of or consider all possible external conditions that may affect the future
claim payments.
3.6.7 Changing Conditions—The actuary should consider whether there have been
significant changes in conditions, particularly with regard to claims, losses, or
exposures, that are likely to be insufficiently reflected in the experience data or in the
assumptions used to estimate the unpaid claims. Examples include reinsurance
program changes and changes in the practices used by the entity’s claims personnel
to the extent such changes are likely to have a material effect on the results of the
actuary’s unpaid claim estimate analysis. Changing conditions can arise from
circumstances particular to the entity or from external factors affecting others within
an industry. When determining whether there have been known, significant changes
in conditions, the actuary should consider obtaining supporting information from the
principal or the principal’s duly authorized representative and may rely upon their
representations unless, in the actuary’s professional judgment, they appear to be
unreasonable.
3.6.8 Uncertainty—The actuary should consider the uncertainty associated with the unpaid
claim estimate analysis. This standard does not require or prohibit the actuary from
measuring this uncertainty. The actuary should consider the purpose and use of the
unpaid claim estimate in deciding whether or not to measure this uncertainty. When
the actuary is measuring uncertainty, the actuary should consider the types and
sources of uncertainty being measured and choose the methods, models, and
assumptions that are appropriate for the measurement of such uncertainty. For
example, when measuring the variability of an unpaid claim estimate covering
multiple components, consideration should be given to whether the components are
7
independent of each other or whether they are correlated. Such types and sources of
uncertainty surrounding unpaid claim estimates may include uncertainty due to
model risk, parameter risk, and process risk.
3.7 Unpaid Claim Estimate—The actuary should take into account the following with respect to
the unpaid claim estimate:
3.7.1 Reasonableness—The actuary should assess the reasonableness of the unpaid claim
estimate, using appropriate indicators or tests that, in the actuary’s professional
judgment, provide a validation that the unpaid claim estimate is reasonable. The
reasonableness of an unpaid claim estimate should be determined based on facts
known to, and circumstances known to or reasonably foreseeable by, the actuary at
the time of estimation.
3.7.2 Multiple Components—When the actuary’s unpaid claim estimate comprises

multiple components, the actuary should consider whether, in the actuary’s
professional judgment, the estimates of the multiple components are reasonably
consistent.
3.7.3 Presentation—The actuary may present the unpaid claim estimate in a variety of
ways, such as a point estimate, a range of estimates, a point estimate with a margin
for adverse deviation, or a probability distribution of the unpaid claim amount. The
actuary should consider the intended purpose or use of the unpaid claim estimate
when deciding how to present the unpaid claim estimate.
3.8 Documentation—The actuary should consider the intended purpose or use of the unpaid
claim estimate when documenting work, and should refer to ASOP No. 41.
8
4.1 Actuarial Communication—When issuing an actuarial communication subject to this

standard, the actuary should consider the intended purpose or use of the unpaid claim
estimate and refer to ASOP Nos. 23 and 41.
In addition, consistent with the intended purpose or use, the actuary should disclose the
following in an appropriate actuarial communication:
a. the intended purpose(s) or use(s) of the unpaid claim estimate, including adjustments
that the actuary considered appropriate in order to produce a single work product for
multiple purposes or uses, if any, as described in section 3.1;
b. significant limitations, if any, which constrained the actuary’s unpaid claim estimate
analysis such that, in the actuary’s professional judgment, there is a significant risk
that a more in-depth analysis would produce a materially different result, as
described in section 3.2;
c. the scope of the unpaid claim estimate, as described in section 3.3;
d. the following dates: (1) the accounting date of the unpaid claim estimate, which is
the date used to separate paid versus unpaid claim amounts; (2) the valuation date of
the unpaid claim estimate, which is the date through which transactions are included
in the data used in the unpaid claim estimate analysis; and (3) the review date of the
unpaid claim estimate, which is the cutoff date for including information known to
the actuary in the unpaid claim estimate analysis, if appropriate. An example of such
communication is as follows: “This unpaid claim estimate as of December 31, 2005
was based on data evaluated as of November 30, 2005 and additional information
provided to me through January 17, 2006.”;
e. specific significant risks and uncertainties, if any, with respect to whether actual
results may vary from the unpaid claim estimate; and
f. significant events, assumptions, or reliances, if any, underlying the unpaid claim

estimate that, in the actuary’s professional judgment, have a material effect on the
unpaid claim estimate, including assumptions provided by the actuary’s principal or
an outside party or assumptions regarding the accounting basis or application of an
accounting rule. If the actuary depends upon a material assumption, method, or
model that the actuary does not believe is reasonable or cannot determine to be
reasonable, the actuary should disclose the dependency of the estimate on that
assumption/method/model and the source of that assumption/method/model. The
actuary should use professional judgment to determine whether further disclosure
would be appropriate in light of the purpose of the assignment and the intended users
of the actuarial communication.
9
4.2 Additional Disclosures—In certain cases, consistent with the intended purpose or use, the
actuary may need to make the following disclosures in addition to those in section 4.1:
a. In the case when the actuary specifies a range of estimates, the actuary should
disclose the basis of the range provided, for example, a range of estimates of the
intended measure (each of such estimates considered to be a reasonable estimate on a
stand-alone basis); a range representing a confidence interval within the range of
outcomes produced by a particular model or models; or a range representing a
confidence interval reflecting certain risks, such as process risk and parameter risk.
b. In the case when the unpaid claim estimate is an update of a previous estimate, the
actuary should disclose changes in assumptions, procedures, methods or models that
the actuary believes to have a material impact on the unpaid claim estimate and the
reasons for such changes to the extent known by the actuary. This standard does not
require the actuary to measure or quantify the impact of such changes.
4.4 Deviation from Standard—If, in the actuary’s professional judgment, the actuary has
deviated materially from the guidance set forth elsewhere in this standard, the actuary can
still comply with this standard by applying the following sections as appropriate:
4.4.1 Material Deviations to Comply with Applicable Law—If compliance with applicable
law requires the actuary to deviate materially from the guidance set forth in this
standard, the actuary should disclose that the assignment was prepared in compliance
with applicable law, and the actuary should disclose the specific purpose of the
assignment and indicate that the work product may not be appropriate for other
purposes. The actuary should use professional judgment to determine whether
additional disclosure would be appropriate in light of the purpose of the assignment
and the intended users of the actuarial communication.
4.4.2 Other Material Deviations—The actuary’s communication should disclose any other
material deviation from the guidance set forth in this standard. The actuary should
consider whether, in the actuary’s professional judgment, it would be appropriate and
practical to provide the reasons for, or to quantify the expected impact of, such
deviation. The actuary should be prepared to explain the deviation to a principal,
another actuary, or other intended users of the actuary’s communication. The actuary
should also be prepared to justify the deviation to the actuarial profession’s
disciplinary bodies.
10
Appendix 1
practice.
Background
This standard defines issues and considerations that an actuary should take into account when
estimating unpaid claim and claim adjustment expense for property and casualty coverages or
hazard risks. The Statement of Principles Regarding Property and Casualty Loss and Loss
Adjustment Expense Reserves was adopted by the Board of Directors of the Casualty Actuarial
Society in May 1988. The Statement of Principles has served as the primary guidance regarding
estimation of unpaid property and casualty claim and claim adjustment expense amounts
providing both principles and considerations related to practice. In conjunction with the
development of this standard, the Statement of Principles is undergoing revision to focus on
principles rather than also discussing considerations.
A decision was made to exclude unpaid claim estimates developed for ratemaking purposes from
the scope of this standard. This was done to avoid placing inappropriate requirements on unpaid
claim estimates in the ratemaking context, and to keep the scope workable by excluding
additional considerations only applicable to the ratemaking context. Ratemaking requires more
of a hypothetical analysis of possible future events than an analysis of the cost of past events.
Hence, the selection and evaluation of assumptions and methods for ratemaking purposes may be
different from the selection and evaluation of such for past event unpaid claim estimates.
Current Practices
Actuaries are guided by the Statement of Principles Regarding Property and Liability Loss and
Loss Adjustment Expense Reserves of the Casualty Actuarial Society. Other ASOPs issued by the
Actuarial Standards Board pertaining to claim and claim adjustment expense estimates have
included ASOP No. 9, Documentation and Disclosure in Property and Casualty Insurance
Ratemaking, Loss Reserving, and Valuations; ASOP No. 20, Discounting of Property and
Casualty Loss and Loss Adjustment Expense Reserves; ASOP No. 23, Data Quality; ASOP No.
36, Statement of Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense
Reserves, and ASOP No. 41, Actuarial Communications. In addition, since 1993, the Casualty
Practice Council of American Academy of Actuaries has published practice notes addressing
current National Association of Insurance Commissioners’ requirements for the statement of
actuarial opinion. The practice notes describe some current practices and show illustrative
wording for handling issues and problems. While these practice notes (and future practice notes
issued after the effective date of this standard) can be updated to react in a timely manner to new
concerns or requirements, they are not binding, and they have not gone through the exposure and
adoption process of the standards of actuarial practice promulgated by the Actuarial Standards
11
Board.
There are also numerous educational papers in the public domain relevant to the topic of unpaid
claim estimates, including those published by the Casualty Actuarial Society. Some of these are
refereed and others are not. While these may provide useful educational guidance to practicing
actuaries, none is an actuarial standard.
12
Appendix 2
Comments on the Second Exposure Draft and Responses
The second exposure draft of this ASOP, Property/Casualty Unpaid Claim Estimates, was issued
in February 2007 with a comment deadline of May 1, 2007. Nine 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 Subcommittee on Reserving carefully
considered all comments received and the Casualty Committee and ASB reviewed (and
modified, where appropriate) the proposed changes.
the responses.
The term “reviewers” in appendix 2 includes the subcommittee, the Casualty Committee, and the
ASB. Also, unless otherwise noted, the section numbers and titles used in appendix 4 refer to
those in the second exposure draft.
GENERAL COMMENTS
Comment Two commentators requested that the standard comment on what would constitute
reasonable review of a previous estimate. Specifically, they were concerned with
actuaries reviewing an earlier estimate with the benefit of hindsight, particularly in a
litigation situation.
Response A sentence has been added to section 3.7.1, Reasonableness, to address this issue.
Section 1.2, Scope
Comment One commentator suggested a clarification to section 1.2, inserting the words “or will
have occurred” immediately after the words “for events that have already occurred.”

Comment One commentator was concerned that the development of unpaid claim estimates for
ratemaking purposes would benefit from much of what is in this standard, despite the
ratemaking scope exclusion in this standard. The recommendation was to retain the
ratemaking exclusion in this standard but to then begin work on a revision that would
remove such an exclusion.
Response The reviewers agree with retaining the ratemaking scope exclusion for this standard but
believe the ratemaking situation is outside their current charge.
13
Comment One commentator suggested adding the words “specific types of” before the word
“recoverables” in the first paragraph of section 1.2, as otherwise it might imply that all
types of recoverables are being discussed.
Response The reviewers disagree with the suggestion, as the intent is to potentially include all
types of recoverables related to unpaid claims, relying on the actuary in section 3.3,
Scope of the Unpaid Claim Estimate, to identify the particular recoverables (if any)
applicable to the given purpose or use of the unpaid claim estimate(s) being developed.
The reviewers made no change.
Comment Two commentators were concerned that some may be confused by the use of the term
“unpaid claim estimates” rather than “reserves.”
Response The reviewers added a paragraph to section 1.2 for clarity.

Comment One commentator was concerned that the scope exclusion for items that “may be a
function of unpaid claim estimates” would inadvertently exclude recoverables that are
included in unpaid claims.
Response The reviewers believe that the standard is sufficiently clear (as reflected in the first
paragraph, last sentence of section 1.2) that such recoverables are covered by the
standard.
Comment One commentator suggested adding “pricing” and “premiums” to the list of items that
are a function of unpaid claim estimates or claim outcomes but not included in this
standard’s scope.
Response The reviewers do not feel this is necessary, as ratemaking is already excluded in the
section’s first paragraph, and this list is not meant to be all inclusive.
Comment Two commentators expressed concern that health insurance written by companies filing
property/casualty annual statements may be included in the scope. One of these
commentators recommended addressing this by explicitly excluding health insurance
from the scope. The other commentator recommended that there was no need for a
separate property casualty standard on unpaid claim estimates, as the property/casualty
perspective could probably be addressed in the current ASOP No. 5, Incurred Health
and Disability Claims. The latter commentator also suggested a definition of
“property/casualty” be provided if a separate property/casualty standard was to be
adopted.
Response The reviewers agree that such confusion may exist, and added a paragraph to section
1.2, Scope.
Comment One commentator stated the end of section 1.2 dealing with conflict with applicable
law, etc. is not necessary, and that the term “provision” (found in section 1.3, Cross
References) is also used in some jurisdictions in place of policy or loss reserves.
Response The reviewers disagree as this wording is standard for all ASOPs and made no change.
14
Section 2.1, Actuarial Central Estimate
Comment One commentator objected to the term “actuarial central estimate,” due to the concern
that it would be a truncated mean in most situations, biased low relative to the expected
value, and recommended that if absolutely needed in the standard that it be relabeled
without the word “actuarial” as part of the label.
Response The reviewers disagree with the deletion of the term “actuarial” and made no change.
Refer to appendix 3.
Comment One commentator was concerned that the use of the term “expected value” in the
definition of “actuarial central estimate” would imply a statistical mean. The
commentator suggested changing “expected value” to “central tendency…such as an
average or an expected value.”
Response The reviewers considered similar wording in the drafting process and made no change.
Refer to appendix 3.
Comment One commentator suggested that different terms be used to describe the results from
methods vs. models. Specifically, the commentator suggested the term “actuarial
central estimate” be limited to describing a result from a method, while the term
“actuarial distribution estimate” or some other term be used to describe the results of a
model.
Response
The reviewers believe the standard allows the actuary to describe the results using
whatever term the actuary sees fit to use (the term “actuarial central estimate” is
provided as just one of many possible terms that can be used) and made no change.
Section 2.3, Coverage
Comment One commentator was concerned that the definition of “coverage” did not include self-
insured first party claims.
Response The reviewers could not envision a situation where a “liability” or claim would exist
with regard to first party self-insured losses. Rather, this was viewed as more of a
reduction in asset value. As such, the reviewers did not agree with the need to address
self-insured first party claims and made no change.
Section 2.5, Method and 2.6, Model
Comment One commentator stated, “There are definite differences between ‘methods’ and
‘models’ that are much more substantial and fundamental than” what is in the proposed
standard. The commentator suggested that more complete definitions be taken from the
CAS Working Party paper on reserve variability.
Response The definitions in the standard are abbreviated versions of what is in the referenced
Working Party paper. The reviewers believe that further elaboration is unnecessary,
although reference to various CAS publications has been added to appendix 1.
Section 2.7. Model Risk
Comment One commentator believed that combining reference to methods and models in the
definition of “model risk” in section 2.7 caused grammatical problems. The suggested
fix was to create a new term, “method risk,” which would also lead to a slight change
in paragraph 3.6.8, Uncertainty.
Response The reviewers believe that common usage is to include what was described as “method
risk” in the category of “model risk.” Hence, a change was made to the definition, but a
separate term (and definition) for “method risk” was not added.
15
Section 2.8, Parameter Risk
Comment One commentator objected to the reference to “methods” in the definition of
“parameter” risk, due to a belief that “since a ‘method’ does not have an underlying
distribution there are no parameters to estimate.”
Response The reviewers believe that this is within the purview of common usage of the terms
“methods” and “parameters,” and made no change.
Comment One commentator suggested adding a definition of “parameter” for consistency
purposes.
Response The reviewers believe that such a definition is unnecessary and made no change.
Section 2.11, Unpaid Claim Estimates
Comment One commentator suggested modifying this definition (and the unpaid claim estimate
analysis definition) to clarify that unpaid claim estimates are synonymous with loss
reserve estimates or unpaid claim liability estimates in financial reporting contexts.
Response The reviewers added language to section 1.2, Scope, for clarity.
Section 3.1, Purpose or Use of the Unpaid Claim Estimate
Comment One commentator agreed with the use of the term “unpaid claim estimate” rather than
“reserve” to avoid the financial reporting context, but believed that reference to the
“intended purpose” of the estimate forced the discussion back solely to reserves and
financial reporting. The suggested fix was to remove any discussion of “intended
purpose” in the standard, and focus solely on estimating the distribution of possible
future outcomes in the standard. (This concern also led to minor changes suggested in
section 1.2, Scope.)
Response The reviewers disagree that the only “intended purposes” would be those relating to
financial reporting. Other “intended purposes” (some of which are listed in section 3.1)
include merger/acquisition-related valuations, scenario analyses for risk management
purposes, valuations as part of commutation discussions, etc. The reviewers made no
change.
Comment The last sentence of this section states “the actuary…should consider adjustments to
accommodate the multiple purposes to the extent…it is appropriate and practical” to do
so. One commentator asked if the intent was for the actuary to adjust the estimate or to
provide different estimates for each purpose/use.
Response The reviewers discussed different possible approaches to addressing this situation and
decided that the standard should be silent on whether to produce multiple estimates,
produce a single estimate that attempts to accommodate both purposes (assuming that
this is possible), or some other option. Instead, the standard requires the actuary to
consider some adjustment and leaves it up to the actuary’s professional judgment as to
whether or what kind of adjustment to make. The reviewers made no change.
16
Section 3.2, Constraints on the Unpaid Claim Estimate Analysis
Comment One commentator suggested replacing “staff” with “resources” in this section as to be
more general.
Response The reviewers agree and changed the language.

Comment One commentator suggested replacing “result” with “estimate” in this section so that it
is more consistent with the rest of the ASOP.
Response The reviewers disagree. As worded, “result” could incorporate other parts of the
analysis beyond the estimate, such as analysis of uncertainty (if included in the
assignment’s scope). The reviewers made no change.
Comment Where there is a significant risk of the type described in this section, one commentator
recommended that this situation be a required disclosure.
Response The reviewers disagree noting that required disclosure is already addressed in section
4.1(b) and made no change.
Section 3.3, Scope of the Unpaid Claim Estimate
Comment One commentator was concerned that the wording in 3.3(a)(1) may cause actuaries to
limit themselves to only the alternatives listed. Alternate wording was suggested.
Response The reviewers agree and changed the wording in response.

Comment One commentator suggested an editorial change for section 3.3(c), whereby “is to be
considered” would be changed to “is considered.”
Response The reviewers disagree with the suggestion, as section 3.3 addresses identification of
the scope of the work in advance of the actual analysis. Hence, “is to be” is more
appropriate than “is” in this context. The reviewers made no change.
Comment One commentator suggested replacing the phrase “any other items” in section 3.3(f)
with “other items” or “any other significant items,” due to a concern that the current
wording would be too all inclusive and could result in excessive procedures.
Response The reviewers disagree, as the reference at the end of the paragraph (“needed to
describe the scope sufficiently”) already addresses the stated concern, and made no
change.
Comment One commentator suggested replacing “material to the actuary” with “material to the
estimate” in section 3.5, Nature of Unpaid Claims, first paragraph.

Section 3.6, Unpaid Claim Estimate Analysis
Comment One commentator was concerned with the possible ambiguity with the term “factors” in
this paragraph.
Response The reviewers believe that this possible ambiguity is sufficiently addressed by the
discussion in section 3.6.
17
Comment One commentator suggested that additional guidance on unpaid claim adjustment
expenses be provided for situations involving prepaid expenses and third party
administrators (TPAs).
Response The standard already includes claim adjustment expenses in its scope, as “unpaid
claims” is defined in section 1.1, Purpose, as including the related claim adjustment
expenses. The reviewers also believe that prepayments to TPAs for the expense of
adjusting claims is a specific situation and, as such, is too detailed for the general
guidance in this standard. The reviewers made no change.
Section 3.6.1, Methods and Models
Comment One commentator stated that “we should be doing all we can to foster the rigorous use
of stochastic models in favor of traditional deterministic methods” and objected to the
use of “methods” and “models” as essentially interchangeable terms.
Response The reviewers consider judgment to be a major component of the application of both
methods and models. As such, the reviewers do not consider one to be clearly superior
to the other in all situations. The reviewers made no change.
Comment In section 3.6.1, in the phrase that says, “For example, different coverages within a line
of business may require different methods,” one commentator questioned whether the
word “require” was appropriate.
Response The reviewers believe that the word “require” is appropriate in this context, given that
it is used in the context of an example and not in providing a direct requirement. The
reviewers made no change.
Comment One commentator suggested wording with regard to required disclosure if multiple
methods were not used for “any component.” The suggestion limited the disclosure to
only material components. The same commentator also asked for clarification of the
term “component.”
Response The reviewers reworded the section to clarify that the requirement only existed for
material components. The suggested clarification of the term “component” was not
adopted, as the reviewers felt that it would lead to a list of component examples that
would never be complete for all applications.
Section 3.6.3, Data
Comment One commentator suggested adding guidance that “additional liabilities may be
necessary if the data does not balance to recorded claim expenses, i.e., if there is a
timing difference between when a claim is shown as paid in the actuarial data and when
it is recorded by the principal.”
Response The reviewers believe that this is a specific situation and is covered by the general
guidance in section 3.6.1(c). The reviewers made no change.
Section 3.6.6, External Conditions
Comment One commentator suggested that section 3.6.6, External Conditions, focused on past or
current conditions, while section 3.6.7, Changing Conditions, focused on current or
future conditions, and that these time horizons might be clarified in the standard.
Response The reviewers do not agree that the time horizons in the two sections are constrained as
suggested by the commentator and made no change.
18
Section 3.6.7, Changing Conditions
Comment Two commentators suggested that the actuary should be required to evaluate the
reasonableness of management’s representations (as referred to in section 3.6.7) under
certain circumstances. One of these commentators stated the reference to “reasonable
representations” in section 3.6.7 already implies the actuary is required to perform such
an evaluation but suggested the standard state this requirement explicitly.
Response The reviewers disagreed that the standard should require an actuary to perform an
evaluation affirming the reasonableness of management’s representations and have
revised the language to indicate the actuary may rely upon their representations unless,
in the actuary’s professional judgment, they appear to be unreasonable.
Section 3.6.8, Uncertainty
Comment One commentator suggested that examples of uncertainty measures be provided.
Response The reviewers did not believe that such a list was necessary and made no change.
Comment One commentator suggested that the original reference to the covariance of multiple
component’s estimates implied particular statistical tests or relationships that may not
be amenable to testing. Replacement wording was suggested.
Response The reviewers acknowledge the concern and developed new wording that addressed the
concern expressed.
Comment One commentator stated that since the concept of a risk margin is implied by this
section, this section should discuss risk margins explicitly.
Response The reviewers disagree that discussion of uncertainty requires discussion of a risk
margin and made no change.
Section 3.7.1, Reasonableness
Comment One commentator asked if the actuary should also be assessing the reasonableness of
the estimate relative to its intended purpose.
Response The reviewers believe that the required disclosures in section 4.1, Actuarial
Communications, and ASOP No. 41, Actuarial Communications, sufficiently address
the commentator’s concerns and made no change.
19
Section 3.7.2, Multiple Components
Comment One commentator stated, “I am not certain how ‘estimates of the multiple components’
can be consistent. I can see how the assumptions used can be consistent, the methods
can be consistent, or they can be consistently developed.” As a result, the commentator
suggested that this section be clarified.
Response The reviewers believe that the correct focus is on consistency of the estimates of the
multiple components as stated. It is not always apparent whether or not the assumptions
and/or models/methods underlying the estimates are consistent until the results of those
assumptions/models/methods are evaluated. For example, an estimate of gross claim
liabilities and a separate estimate of net claim liabilities may each seem to be
reasonable when evaluated individually based on the underlying
assumptions/models/methods used in their estimation, but the resulting relationship
between gross and net estimates may be found to be unreasonable, indicating that the
estimates were not reasonably consistent. The reviewers made no change.
Section 3.7.3, Presentation
Comment One commentator recommended that the standard require that the methods and/or
models be appropriate to the intended purpose of the estimate, and that this is more
important than requiring such of the estimate presentation.
Response The wording in section 3.6.1, Methods and Models, already addresses this issue and no
change was made.
Section 4.1, Actuarial Communications
Comment One commentator noted that the definition of “valuation date” found in section 4.1(d)
differed from that found in ASOP No. 41, Actuarial Communications, “the date as of
which the liabilities are determined.”
Response The reviewers believe that the definition in section 4.1(d) of this standard conforms
with standard usage of the term among casualty actuaries and made no change.
Comment One commentator suggested further elaborating on this disclosure requirement by
requiring “specific comments regarding the major factors or particular conditions
applicable to the unpaid claim estimate.” Otherwise, the commentator was concerned
that this would result in too many boilerplate disclosures about the risk.
Response The reviewers acknowledge the concern and addressed it by adding the word “specific”
before “significant” in section 4.1(e).
Section 4.2, Additional Disclosures
Comment Where the unpaid claim estimate is an update of a previous estimate, one commentator
suggested requiring that the amount of change in estimate be disclosed, with reasons
provided whenever the change was significant and the reasons for the change were
known.
Response The reviewers did not agree and made no change.
20
Appendix
Appendix 1—Background
Comment One commentator suggested a change to appendix 1 regarding the proposed revision to
the CAS Statement of Principles Regarding Property and Casualty Loss and Loss
Adjustment Expense Reserves. The commentator recommended that the wording be
changed from “focus more narrowly on principles” to “focus more broadly on
principles.”
Response The reviewers disagree, as the proposed revision would remove various sections in the
current Principles statement, including extensive discussion on Considerations, and
made no change.
21
Appendix 3
practice.
Comments on “Actuarial Central Estimate”
During this standard’s development, the “actuarial central estimate” concept and definition
elicited the most comments of any of the topics covered. The subcommittee believes that the
issues raised by this topic are worthy of expanded discussion. The following is meant to provide
additional clarity to these key concepts.
This appendix is organized by first providing a background as to the originally proposed wording
regarding the actuarial central estimate, followed by a summary of comments received on the
actuarial central estimate proposal and subcommittee responses.
Background
The term “actuarial central estimate” was originally created by the subcommittee due to a desire
to have a “default” intended measure for the unpaid claim estimate.
The standard requires that the actuary identify (and disclose) the intended measure. The
subcommittee had debated whether or not to require disclosure of the estimate’s intended
measure in all cases, or to allow for a default intended measure.1 If a default did exist, the
subcommittee felt that it needed to allow for many of the traditional actuarial estimation
methods. But many traditional actuarial methods do not explicitly define the intended measure
that results from their application. Implicitly, they attempt to produce a central estimate2 of some
sort with regard to the distribution of possible outcomes, but the resulting intended measure does
not have a well-defined statistical definition. Hence, if the standard were to include a default
intended measure, the subcommittee believed that it would have to create a new term and a
corresponding definition.
As to the definition of the term, it is generally agreed that most traditional actuarial methods are
meant to produce some measure of central tendency. But what measure? There are several
different measures of central tendency, including (for example) mean, median, mode, and
truncated mean. The subcommittee believed that “mean” best represented the central tendency
measure implicitly underlying most traditional actuarial methods, even if such traditional
methods are not statistical in nature. (For further discussion, this will be referred to as a
“conceptual mean” rather than a “statistical mean.”)
Next, the subcommittee considered the issue of whether this conceptual mean is intended to
1 Note that several accounting frameworks use the term “measurement objective” for this concept, rather than
“intended measure.”
2 Note that “central estimate” does not imply a midpoint. One respondent suggested using the words “medium or
intermediate” estimate to avoid any incorrect interpretation that a “central estimate” must be a midpoint.
22
incorporate the entire range of all possible outcomes. In some lines of business, the
subcommittee felt that this would be problematic due to the potential for doomsday and/or
systemic shocks in the tail of the distribution. For example, it is doubtful whether any actuarial
estimate (stochastic or deterministic) in 1999 considered the liability for Y2K events to the
extent they were forecasted at that time. Many of those Y2K-event liability estimates proved to
be overly pessimistic, and most financial statement preparers did not incorporate such estimates
in their financial statements prior to January 1, 2000. Similarly, estimates of future mass torts
that have yet to be identified (for example, “the next asbestos”) are generally viewed as not
reliably estimable. Hence, the subcommittee felt that requiring that the entire range of all
possible outcomes be considered in the estimation of the mean is unrealistic.
In looking for other approaches for dealing with this situation, the subcommittee looked at
developments in other parts of the world. The subcommittee found that the term “central
estimate” was being used in various locations to describe the intended measure of traditional
methods.3 4 Initial drafts of this standard also used the same term, but it was eventually decided
that the phrase “central estimate” was too generic, with risk of confusion and misinterpretation
due to common meanings of the term “central.” The subcommittee felt that a new term needed to
be developed that conveyed the same concepts but without the same risk of misinterpretation.
This led to the term “Actuarial Central Estimate,” which was designed to be non-generic, and
hence capable of being defined solely by this standard.
As a result of the deliberations discussed above, the subcommittee had developed a rudimentary
definition (“conceptual mean,” excluding remote or speculative outcomes) and a name for a
default intended measure consistent with the desired default. The resulting paragraph in the first
exposure draft was as follows:
2.1 Actuarial Central Estimate—An estimate that represents a mean excluding remote or
speculative outcomes that, in the actuary’s professional judgment, is neither optimistic nor
pessimistic. An actuarial central estimate may or may not be the result of the use of a
probability distribution or a statistical analysis. This definition is intended to clarify the
concept rather than assign a precise statistical measure, as commonly used actuarial
methods typically do not result in a statistical mean.
3 “‘Central Estimate’: an estimate that contains no deliberate or conscious over or under estimation,” from
http://www.actuaries.org.nz/publications/PS4%20General%20Insurance.pdf#search=%22central%20estimate%20ac
tuarial%22, September 5, 2006
4 As the recently modified AASB1023 now requires companies to disclose the central estimate of their liabilities
(that is the 50% PoS or “best estimate” figure). INFORMATION FOR OBSERVERS, IASB Meeting: 19 April
2005, London, Topic: Insurance Contracts - Education session (Agenda item 3)
23
Comments and Responses
The comments from this standard’s first exposure draft on “actuarial central estimate” and its
later usage could generally be grouped into the following five categories:
• Concern with the use of the term “mean” in the “actuarial central estimate” definition,
as doing so may imply statistical approaches and distributions regardless of the
caveats of such in the proposed definition.
• Concern with the exclusion of “remote or speculative” outcomes in the “actuarial
central estimate” definition, as doing so may lead to an estimate biased low (relative
to a mean reflecting the entire distribution of possible outcomes).
• Desire for the default to allow for or possibly even promote conservatism.
• Desire that the standard promote statistical techniques.
• Preference for the term “best estimate” over “actuarial central estimate.”
As a result of the comments that were received, the subcommittee decided to eliminate the
concept of prescribing a default measure since opinions differed widely on what the default
measure ought to be. It was felt that requiring the actuary to identify the intended measure in all
circumstances allowed the actuary to describe the intended measure in the actuary’s own words.
However, the subcommittee felt that it was important to have terminology for the measure that
results from traditional actuarial methods where the actuary is conceptually aiming for a mean
estimate. The subcommittee therefore retained the term ”actuarial central estimate,” revised the
definition and included it as an example of an intended measure in the non-exhaustive list that
was provided in section 3.3(a)(1).
More detailed responses to the comments are shown below:
Comment:
Some commentators objected to the use of the term “mean” in the definition of “actuarial central
estimate,” as they believed that it was impossible to use the term without conveying an implied
statistical approach.
Response:
The final definition replaced the term “mean” with “expected value.” Additional clarification is
provided in 3.3(a)(1), where it states that the “description [of actuarial central estimate] is
intended to clarify the concept rather than assign a precise statistical measure, as commonly used
actuarial methods typically do not result in a statistical mean.”
24
Comment:
Some commentators had a concern with the exclusion of “remote or speculative” outcomes in the
originally proposed “actuarial central estimate” definition, as they felt that this would lead to
estimates that were biased low (relative to a statistical mean reflecting the entire distribution).
Response:
The subcommittee believes that nearly all methods currently in use for estimating unpaid claims,
whether stochastic or deterministic, do not reflect all possible outcomes, nor should they
necessarily do so. The major concern of the subcommittee in this area are those outcomes where
reliable determination of the outcomes’ contribution to a mean estimate are so problematic as to
be speculative and which are not expected to be normal or recurring on a regular basis.
Examples include the Y2K concerns prior to January 1, 2000, and estimates of future mass torts
that have yet to be identified (for example, “the next asbestos”). This concern is also limited to
those outcomes that could be material to an expected value estimate.
The exposure draft did not and the final standard does not require exclusion of such outcomes in
the determination of the unpaid claim estimate, but the subcommittee believes that the actuary
should consider whether truly all possible outcomes are included in the actuary’s unpaid claim
estimate (where the intended measure purports to reflect the entire distribution of possible
outcomes). With regard to the “actuarial central estimate” definition, the subcommittee has
eliminated the terms “speculative” and “remote,” and has replaced them with wording that
focused more directly on the concern that reliable estimates of such outcomes cannot be
produced.
Comment:
Some commentators were concerned that the “actuarial central estimate” definition precluded the
use of conservatism (described in some instances as a margin for adverse deviation) in the
unpaid claim estimate intended measure.
Response:
This standard was meant to apply to work done in a variety of situations. In many of those
situations, the purpose and/or use of the unpaid claim estimate will dictate whether a margin for
adverse deviation is required, allowed or prohibited. The subcommittee does not believe it is the
role of the actuary or ASB to dictate a certain singular treatment of margins for adverse deviation
for all unpaid claim estimates. In fact, in certain instances the subcommittee believes that the
treatment of such in the unpaid claim estimate is clearly not part of the role of the actuary.
The subcommittee also believes that the actuary should clearly disclose the basis of the unpaid
claim estimate regarding all the items listed in section 3.3. Hence, in those instances where the
unpaid claim estimate includes a margin for adverse deviation, the presence of such margin
should be explicitly disclosed.
25
Comment:
Some of the commentators wanted the standard to advocate only certain techniques for
calculating any unpaid claim estimate, regardless of the intended measure. In particular, these
comments wanted the standard to dictate the use of stochastic models.
Response:
The subcommittee believes the choice of methodology should be determined by the actuary.
26
Actuarial Standard
of Practice
No. 44
Selection and Use of Asset Valuation Methods

for Pension Valuations
Developed by the
Adopted by the
September 2007
(Doc. No. 108)

ASOP NO. 44—September 2007
TABLE OF CONTENTS

1.1 Purpose 1
1.2 Scope 1
2.2 Actuarial Value of Assets 2
2.3 Asset Valuation Method 2
2.4 Market Value 2
2.6 Prescribed Asset Valuation Method 2
2.7 Principal 2

3.1 Overview 2
3.2 Considerations in Selecting a Method 2
3.2.1 Purpose and Nature of the Measurement 3
3.2.2 Objectives of the Principal 3
3.2.3 Multiple Asset Valuation Methods 3
3.2.4 Adjustment of Asset Values for Timing Differences 3
3.2.5 Use of Actuarial Assumptions 3
3.2.6 Additional Considerations 4
3.3 Selecting Methods Other Than Market Value 4
3.4 Using Methods Other Than Market Value 5
3.4.1 Bias 5
3.4.2 Different Treatment of Realized and Unrealized Gains and Losses 6
3.5 Assets that are Difficult to Value 6
3.6 Reviewing the Asset Valuation Method 7
3.7 Level of Refinement 7
3.9 Documentation 7

4.1 Disclosures in Actuarial Reports 7
4.1.1 Asset Valuation Method 8
4.1.2 Market Value and Actuarial Value of Assets 8
ii
4.1.3 Changes in Asset Valuation Method 8

4.1.4 Prescribed Asset Valuation Method 8
4.1.5 Bias 8
4.1.6 Different Treatment of Realized and Unrealized Gains and Losses 8
4.2 Disclosures in Other Actuarial Communications 9
4.3 Deviation 9

Background 10
Appendix 2—Comments on the Fourth Exposure Draft and Responses 11
iii
September 2007

Actuarial Standards Board and Other Persons Interested in the Selection and Use
of Asset Valuation Methods for Pension Valuations
This document contains the final version of ASOP No. 44, Selection and Use of Asset Valuation
Methods for Pension Valuations.
Background
3. This ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension
Valuations; and
iv
The comment letters on the exposure drafts of this ASOP led the Pension Committee to conclude
that both the use of market value and the use of a variety of asset valuation methods other than
market value are generally accepted actuarial practices. In recognition of the many circumstances
in which the actuary does not select the asset valuation method and the many different asset
valuation methods that are in widespread use, this ASOP provides guidance in selecting
appropriate methods and, in some instances, requires disclosure of characteristics of the asset
valuation method, regardless of who selected it.
The ASOP also separates considerations relevant to the choice of any asset valuation method,
including market value, from those considerations that are relevant only to asset valuation
methods other than market value.
This ASOP is intended to accommodate the concepts of financial economics as well as

traditional actuarial practice.
The first exposure draft of this ASOP, then titled Selection of Asset Valuations for Pension
Valuations, was issued in December 2001, with a comment deadline of May 15, 2002.
Thirty-four comment letters were received and considered in developing modifications that were
reflected in the second exposure draft.
The second exposure draft of this ASOP was issued in October 2003 with a comment deadline of
April 30, 2004. Fifteen comment letters were received and considered in developing
modifications that were reflected in the third exposure draft.
The third exposure draft of this ASOP was issued in September 2005 with a comment deadline
of February 28, 2006. Five comment letters were received and considered in developing
modifications that were reflected in the fourth exposure draft.
Fourth Exposure Draft
The fourth exposure draft of this ASOP was issued in August 2006 with a comment deadline of
March 1, 2007. The Pension Committee carefully considered the five comment letters received.
The key changes made to the final standard in response to these comment letters are as follows:
v
1. Section 3.4.1(b), Bias, which addressed possible bias in the de facto asset valuation
method associated with changes in the asset valuation method, was removed. Instead,
section 4.1.3, Changes in Asset Valuation Method, was expanded to require the actuary
to disclose the reasons for any changes in asset valuation method.
2. Section 4.1.5, Bias, was revised to provide an example of a disclosure that describes
significant systematic bias as a characteristic of an asset valuation method without using
the word “bias.”
detailed discussion of the comments received and the reviewers’ responses.
suggestions on the exposure drafts.
The Pension Committee thanks former committee members Thomas P. Adams, Arthur J.
Assantes, Lawrence Deutsch, David L. Driscoll, Bruce C. Gaffney, Lawrence A. Golden,
Marilyn F. Janzen, Daniel G. Laline Jr., John F. Langhans, Michael B. Preston, William A.
Reimert, Phillip A. Romello, Joan M. Weiss, and Ruth F. Williams for their assistance with
drafting this ASOP.

vi

vii
SELECTION AND USE OF ASSET VALUATION METHODS

FOR PENSION VALUATIONS
1.1 Purpose—This actuarial standard of practice (ASOP) provides guidance to the actuary
when performing professional services with respect to the following:
a. selection of an asset valuation method for purposes of a defined benefit pension

plan actuarial valuation; and
b. appropriate disclosures regarding the asset valuation method used.
1.2 Scope—This standard applies to the actuary when performing professional services with
respect to selecting or using an asset valuation method for any defined benefit pension
plan that is not a social insurance program 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). Throughout this standard, any reference to selecting an asset
valuation method also includes giving advice on selecting an asset valuation method. For
instance, the actuary may advise the plan sponsor on selecting an asset valuation method,
where the plan sponsor is responsible for selecting the method.
To the extent that the guidance in this standard may conflict with ASOP No. 4,
Measuring Pension Obligations and Determining Pension Plan Costs or Contributions,
ASOP No.4 will govern.
1
2.1 Actuarial Valuation—The measurement of relevant pension obligations and, when

applicable, the determination of the actuarial value of assets, periodic costs, or
contributions.
2.2 Actuarial Value of Assets—The value of pension plan investments and other property,
used by the actuary for the purpose of an actuarial valuation (sometimes referred to as
valuation assets or market-related value of assets).
2.3 Asset Valuation Method—A method used by the actuary to determine the actuarial value
of assets.
2.4 Market Value—The price that would be received to sell an asset in an orderly transaction
between market participants at the measurement date (sometimes referred to as fair
value).
2.5 Measurement Date—The date as of which the actuarial value of assets is determined
(sometimes referred to as the valuation date).
2.6 Prescribed Asset Valuation Method—A specific asset valuation method that is mandated
by law, regulation, or other binding authority. For purposes of this standard, the plan
sponsor would be considered a binding authority to the extent that law, regulation, or
accounting standards give the plan sponsor responsibility for selecting such an asset
valuation method.
2.7 Principal⎯A client or employer of the actuary.
3.1 Overview—The measurement of a pension plan’s assets and the relationship between the
plan’s assets and its obligations are integral to the valuation process. The asset valuation
method potentially affects the timing and amount of future plan costs or contributions and
the plan’s ability to satisfy its benefit obligations. Consequently, the actuary should use
professional judgment when selecting an asset valuation method.
3.2 Considerations in Selecting a Method—The actuary should consider the following factors
2
when selecting an asset valuation method:
3.2.1 Purpose and Nature of the Measurement—The actuary should consider the
purpose and nature of the measurement when selecting an asset valuation method.
It may be appropriate for the actuary to select different methods for different
purposes. For example, for purposes of determining contributions to an ongoing
plan, the actuary may consider selecting an asset valuation method that smoothes
the effects of volatility in market value on the pattern of contributions. As a
second example, for measurements in conjunction with a plan termination, the
actuary should consider selecting an asset valuation method that produces an
actuarial value of assets that represents the value of assets expected to be
available for distribution (i.e., net of any significant liquidation or surrender
charges reasonably expected to be incurred).
3.2.2 Objectives of the Principal—The actuary should consider the objectives of the
principal to the extent such objectives have been communicated to the actuary, are
relevant to, and not inconsistent with, the purpose of the measurement, and are
consistent with the actuary’s responsibilities under the Code of Professional
Conduct. For example, when the principal is a plan sponsor and the purpose of the
measurement is to determine annual contributions, the actuary should consider
plan sponsor objectives such as a desire for stable or predictable costs or
contributions, or a desire to achieve a target funding level within a specified time
frame.
3.2.3 Multiple Asset Valuation Methods—The actuary may select different asset
valuation methods for different classes of assets. For example, the actuary may
determine that it is appropriate to use a smoothing method for equity investments
and market value for fixed income investments.
3.2.4 Adjustment of Asset Values for Timing Differences—Sometimes asset values as

of the measurement date are not available. In these situations, the actuary should
select an asset valuation method that adjusts the value of the assets for the time
between the date as of which asset values are available and the measurement date.
Such an asset valuation method may reference appropriate published asset indices
or involve an adjustment using another reasonable method.
3.2.5 Use of Actuarial Assumptions—To the extent that actuarial assumptions are used
as part of an asset valuation method, the actuary should be guided by ASOP
No. 27, Selection of Economic Assumptions for Measuring Pension Obligations,
and No. 35, Selection of Demographic and Other Noneconomic Assumptions for
Measuring Pension Obligations, in selecting those assumptions. Furthermore, the
assumptions should be consistent with the other assumptions used in the actuarial
valuation.
3
It may be appropriate for the actuary to select different assumptions for different
purposes. For example, the actuary may project asset values for a few months
using an assumption that differs from a long-term expected return assumption.
3.2.6 Additional Considerations—When selecting an asset valuation method, the

actuary should consider other known, relevant factors such as the following:
a. the plan’s investment policy and actual investment practices;
b. the characteristics of the asset classes in which the plan is invested (for
example, the volatility of the return of each asset class and the correlation
of the return with changes in the value of plan obligations);
c. the plan’s expected future cash flows and liquidity needs;
d. the period of time over which the plan’s assets are expected to be held;
and
e. the characteristics of the method used to measure the pension obligation

(for example, whether the pension obligation is measured on a mark-to-
market basis).
3.3 Selecting Methods Other Than Market Value⎯If the considerations in section 3.2 have
led the actuary to conclude that an asset valuation method other than market value may
be appropriate, the actuary should select an asset valuation method that is designed to
produce actuarial values of assets that bear a reasonable relationship to the corresponding
market values. The qualities of such an asset valuation method include the following:
a. The asset valuation method is likely to produce actuarial values of assets that are
sometimes greater than and sometimes less than the corresponding market values.
b. The asset valuation method is likely to produce actuarial values of assets that, in
the actuary’s professional judgment, satisfy both of the following:
1. The asset values fall within a reasonable range around the corresponding
market values. For example, there might be a corridor centered at market
value, outside of which the actuarial value of assets may not fall, in order
to assure that the difference from market value is not greater than the
actuary deems reasonable.
2. Any differences between the actuarial value of assets and the market value
are recognized within a reasonable period of time. For example, the
actuary might use a method where the actuarial value of assets converges
4
toward market value at a pace that the actuary deems reasonable, if the
investment return assumption is realized in future periods.
In lieu of satisfying both (1) and (2) above, an asset valuation method could
satisfy section 3.3(b) if, in the actuary’s professional judgment, the asset valuation
method either (i) produces values within a sufficiently narrow range around
market value or (ii) recognizes differences from market value in a sufficiently
short period.
A plan’s investment policy may provide that fixed-income securities are expected to be
held to maturity and holding such securities to maturity is not inconsistent with the plan’s
investment practice and expected cash flow needs. In such situations, an asset valuation
method that uses amortized cost for such securities is deemed to bear a reasonable
relationship to market value relative to those assets.
3.4 Using Methods Other Than Market Value—When using an asset valuation method other
than market value, regardless of who selected the method, the actuary should consider the
following:
3.4.1 Bias⎯If the asset valuation method has significant systematic bias, the actuary
should disclose such bias in accordance with section 4.1. An asset valuation
method has significant systematic bias if, in the actuary’s professional judgment,
the method’s design is expected to produce a distribution of actuarial values that
is skewed toward understatement or overstatement relative to the corresponding
market values.
The following paragraphs are intended to clarify the meaning of bias for purposes
of this standard.
a. An asset valuation method does not have significant systematic bias solely
because it has one or both of the following characteristics:
1. the asset valuation method would produce actuarial values of

assets that are consistently less than (or greater than) the
corresponding market values during sustained periods of
increasing (or decreasing) market values; or
2. the asset valuation method would produce actuarial values of

assets that approach the corresponding market values
asymptotically, assuming the investment return assumption is
realized in future periods.
b. Examples of asset valuation methods that have significant systematic bias

5
1. an asset valuation method that is designed to produce a value

consistently below market value if, in all time periods relevant to
the application of the asset valuation method, the actual return on
market value of the assets subject to the asset valuation method
were equal to the actuary’s expected return on those assets (such as
a method that immediately recognizes interest and dividends but
defers recognition of realized and unrealized capital gains and
losses; and
2. an asset valuation method that produces an actuarial value of assets

equal to a smoothed value that is subject to an asymmetrical
corridor around market value, such as not more than 105% of
market value or less than 80% of market value.
3.4.2 Different Treatment of Realized and Unrealized Gains and Losses⎯If the asset
valuation method treats realized gains and losses differently from unrealized gains
and losses, the actuary should disclose this difference in accordance with section
4.1. An asset valuation method treats realized gains and losses differently from
unrealized gains and losses if it would produce different results depending upon
whether an asset is sold or held. When such a method is used, an increase in asset
turnover, as might happen if the plan changes investment managers, can cause a
significant change in the actuarial value of assets.
Examples of asset valuation methods that treat realized gains and losses
differently from unrealized gains and losses include the following:
a. an asset valuation method that uses the average of book value and market
value;
b. an asset valuation method that immediately recognizes realized gains and

losses and gradually recognizes unrealized gains and losses; and
c. an asset valuation method that uses the product of the book value of assets
on the measurement date multiplied by a five-year average of the ratio of
market value to book value.
3.5 Assets that are Difficult to Value—Some assets do not have a readily established market
value, such as certain insurance contracts, real estate, or other property. In determining
the value of such assets, if audited financial statements do not provide an appropriate
market value, the actuary may consider appraisals by qualified independent experts,
recent sales of similar assets, the present value of reasonably expected future cash flows,
or other appropriate methods. The value, so determined, may be treated as market value
for purposes of this standard.
6
3.6 Reviewing the Asset Valuation Method—Once an asset valuation method has been
selected for a particular purpose, at each subsequent measurement date, the actuary
should consider whether the selected asset valuation method continues to be appropriate
for that purpose. The actuary is not required to do a complete reassessment at each
measurement date. However, if a significant change in the principal’s objectives has been
communicated to the actuary (see section 3.2.2), the actuary should review the
appropriateness of the asset valuation method. Furthermore, if the asset valuation method
is other than market value, the actuary should review the appropriateness of the asset
valuation method if an event such as the following has occurred:
a. a significant change in the plan provisions affecting cash flow (such as adding a
lump sum payment option, or freezing or terminating the plan), in the actuarial
cost method or funding policy, or in participant demographics;
b. a significant change in the plan’s investment policy (such as adding a new asset
class or significantly changing the proportion of assets invested in each class);
c. a prolonged significant deviation from market value; or
d. changes in relevant law, regulations, or accounting guidance.
3.7 Level of Refinement—The actuary should exercise professional judgment in establishing

an appropriate balance between refined methodology and materiality. The actuary is not
required to use a particular type of valuation method or to select a highly refined method
when it is not expected to produce materially different results than would a less refined
method. For example, it may be reasonable to assume that benefit payments are evenly
distributed throughout the year, rather than reflecting the actual timing of each payment.


4.1 Disclosures in Actuarial Reports—When issuing an actuarial report, as defined in ASOP

No. 41, the actuary should follow the applicable disclosure requirements in ASOP No. 4,
Measuring Pension Obligations and Determining Plan Costs or Contributions, and
7
ASOP No. 23. In addition, the actuary should disclose the following:
4.1.1 Asset Valuation Method—The actuary should describe each asset valuation
method used in the measurement in sufficient detail to permit another actuary
qualified in the same practice area to reproduce the calculation if the actuary were
provided with the necessary asset data.
4.1.2 Market Value and Actuarial Value of Assets—The actuary should disclose the
market value and actuarial value of assets. If multiple asset valuation methods are
used, in accordance with section 3.2.3, the actuary should disclose the market
value and actuarial value of the assets subject to each asset valuation method.
With respect to assets whose market value is determined under section 3.5,
disclosure shall include the amount of such assets and a description of how the
value of such assets was determined.
4.1.3 Changes in Asset Valuation Method—The actuary should describe changes, if

any, in the asset valuation method from the method previously used for the same
measurement purpose and the reasons for those changes. The actuary should
disclose the general effects of any such changes in words or by numerical data, as
appropriate.
4.1.4 Prescribed Asset Valuation Method—The actuary’s communication should state

the source of any prescribed asset valuation method, including any assumption
used as part of the asset valuation method. In addition, in accordance with ASOP
No. 4, the actuary should evaluate whether a prescribed asset valuation method
selected by the plan sponsor is reasonable for the purpose of the measurement
and, if necessary, make appropriate disclosure.
4.1.5 Bias⎯If, in the actuary’s professional judgment, the asset valuation method has
significant systematic bias toward understatement or overstatement relative to
market value, as described in section 3.4.1, the actuary should disclose the
direction of the bias. For example, if the asset valuation method used to determine
the plan’s contribution requirements is one of the methods described in section
3.4.1(b), the disclosure might state the following: “A characteristic of this asset
valuation method is that, over time, it is more likely to produce an actuarial value
of assets that is less than the market value of assets.”
4.1.6 Different Treatment of Realized and Unrealized Gains and Losses⎯If the asset
valuation method treats realized gains and losses differently from unrealized gains
and losses, the actuary should disclose this characteristic and the possible
consequences of the use of such an asset valuation method. For example, the
disclosure might state the following: “This asset valuation method treats
unrealized gains and losses differently from realized gains and losses. Thus, asset
8
turnover can cause a significant change in the actuarial value of assets.”
4.2 Disclosures in Other Actuarial Communications⎯The actuary should be guided by

ASOP No. 41 when considering which of the disclosures in section 4.1 should be
included in an actuarial communication that is not in the form of an actuarial report.
4.3 Deviation —If, in the actuary’s professional judgment, the actuary has deviated
materially from the guidance set forth elsewhere in this standard, the actuary can still
comply with this standard by applying the following sections as appropriate:


9
Appendix 1
practice.
Background
Historically, actuaries have selected various methods to determine the actuarial value of pension
plan assets for different measurement purposes.
Current Practices
Actuaries use both market value and asset valuation methods other than market value. The latter
asset valuation methods are usually used for smoothing the effects of volatility in market value
on plan costs or contributions, or achieving consistency between the valuation of assets and
obligations.
An asset valuation method that is intended to smooth the effects of market volatility typically
reflects the market value of plan assets in some fashion. This is accomplished through a variety
of commonly used techniques, such as the following:
1. smoothing some components of the return on market value or the difference between
actual returns on market value and expected returns;
2. requiring that the actuarial value of assets fall within a specified range, such as 80% to
120%, of the market value; or
3. recognizing differences between the actuarial and market values of assets over a specified
time schedule.
Actuaries often select different asset valuation methods for different purposes, such as for
determining cash contribution requirements, determining employer accounting costs, or
assessing the plan’s funded status upon plan termination.
Asset valuation methods have been the subject of growing attention, influenced by regulatory
trends and consideration of the concepts of financial economics. Actuaries who apply a financial
economics approach generally advocate the use of market measurement of assets, while
traditional actuarial practice includes both the use of market value and the use of a variety of
asset valuation methods other than market value.
10
Appendix 2
Comments on the Fourth Exposure Draft and Responses
The fourth exposure draft of this proposed ASOP was issued in August 2006 with a comment
deadline of March 1, 2007. Five comment letters were received, some of which were submitted
appendix, the term “commentator” may refer to more than one person associated with a
particular comment letter. The Pension Committee carefully considered all comments received,
and the ASB reviewed (and modified, where appropriate) the proposed changes. Summarized
to each. The term “reviewers” includes the Pension Committee and the ASB. Unless otherwise
noted, the section numbers and titles used below refer to those in the fourth exposure draft.
GENERAL COMMENTS
below.
section.
Comment One commentator believed the effective date should be extended until regulations concerning asset
valuation methods are issued under the Pension Protection Act of 2006.
Response The reviewers disagree and made no change. Section 1.2 addresses how to reconcile any discrepancies
between applicable law and this standard.
Section 2.4, Market Value
Comment One commentator suggested that the definition be revised to capture the nuance that market value is
technically not the price for which an asset might potentially be sold (the “bid price”), but rather the last
price for which a security was sold. The commentator recommended that the proposed standard state that
the actuary may rely on brokerage statements for market value and is not required to ascertain the
difference between bid price, asked price, and last sales price.
Response The reviewers believe that the current definition, which is based on the definition of “fair value” in
Statement of Financial Accounting Standards No. 157, Fair Value Measurements, is appropriate and
made no change.
11
Section 2.6, Prescribed Asset Valuation Method

Comment One commentator recommended that the definition be revised to include asset valuation methods
selected by principals other than plan sponsors.
Response The reviewers note that the definition is intended to be limited to those situations in which the plan
sponsor is given responsibility for selecting an asset valuation method by law, regulation, or accounting
standards. Thus, an asset valuation method selected by the plan sponsor or other principal in other
circumstances – determining the cost of a benefit increase during collective bargaining, for example –
would not be considered a prescribed asset valuation method. Hence, the reviewers made no change.
Section 3.2.6, Additional Considerations
Comment One commentator wrote that item (a) could be interpreted to mean that the actuary should not consider a
plan’s actual investment practices when the plan has a stated investment policy. The commentator
suggested that a plan’s actual investment practices should always be considered, regardless of whether
the plan has a stated investment policy.
Response The reviewers agree and changed the wording accordingly.

Section 3.3, Relationship to Market Value, and 3.4, Further Considerations for Methods Other Than Market
Value (now 3.3, Selecting Methods Other Than Market Value, and 3.4, Using Methods Other Than Market
Value)
Comment One commentator pointed out that the title of section 3.4, Further Considerations for Methods Other
Than Market Value, was misleading because the section required disclosure of characteristics of asset
valuations other than market value. The commentator recommended changing the section’s title to
correspond to the content of the section.
Response The reviewers agree and renamed sections 3.3 and 3.4 to be consistent with the guidance provided in
those sections. In addition, the reviewers clarified that the considerations in section 3.4 are intended to
apply to all asset valuation methods other than market value, whether selected by the actuary or selected
by others.
12
Section 3.4.1, Bias

Comment One commentator disagreed with the requirement that the actuary disclose that an asset valuation method
has significant systematic bias, believing that a full description of the asset valuation method is sufficient
for the user to determine if the method is biased.
The commentator also wrote that it is inappropriate for the proposed standard to require the actuary to
disclose that a prescribed asset valuation method has bias, as it puts the actuary in a position of
evaluating whether a required method has characteristics that could be considered undesirable.
Finally, the commentator noted that the word “bias” is often used to describe the introduction of error
into a statistical sample, and pointed out that describing an asset valuation method as having “significant
systematic error” suggests that the use of that asset valuation method is inappropriate and that the
actuary should not perform the assignment.
Two commentators supported the requirement that the actuary disclose that an asset valuation method
has significant systematic bias.
Response Regarding the first point, the reviewers do not believe that a full description of a biased asset valuation
method is always sufficient for all intended users to recognize that the method has bias. The reviewers
revised section 4.1.5 to provide an example of a disclosure that describes significant systematic bias as a
characteristic of the asset valuation method without the use of the word “bias.”
Comment One commentator noted that the appropriate assumption in paragraph (a)(2) is that market values
experience expected returns rather than constant returns.
Response The reviewers agree and made the recommended change. A similar change was made in section
3.3(b)(2).
Comment Three commentators wrote that paragraph (b) was vague and inappropriate.
One commentator pointed out that paragraph (b) could be read to imply that any change in asset
valuation method produces systematic bias if the new method results in a greater actuarial value of assets
than the old method.
One commentator was concerned that paragraph (b) required information about past changes in the asset
valuation method that might not be available to the actuary. The commentator recommended that
disclosure of significant systematic bias be limited to the future operation of the asset valuation method
rather than the application of the asset valuation method in the past.
Another commentator pointed out that paragraph (b) could be read to imply that many changes in asset
valuation method that are decided upon after the relevant measurement date could have been influenced
by market experience subsequent to the measurement date and be deemed biased.
Response The reviewers agree that paragraph (b) was problematic and deleted it. Instead of considering whether
changes in the asset valuation method produce systematic bias, the standard now requires the actuary to
disclose the reason for any changes in asset valuation method (section 4.1.3).
Section 3.6, Reviewing the Asset Valuation Method
Comment One commentator recommended adding a reference to changes in relevant law, regulations, or
accounting guidance.
13

Section 4.1.4, Prescribed Asset Valuation Method
Comment One commentator opposed the requirement that the actuary disclose that, in the actuary’s professional
judgment, an asset valuation method prescribed by the plan sponsor is not reasonable in light of the
purpose of the measurement even though a regulator has approved the general use of that asset valuation
method.
The reviewers note that the standard requires the actuary to evaluate whether the prescribed asset
Response valuation method selected by the plan sponsor is reasonable for the purpose of the measurement, and did
not believe that general approval of an asset valuation method by a regulator indicates that the use of that
method is reasonable for every measurement.
Section 4.1.6, Different Treatment of Realized and Unrealized Gains and Losses
Comment One commentator suggested that this section require disclosure of the possible consequences of treating
realized gains and losses differently from unrealized gains and losses.

Appendix 1, Background and Current Practices
Comment One commentator wrote that the relevance of the appendix wasn’t clear and that it seemed unnecessary.
The commentator also noted that the appendix incorrectly equated the use of market value with financial
economics.
Response The reviewers note that the appendix is provided for informational purposes and is not part of the
standard. It is intended to describe current actuarial practice. However, the reviewers agree that the
appendix incorrectly implied that traditional actuarial practice involved only the use of asset valuation
methods other than market value, and that actuaries who apply the principles of financial economics
were the only actuaries who use market value. The reviewers revised the appendix to correct this.
14

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Introduction to the

Actuarial Standards of Practice

(Doc. No. 113)

Transmittal Memorandum iii

Appendix: Comments on the Exposure Draft and Responses.......................................................8

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the

FROM: Actuarial Standards Board (ASB)

SUBJ: Introduction to the Actuarial Standards of Practice (ASOPs)

The ASB voted in October 2008 to adopt this Introduction.

Actuarial Standards Board

Stephen G. Kellison, Chairperson

INTRODUCTION TO THE ACTUARIAL STANDARDS OF PRACTICE

Section 2. The Actuarial Standards Board

Section 3. Actuarial Standards of Practice

3.1 The Purpose of ASOPs

ASOP articulates a process of analysis, documentation, and disclosure that, in the

to handle new or nonroutine situations not anticipated by the ASOPs. In those

a. The Analysis of Issues and Recommended Practices section is organized

the actuary with an appropriate analytical framework for completing the

b. The Communications and Disclosures section contains a clause that

Section 4. Compliance with ASOPs

4.5.1 KnownASOPs frequently refer to circumstances, factors, practices of the

4.5.2 Practical/Practicable—ASOPs frequently call upon actuaries to undertake certain

4.5.3 Professional judgment—Actuaries bring to their assignments not only highly

Comments on the Exposure Draft and Responses

C OMMENTS ON REQUESTED SECTIONS FOR REVIEW

Section 3.1.2 (Now 3.1.3)

Response The reviewers agree and made the change.

Section 3.1.3 (Now 3.1.4)

Comment One commentator suggested that “Code” be changed to “Code of Professional

Response The reviewers agree and made the change.

COMMENTS ON OTHER SECTIONS OF THE ASOP

Response The reviewers agree and made the change.

Section 3.1.4 (Now 3.1.5)

Response The reviewers disagree, and made no change.

Section 3.1.5 (Now 3.1.6)

Section 3.1.6 (Now 3.1.7)

Response The reviewers agree and made the change.

Section 3.1.7 (Now 3.1.8)

Section 3.1.8 (Now 3.1.9)

Response The reviewers do not feel such a statement is needed.

Response The reviewers agree and made the change.

Nonguaranteed Charges or Benefits

(Doc. No. 092)

Transmittal Memorandum iii

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

Section 3. Analysis of Issues and Recommended Practices 3

Section 4. Communications and Disclosures 4

Appendix 1—Background and Current Practices 6

Appendix 2—Comments on the Exposure Draft and Task Force Responses 9

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the

FROM: Actuarial Standards Board (ASB)

SUBJ: Actuarial Standard of Practice (ASOP) No. 1

The ASB voted in March 2004 to adopt this standard.

Task Force to Revise ASOP No. 1

Thomas A. Phillips, Chairperson

Life Committee of the ASB

Robert G. Meilander, Chairperson

Actuarial Standards Board

Michael A. LaMonica, Chairperson

ACTUARIAL STANDARD OF PRACTICE NO. 1

NONGUARANTEED CHARGES OR BENEFITS

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

1.2 Scope—This standard applies to actuaries when performing professional services in