GH CORU Spring 2016 Solutions Page 1 GH CORU Model Solutions Spring 2016 1. Learning Objectives: 6. Evaluate the impact of regulation and taxation on companies and plan sponsors in the U.S. Learning Outcomes: (6b) Describe the major applicable laws and regulations and evaluate their impact. Sources: Ch. 17 Health Benefit Exchanges and Connectors, Group Insurance, Bluhm, 6 th Implication of Individual Subsidies in the Affordable Care Act – What Stakeholders Need to Understand, HealthWatch, May 2014 Commentary on Question: Candidates generally did well on parts a, b, and c, but struggled with part d. More specific commentary is included within each subsection below. Solution: (a) Describe the principal functions of a Health Benefit Exchange (HBE) and the general features of benefit plans that can be offered. Commentary on Question: Candidate needed to describe functions of an HBE and general features of benefit plans to receive any credit. The best responses included not only mention of a marketplace for health insurance (i.e. finding, comparing, and purchasing insurance), but also noted how exchanges facilitated improvements in cost and quality via transparency, and served as a financial clearinghouse. Principal functions of an HBE: Facilitate the purchasing of insurance by allowing consumers to find, compare, and purchase insurance from multiple companies Serve as a financial clearing house for premiums, subsidies for low income participants, and employer contributions, directing funds to the appropriate parties Facilitate improvements in cost and quality, through the transparency and comparability of competing products, prices, and quality ratings
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GH CORU Spring 2016 Solutions Page 1
GH CORU Model Solutions
Spring 2016
1. Learning Objectives: 6. Evaluate the impact of regulation and taxation on companies and plan sponsors in
the U.S.
Learning Outcomes:
(6b) Describe the major applicable laws and regulations and evaluate their impact.
Sources:
Ch. 17 Health Benefit Exchanges and Connectors, Group Insurance, Bluhm, 6th
Implication of Individual Subsidies in the Affordable Care Act – What Stakeholders
Need to Understand, HealthWatch, May 2014
Commentary on Question:
Candidates generally did well on parts a, b, and c, but struggled with part d. More
specific commentary is included within each subsection below.
Solution:
(a) Describe the principal functions of a Health Benefit Exchange (HBE) and the
general features of benefit plans that can be offered.
Commentary on Question:
Candidate needed to describe functions of an HBE and general features of benefit
plans to receive any credit. The best responses included not only mention of a
marketplace for health insurance (i.e. finding, comparing, and purchasing
insurance), but also noted how exchanges facilitated improvements in cost and
quality via transparency, and served as a financial clearinghouse.
Principal functions of an HBE:
Facilitate the purchasing of insurance by allowing consumers to find,
compare, and purchase insurance from multiple companies
Serve as a financial clearing house for premiums, subsidies for low income
participants, and employer contributions, directing funds to the appropriate
parties
Facilitate improvements in cost and quality, through the transparency and
comparability of competing products, prices, and quality ratings
GH CORU Spring 2016 Solutions Page 2
1. Continued
General features of benefit plans that can be offered:
Benefit plan must be “qualified” to sold on the Exchange and provide
Essential benefits – supposed to those offered by a typical comprehensive
employer insurance plan
States have options they can use to define the benchmark plan
Metal levels – defined by the actuarial plan value of their benefits
Bronze (60% of APV), silver (70% of APV), gold (80% of APV), platinum
(90% of APV), catastrophic
(b) Describe the three carrier risk management tools within an HBE.
Commentary on Question:
Most candidates recognized this subsection was testing knowledge of the “3 R’s”
although some did not. Risk adjustment seemed to be the most well-known of the 3
and some candidates provided more detail than was necessary, possibly to
compensate for a relative lack of knowledge on risk corridors and reinsurance.
Overall candidates performed well on this subsection.
Reinsurance
provides carriers with protection against high cost members
temporary/transitional program for 2014-2016
funded by payments from all health insurance carriers in individual and group
markets, including self-insured plans through third party administrators
reinsurance payments to insurance carriers in Individual market to cover some
portion of claim cost above the attachment point
Risk Corridor
temporary/transitional program 2014-2016
provides carriers protection against total claims across all members being
higher than expected
a carrier will receive payments from the government if their cost-to-premium
ratio is greater than 103%
a carrier will make payments to the government if its cost-to-premium is less
than 97%
Risk Adjustment
a permanent program
“a zero-sum game” across each market in each state
lessen or eliminate the incentives for carriers to avoid sick enrollees or to
attract a less risky membership
carriers with healthier participants have to subsidize carriers with less healthy
participants by making a transfer payment each year
GH CORU Spring 2016 Solutions Page 3
1. Continued
(c) Define eligibility requirements for ACA subsidies for individuals and explain how
each is intended to lower individual purchasers’ costs.
Commentary on Question:
Most candidates did well at defining the eligibility requirements, but the best
responses clearly identified the two types of ACA subsidies, premium and cost-
sharing, and explained how each lowered the individual purchasers’ costs.
Cost Sharing Subsidy
Available only for individuals with income below 250% of Federal Poverty
Level (FPL) who must select a Silver metal plan from the exchange
The benefits are adjusted to gross up Actuarial Value (AV) from 70% to 73%
if 200%-250% of FPL, to 87% AV if 150%-200% of FPL, and to 94% AV if
100%-150% of FPL
Premium rate for these eligible individuals remains at 70% AV level
Federal government subsidizes the difference between 70% and the grossed-
up AV
This helps lower an individual’s out-of-pocket expenses such as deductibles,
copays, and coinsurance. There are three levels of cost sharing reduction
depending on the household income level (up to 400% FPL)
There is benefit design flexibility to achieve the right cost share level, a
minimum requirement is adjusting the maximum out-of-pocket limit to $2,250
for individuals at 100-200% FPL, and to $5,200 for individuals at 200-250%
FPL
All cost sharing is zero for Native Americans below 300% FPL for all metal
plans
Premium subsidies
Available for qualified individuals and families with incomes between 100-
400% of FPL for qualified coverage purchased through the Exchanges
lesser of premiums paid and the excess of a benchmark over a percentage of
household income
the subsidy goes down as income increases until it reaches zero at 400% FPL
Premium credits are tied to the second-lowest silver plan in the individual’s
geographic area – known as the benchmark plan
(d) A common theory is that broad participation in HBE products across targeted
populations is necessary for the ACA to be successful. Identify and explain the
ACA provisions that may hinder participation in HBE products for population
subgroups.
GH CORU Spring 2016 Solutions Page 4
1. Continued
Commentary on Question:
Candidates did poorly on this subsection. The key here was the connection
between ACA provision and how these may influence certain subpopulations (i.e.
younger adults, children under age 26) to stay out of the HBE products. There
were many lengthy answers that were not pertinent to the question.
General belief is that premium subsidies have uniform and directionally
appropriate effects across the general population
Reasons why younger healthy people may not choose to enroll in the HBEs
Subsidies will primarily benefit older people as premium rates for younger are
more likely to be considered “affordable” before a subsidy adjustment
o Maximum premium contribution based on sliding scale of FPL – means
greater premium subsidy to older people with higher age rated premiums
o Younger will actually pay more for plans with APV less than silver
Widely known ACA provision requires employers to allow children under age
26 to remain on their parents’ plans
Age compression (3:1) of individual market premiums that discourages
enrollment when compared to the premiums they would pay for off-exchange
products
Younger people currently rated on a steeper age curve (5:1 or 7:1) will have a
greater propensity to keep their plan than older people.
GH CORU Spring 2016 Solutions Page 5
2. Learning Objectives: 5. The candidate will understand how to prepare and interpret insurance company
financial statements in accordance with U.S. Statutory Principles and GAAP.
6. Evaluate the impact of regulation and taxation on companies and plan sponsors in
the U.S.
Learning Outcomes:
(5a) Prepare a financial statement in accordance with generally accepted accounting
principles.
(5b) Interpret the results of both statutory and GAAP statements from the viewpoint of
various stakeholders, including regulators, senior management, investors.
(5c) Apply applicable standards of practice.
(6b) Describe the major applicable laws and regulations and evaluate their impact.
(6c) Apply applicable standards of practice.
Sources:
ASOP 21
US GAAP – Chapter 2
Group Insurance – Chapter 45
Analysis for Financial Management – Chapter 4
US GAAP – Chapter 1
Commentary on Question:
Commentary listed underneath question component.
Solution:
(a) Explain the responsibilities an actuary fulfills in relation to financial statements
according to ASOP 21:
(i) As responding Actuary
(ii) As reviewing Actuary
GH CORU Spring 2016 Solutions Page 6
2. Continued
Commentary on Question:
To receive full credit for this question it was necessary to include a robust
response for each of the parties noted above. Simply providing a list of
responsibilities would not receive credit. To receive full credit the candidate
needed to explain at least two responsibilities for each of the parties listed above.
Candidates tended to not provide enough commentary to receive full credit on
question.
(i) 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.
Data, Assumptions, and Method s⎯ The responding actuary should be
prepared to discuss with the auditor or examiner the following items,
based on existing 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.
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.
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.
GH CORU Spring 2016 Solutions Page 7
2. Continued
(ii) The reviewing actuary has responsibility with respect to the planning and
documentation of the audit or examination procedures, as described
below.
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 information needed by the reviewing
actuary to perform the planned procedures.
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.
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.
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.
(b) Describe the role of the following organizations:
(i) The American Institute of Certified Public Accountants
(ii) The Financial Accounting Standards Board
(iii) The Securities and Exchange Commission
GH CORU Spring 2016 Solutions Page 8
2. Continued
Commentary on Question:
Candidates needed to provide a detailed description to receive full credit. A basic
explanation of each of the organizations listed above received half credit.
Candidates tended to provide a more basic explanation.
(i) The AICPA is the association representing the accounting and auditing
professions. (basic)
The AICPA has played a significant role in providing guidance to
accountants and auditors in the conduct of their profession, including
guidance on the proper application of accounting principles and practices.
(specific)
(ii) The FASB is the primary accounting standard setter. (basic)
Under its purview, various pronouncements that have been issued continue
to address the evolutionary aspects of financial accounting. (specific)
(iii) The SEC enforces the laws related to the Securities Act of 1933. (basic)
This organization regulates the securities markets and prescribes the form
and content of financial statements that are filed with it. (specific)
(c) For each of the organizations in (b):
(i) Write down an example of a standard for financial reporting set by the
organization and
(ii) Explain how that standard applies to the insurance industry.
Commentary on Question:
To receive partial credit a candidate needed to state specific examples of a
standard for financial reporting for the organizations. For full credit the
candidate needed to explain how the standard applies to insurance companies.
Candidates did not perform well on this question if they did not list specific
standards created by the organizations.
AICPA – Some examples of standards this organization has set that a candidate
might be able to relate to the insurance industry:
APB Opinion No. 16 – “Business Combinations”
APB Opinion No. 17 – “Intangible Assets”
Practice Bulletin No. 8
Practice Bulletin No. 15
Industry Audit Guides
GH CORU Spring 2016 Solutions Page 9
2. Continued
FASB – Some examples of standards this organization has set that a candidate
might be able to relate to the insurance industry:
SFAS No. 5 – “Accounting for Contingencies”
SFAS No. 60 – “Accounting and Reporting by Insurance Enterprises”
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”
SEC – Some examples of standards this organization has set that a candidate
might be able to relate to the insurance industry:
Regulation SX Section 210.7
Staff Accounting Bulletins
Financial statements like the 10-K, 10-Q, and 8-K
(d)
(i) Restate the balance sheet to reflect the corrected liabilities.
(ii) Goldfinger performed computer based forecasting to predict the impact of
2013 growth by adjusting the 2012 balance sheet. Create the proforma
balance sheet for 2013 based on the following growth assumptions:
(iii) Calculate the following metrics for both the restated balance sheet and the
proforma projection. Assume the policy liabilities and policy assets are current.
ROE
ROA
Debt to assets
Debt to equity
Current ratio
(iv) Compare the restated 2013 balance sheet to the proforma balance sheet
from (ii) and describe the implications of any variance from plan.
Commentary on Question:
Candidates performed well on part (i) of question d. Common mistakes were to
adjust total liabilities rather than claims unpaid. Another common mistake was to
not apply the 30% adjustment as a multiplicative factor. Candidates needed to
note or correct the imbalance that occurs as a result of adjusting claims unpaid.
Candidates also performed well on part (ii). Candidates performed well on part
(iii). A common mistake was to use Long-Term debt in the debt to asset ratios
rather than Total Liabilities. Full credit was awarded to candidates who
calculated the ratio correctly using miscalculated values from part (i) or (ii).
Candidates tended to skip part (iv) or to not note the implications of the variance
from plan.
GH CORU Spring 2016 Solutions Page 10
2. Continued
(i) The following example corrects the claims unpaid and would have
required the candidate to note the out of balance. Another proper solution
would be to reduce the retained earns by the amount by which the claims
unpaid increased.
Case study Corrected
Assets 12/31/2013 12/31/2013
Current assets 82,982 82,982
Long-term investments 9,524 9,524
Net property, plant and equipment 4,865 4,865
Net Intangible assets 31,969 31,969
129,340 129,340
Liabilities
Claims unpaid 16,965 × 1.3 22,055 5,090
Reserves for future policy benefits 321 321
Other policyholder liabilities 4,789 4,789
22,075 27,165
Unearned Premium 3,456 3,456
Premiums received in advance 18,014 18,014
Long-term debt 29,785 29,785
Reserves for future policy benefits, noncurrent 345 345
Deferred tax liabilities, net 3,129 3,129
Payable for securities 2,203 2,203
Total liabilities 79,007 84,097
Common capital stock 25,521 25,521
Retained Earnings 24,812 24,812 -
Total Shareholder's Equity 50,333 50,333
Total Liabilities and Owner's Equity 129,340 134,430 0
Shareholder's Equity
Total Assets
Liabilities, Shareholder's Equity
Policy liabilities
Total policy liabilities
GH CORU Spring 2016 Solutions Page 11
2. Continued
(ii) The following is an example of the proper calculations of the proforma
balance sheet
(iii) The following are the formulas needed to properly calculate the requested
ratios. The ratio must have been calculated for both the rebalanced sheet
as well as the proforma calculation
ROE = net income / shareholder’s equity
ROA = net income / total assets
Debt-to-Assets = total liabilities / total assets
Debt-to-Equity = total liabilities / shareholder’s equity
Current Ratio = current assets / current liabilities
Case study Proforma
Assets 12/31/2012 adjustments 12/31/2013
Current assets 86,983 30% 113,078
Long-term investments 6,165 50% 9,248
Net property, plant and equipment 5,187 -8% 4,772
Net Intangible assets 27,109 31,679
125,444 158,777 rounding imbalance
Liabilities
Claims unpaid 17,066 40% 23,892
Reserves for future policy benefits 154 40% 216
Other policyholder liabilities 5,746 -4% 5,516
22,966 29,624
Unearned premium 2,651 40% 3,711
Premiums received in advance 14,904 40% 20,866
Long-term debt 33,938 -10% 30,544
Reserves for future policy benefits, noncurrent 290 30% 377
Deferred tax liabilities, net 4,524 40% 6,334
Payable for securities 2,506 -10% 2,255
Total liabilities 81,779 93,711
Common capital stock 20,945 49% 31,208
Retained Earnings 22,720 49% 33,853
Total Shareholder's Equity 43,665 65,061
Total Liabilities and Owner's Equity 125,444 158,772rounding imbalance
Total Assets
Liabilities, Shareholder's Equity
Policy liabilities
Total policy liabilities
Shareholder's Equity
GH CORU Spring 2016 Solutions Page 12
2. Continued
(iv) Current assets are significantly lower on the restated balance sheet as
compared to the proforma, as are deferred tax liabilities, common stock,
and retained earnings. Thus, ROE is inflated, and business is risker due to
heavier reliance on debt rather than equity.
(Other reasonable responses were accepted. Candidates should have
noted the difference in assets.)
(e)
(i) Calculate the sustainable growth rate and compare to actual growth. Show
your work.
(ii) Draft a memo proposing plans to maintain the current growth rate.
Commentary on Question:
Most candidates were able to correctly state an acceptable formula for
sustainable growth rate, calculate its value, and calculate the actual growth.
Partial credit was granted for candidates who provided a correct formula but
were unable to use it appropriately.
To receive full credit for the memo the candidate must have compared the actual
and sustainable growth rate, identified at least three plausible options, and
proposed them with a cogent argument or potential shortcomings of the option.
Most candidates only listed options.
Sustainable growth rate (g*)= change in equity ÷ equity at beginning of period
Sustainable growth rate = P R A T
Profit margin × retention ratio × asset turnover ratio × Financial leverage