69O-149.006. Actuarial Memorandum

(1) In order for a rate filing to be reviewed properly by the Office, the actuarial memorandum required by subparagraph 69O-149.003(2)(b)4., F.A.C., shall contain the items listed in subsection (2), below, for a new product filing, a rate revision or justification of existing rates. Pricing assumptions shall reflect insurer experience to the degree credible, and industry experience where insurer experience is not credible, available or appropriate. Assumptions shall reflect what the insurer fully expects to occur, rather than assumptions developed primarily for rate filing purposes based on sound actuarial principles. All such items shall be adequately justified by supporting data. In reviewing these assumptions, the Office will use, as an initial point of reference, comparisons of the assumptions with those from similar products of the same insurer, similar products of other insurers and independent studies. If an insurer provides projections that differ from those historically experienced for similar coverage, it shall provide supporting data to justify how and why the projections will differ from the actual historical experience. Additional information will be required, if, given the particular facts and circumstances of the filing, the Office determines that the additional information is necessary to properly complete its review of the filing to determine if the benefits are reasonable in relation to the premiums charged. All filings reviewed under rules 69O-149.002 through 69O-149.006, F.A.C., shall be reviewed in accordance with sound actuarial principles and, except where the context plainly does not involve an actuarial determination, all adverbs in these rules such as “properly” and “appropriately” shall be construed in light of those principles.

(2) Note that the numbers preceding the item names refer to the descriptions in subsection (3), below.

(a) Item 1. Scope & Purpose.

(b) Item 2. Benefit Description.

(c) Item 3. Renewability Clause.

(d) Item 4. Applicability.

(e) Item 5. Morbidity.

(f) Item 6. Mortality.

(g) Item 7. Persistency.

(h) Item 8. Expenses.

(i) Item 9. Marketing Method.

(j) Item 10. Underwriting.

(k) Item 11. Premium Classes.

(l) Item 12. Issue Age Range.

(m) Item 13. Area Factors.

(n) Item 14. Average Annual Premium.

(o) Item 15. Premium Modalization Rules.

(p) Item 16. Claim Liability and Reserves.

(q) Item 17. Active Life Reserves.

(r) Item 18. Trend Assumption – Medical and Insurance.

(s) Item 19. Minimum Loss Ratio.

(t) Item 20. Anticipated Loss Ratio.

(u) Item 21. Distribution of Business.

(v) Item 22. Contingency & Risk Margins.

(w) Item 23. Experience – Past & Future.

(x) Item 24. Lifetime Loss Ratio.

(y) Item 25. History of Rate Adjustments.

(z) Item 26. Number of Policyholders.

(aa) Item 27. Proposed Effective Date.

(bb) Item 28. Actuarial Certification.

(3) Descriptions.

(a)1. For new filings, rate revisions, and justification of existing rates, the assumptions presented shall be appropriate at the time of the filing.

2. Rate revision filings shall clearly identify all rating factors or methods proposed to be changed.

3. New policy forms shall include a rate and benefit comparison to at least the two largest volume policy forms of the insurer that provide similar benefits, including all forms currently available for sale. The insurer shall demonstrate that the proposed premium rate schedule represents an actuarially sound relationship between the policy forms and between benefit options within policy forms, giving appropriate consideration to experience emerging under existing forms.

(b) The descriptions, by item number, of the terms listed above in subsection (2), follow:

1. Scope and Purpose of Filing: This section shall specify whether this is a new filing, a rate revision, or a justification of an existing rate. If the filing is a rate revision, the reason for the revision shall be stated.

2. Description of Benefits: This section shall include a brief description of the benefits provided by the policy, the benefit amounts per unit of coverage, and the available number of units.

3. Renewability Clause: This section shall identify the renewability classification of the form.

4. Applicability: This section shall specify whether the insurer anticipates new issues under the form or renewals only.

5. Morbidity: This section shall describe the morbidity basis for the form, including the source or sources used. Any substantive adjustments from either the source or earlier assumptions shall be explained. The morbidity assumed shall be adequately justified by supporting data.

6. Mortality: This section shall state the mortality basis. Any substantive adjustments from earlier assumptions shall be explained and adequately justified by supporting data.

7. Persistency: This section shall state and describe the lapse rates used. Any substantive adjustments from earlier assumptions shall be explained. The Office shall request historical lapse rates on an inforce policy block or on a similar policy form if needed to judge the actuarial reasonableness of the filed lapse rates.

8. Expenses: This section shall include a brief description of any expense assumptions used, including, for example, per policy and percentage of premium expense for acquisition, maintenance, and commissions. These must be provided separately for each policy year.

9. Marketing Method: This section shall provide a brief description of the market and the marketing method. An example of an acceptable brief description is: “This product is sold in a home service debit market by a captive agency force.” The information requested is not intended to compromise the insurer’s proprietary interests but rather to inform the Office’s consideration of allocation of expenses and acquisition costs, as required by section 627.411(2), F.S.

10. Underwriting: This section shall provide a brief description of the extent to which this product will be underwritten, if any, and the expected impact by duration and in total, on the claim costs. The insurer shall state separately the effects of different types of underwriting: medical, financial and plan appropriateness. An example of an acceptable brief description is: “This Policy Form is subject to limited underwriting with yes/no questions. The expected impact is: Duration 1=.15; duration 2=.05; overall=.03 decrease in claim costs.” The information requested is not intended to compromise the insurer’s proprietary interests but rather to inform the Office’s consideration of past and prospective loss experience, as required by section 627.411(2), F.S.

11. Premium Classes: This section shall state all the attributes upon which the premium rates vary.

12. Issue Age Range: This section shall specify the issue age range of the form. A statement shall be made as to whether the premiums are on an issue age, attained age or other basis.

13. Area Factors: This section shall include a brief description for any area factors used, and an explanation of any changes since the last filing. The area factors and definitions must also be displayed.

14. Average Annual Premium: This section shall display the average annual premium for both Florida and the nation. If a rate adjustment is proposed, average annual premiums reflecting the Premium Schedule both before and after the proposed adjustment shall be provided. The average annual premium per policy for individual insurance or per certificate for group insurance shall be calculated based on the distribution of Florida business considering any factors which actuarially justify a rate difference. This distribution is the anticipated issue distribution if the filing is a new policy form, and the actual inforce distribution if the filing is for a rate revision or rate justification. Premiums for riders, endorsements and amendments must be added to the base plan premiums to yield this average. For the purpose of calculating the average annual premium and loss ratios, any fractional premium loading shall not be incorporated in this average.

15. Premium Modalization Rules: This section shall display the modalization factors and fees as applicable. For premium modes other than annual, the level of the fees and factors shall be adequately justified by supporting data.

16. Claim Liability and Reserves: This section represents the present value of future claim payments on claims incurred prior to the valuation date. This includes both the accrued and unaccrued portions of the liability and reserve as of the valuation date. A complete description of the development of these reserves shall be presented. A display which compares the reserve held to the actual claim runoff shall be included. For loss ratio purposes, the interest rates used to determine these reserves and liabilities shall be consistent with the insurer’s premium determination interest rates, which may be different from rates used for valuation purposes. Claim runoff is a common insurance industry term which means the pattern of claims payout after the establishment of reserves.

17. Active Life Reserves: Because these reserves do not represent claim payments, but provide for timing differences, they shall not be included in any benefit and loss ratio calculations. The active life reserve as of the evaluation date for rate revision filings shall be provided.

18. Trend Assumptions – Medical and Insurance:

a. This section must describe the trend assumptions used in pricing, which assumptions must be appropriate for the specific line of business, product design, benefit configuration, and time period.

b. All factors affecting the projection of future claims must be presented.

c. The trend assumptions shall be presented under two categories:

(I) Medical Trend: the combined effect of medical provider price increases, utilization changes, medical cost shifting, and new medical procedures and technology. In determining medical trend from underlying data, the analysis:

(A) Shall use credible data and make appropriate adjustments to claims data to isolate the effects of medical trend only; and,

(B) Shall not include the effects of underwriting wearoff, aging, or changes to claim costs due to changes in demographics, policy coverages, geographic distribution, or reinsurance.

(II) Insurance Trend: the combined effect of underwriting wearoff, deductible leveraging, antiselection resulting from rate increases, and discontinuance of new sales.

(A) Medical trend must be determined or assumed before insurance trend can be determined.

(B) Underwriting wearoff means the gradual increase from initial low expected claims which result from underwriting selection to higher expected claims for later (ultimate) durations.

19. Minimum Required Loss Ratio for the Form: This section shall state the minimum required loss ratio for the form.

20. Anticipated Loss Ratio: This section shall provide the anticipated loss ratio and the interest rate(s) used in the determination of the value. The target loss ratio for an individual or group policy form may be increased through a justification of the proposed change. The target loss ratio for an individual or group policy form may be reduced upon demonstration and justification of an increase in administrative costs, but may not be reduced to less than the minimum required standard for the policy form in Rule 69O-149.005, F.A.C. The proposed decrease due to administrative costs cannot be more than 0.5% per year.

a. When claim cost projections include the effect of medical trend, such as for Medicare supplement and medical expense coverage, premium projections shall also include the effects of such trend.

b. This section shall also include the current approved durational loss ratio table for the form.

(I) If a revised durational loss ratio table is being proposed, the proposed table, together with a justification for the new table, shall be provided.

(II) The proposed new table shall be consistent with the claim projections contained in the filing.

(III) If approved, the new table will be used in filings made subsequent to the one in which it is being proposed.

(IV) A new table shall produce a lifetime loss ratio at least as great as the lifetime loss ratio developed from the current approved loss ratio table and shall become the lifetime standard or target loss ratio for the form.

(V)(A) When the slope or shape of the durational loss ratio table is changed, or the persistency or interest assumptions are changed, from those used in the last approved rate filing, any rate increase due to the change shall be uniformly implemented over a 3 year period.

(B) The insurer may request a shorter phase-in period if it can be demonstrated that the shorter period is not expected to result in the greater of a 5 percent reduction in persistency and a 25 percent increase in lapse rate from what had been assumed in the last approved rate filing.

(C) At its option, a company may request a new business rate schedule based on the full effect of the new assumptions with the phase-in period only applicable to inforce insureds.

(D) When a new business rate is elected, the rate analysis for the form shall be based on the new business rate schedule level.

21. Distribution of Business: This section shall provide the anticipated issue distribution for new policy forms and the actual inforce distribution for rate revisions. All criteria having a rating difference shall be included.

22. Contingency and Risk Margins: This section shall describe the contingency and risk margins anticipated for the Policy Form at the time of the filing. The information requested is not intended to compromise the insurer’s proprietary interests, but rather to inform the Office’s consideration of risk and contingency margins, as required by section 627.411(2), F.S.

23. Experience on the Form (Past and Future Anticipated): This section shall display the actual experience on the form and that expected for the future.

a. Past Experience: Experience from inception (or the last 3 years for annually rated group coverages) shall be displayed, although, with proper interest adjustment, the experience for calendar years more than 10 years in the past may be combined. Excluding annually rated group policy forms, earned premiums, actual incurred and expected claims experience shall also be displayed, for each policy year or issue year, within the calendar year. The following information shall be displayed (A sample experience exhibit is illustrated in Appendix A, Illustrative Experience Exhibit (2/04), which is hereby incorporated by reference):

(I) Year;

(II) Earned premium;

(III) Claims incurred and paid, for past periods only;

(IV) Remaining claim liability and reserve, for past periods only. These reserves shall be updated to reflect actual claim runoff as it develops;

(V) Incurred claims (=(III)+(IV));

(VI) Incurred loss ratio (=(V)/(II));

(VII) Expected loss ratio;

(VIII) Expected incurred claims;

(IX) Actual-to-expected claims (=(V)/(VIII) or equivalently (=(VI)/(VII));

(X) Earned premium on a manual rate basis for at least the past 5 calendar years or the experience period used for projection purposes for annually rated group products; i.e., removing the impact of adjustments to the approved rate manual due to underwriter adjustments, the impact of any rate limits, and experience rating. This restatement to a manual basis does not apply to annually rated group products exempt from the filing and prior approval of rate schedules as provided by subsection 69O-149.002(6), F. A.C.

(XI) Earned premium on a current rate basis for at least the past 5 calendar years or the experience period used for projection purposes for annually rated group products. This is not required for annually rated group products exempt from the filing and prior approval of rate schedules as provided by subsection 69O-149.002(6), F.A.C.

b. Future periods where the projected values are based on inforce experience:

(I) The experience period used as the basis for determining projected values shall be clearly indicated.

(II) The experience period shall reflect the most current data available. For forms subject to the credibility standards of paragraph 69O-149.0025(6)(b), F.A.C., the experience period shall be the period of time used to determine credible data pursuant to paragraph 69O-149.0025(6)(b), F.A.C. For other forms, the experience period shall be the period consisting of the most recently completed four (4) calendar quarters, where such period must end at least 45 days before the date of the filing. (For example, the experience period for a filing submitted on August 1 would be April 1 of the prior year through March 31 of the current year. The experience period for a filing submitted on September 1 would be July 1 of the prior year through June 30 of the current calendar year). Use of other data shall be justified to the office as to why the requisite data is not available or appropriate to use.

(III) An exhibit showing the development of the expected claims and A/E ratio for the experience period shall be provided. (A sample exhibit demonstrating an expected development is illustrated in Appendix A)

(IV) The projected values shall represent the experience that the actuary fully expects to occur. In order for the proposed premium schedule or rate change to be reasonable, the underlying experience used as the basis of a projection must be reflective of the experience anticipated over the rating period. The Office will consider how the following items are considered in evaluating the reasonableness of the projections and ultimate rates. In order to expedite the review process, the actuary is encouraged to provide information on how each of the following have or have not been addressed in the experience period data used as the basis for determining projected values, or otherwise addressed in the ratemaking process.

(A) Large nonrecurring claims;

(B) Seasonality of claims;

(C) Prior rate changes not fully realized;

(D) Rate limits, rate guarantees, and other rates not charged at the full manual rate level;

(E) Experience rating, if any;

(F) Reinsurance costs and recoveries for excess claims subject to non-proportional reinsurance;

(G) Coordination of benefits and subrogation;

(H) Benefit changes during the experience period or anticipated for the rating period;

(I) Operational changes during the experience period or anticipated for the rating period that will affect claim costs;

(J) Punitive damages, lobbying, or other costs that are not policy benefits;

(K) Claim costs paid which exceed contract terms or provisions;

(L) Benefit payments triggered by the death of an insured, such as waiver of premium or spousal benefits;

(M) Risk charges for excess group conversion costs or other similar costs for transferring risk;

(N) The extent and justification of any claim administration expenses included in claim costs; and,

(O) Other actuarial considerations that affect the determination of projected values.

(V) The method or formulas, including necessary assumptions and sample calculations, used in determining the projected values from the experience period used shall be provided.

(VI) Projection years shall include columns I, II, V, VI, VII, VIII and IX as indicated in sub-subparagraph 23.a., above.

(VII) Two projections will be required to be submitted to the Office. Projections shall be based on existing inforce business with and without new sales assumed during the projection period.

(VIII) A summary of the historical and projected data shall be provided for all experience columns providing the accumulated past values, future values, and lifetime values both with and without interest and with and without the proposed rate change.

c. Projections for new forms or otherwise not based on experience shall:

(I) Two projections will be required to be submitted to the Office. Project an initial assumed cohort of new business with and without new sales assumed during the projection period; and,

(II) Shall display columns for each policy year, anticipated premiums, claims and loss ratios and include the lifetime values both with and without interest.

d. The experience exhibit shall be submitted electronically in an active Excel worksheet or workbook, i.e., not converted to a PDF or other image format. Formulas used to develop other values in the worksheet or workbook shall be included. It is noted that the I-file system does provide for the submission of information on a trade secret basis. If this is used, the company shall additionally file a workbook without the trade secret information for the public domain.

24. Lifetime Loss Ratio: This is the loss ratio determined over the rating period for annually rated groups. For other forms, the loss ratio is derived by dividing A by B where:

a. A is the accumulation with interest of incurred claims from the original effective date of the policy form to the evaluation date, and the present value of future incurred claims over the entire future lifetime of the policy form; and,

b. B is the accumulation with interest of earned premiums from the original effective date of the policy form to the evaluation date, and the present value of future earned premiums over the entire future lifetime of the policy form.

c. The evaluation date is the endpoint of the actual experience review period.

25. History of Rate Adjustments: This section shall list the approval dates and average percentage rate adjustments both nationwide and in Florida for the last 5 years. Nationwide information is not required when Florida data is 100 percent credible.

26. Number of Policyholders: This section shall report the number of Florida policyholders/certificateholders who will be affected by the proposed rate revision, and the number of policyholders/certificateholders inforce nationwide.

27. Proposed Effective Date: This section shall state the proposed effective date and method of the proposed rate revision implementation.

28. Actuarial Certification:

a. Certification by a qualified actuary that to the best of the actuary’s knowledge and judgment:

(I) The entire rate filing is in compliance with the applicable laws of the State of Florida and with the rules of the Office;

(II) Complies with the Commonly Accepted Actuarial Practice as defined in subsection 69O-154.202(28), F.A.C.; and,

(III) The benefits provided are reasonable in relation to the proposed premiums. The premium schedule is not excessive, inadequate, nor unfairly discriminatory.

b. In making the certification:

(I) The actuary shall recognize that the certification is a prescribed statement of actuarial opinion.

(II) The actuary’s opinion shall comply with the Commonly Accepted Actuarial Practice as defined in subsection 69O-154.202(28), F.A.C.

c. A qualified actuary is one who is a member of the Society of Actuaries or the American Academy of Actuaries, and who is qualified in the area of health insurance.

d. If the actuary is unable to provide the certification without qualification, a detailed explanation and reason for the qualification shall be provided as part of the certification.

Rulemaking Authority 624.308(1), 627.410(6)(b) FS. Law Implemented 627.410(1), (2), (6), 627.411(1)(e) FS. History–New 7-1-85, Formerly 4-58.06, 4-58.006, Amended 4-18-94, 4-9-95, 11-20-02, 6-19-03, Formerly 4-149.006, Amended 5-18-04, 11-2-06, 10-1-08, 8-15-19, 1-3-21.