STATE OF CALIFORNIA EDMUND G. BROWN JR., Governor DEPARTMENT OF INDUSTRIAL RELATIONS OFFICE OF SELF INSURANCE PLANS 2265 W ATT AVENUE, SUITE 1 SACRAMENTO, CA 95825 PHONE (916) 574-0300 SELF-INSURED GROUP ACTUARY RESPONSIBILITIES AND REPORTS The purpose of this letter is to provide guidance to Self-Insured Group (SIG) Boards of Trustees, Group Administrators, and Actuaries related to SIG actuarial reports. SIGs operating in California are required to annually obtain actuarial reports to estimate the unpaid liability for loss and loss adjustment expenses as of the end of the SIG’s fiscal year. These actuarial reports are used in preparing the group’s financial statements and determining compliance with regulatory funding requirements for the group aggregate results and for each of its “program” or “accident” years. Actuarial reports are also required to establish the SIG’s annual required funding contributions. In anticipation of the submission of actuarial reports for the 2011 liabilities and to ensure that reports are compliant with the rules and regulations, and that they also meet the specific needs of the Office of Self Insurance Plans (OSIP), the following presents a summary of the relevant regulatory requirements for actuarial reports prepared for SIGs. The California Code of Regulations (CCR) sets forth the specific compliance requirements for actuarial reports prepared to estimate the SIG’s unpaid liabilities and required funding contributions. CCR § 15481 pertains to the annual actuarial certification of losses of a SIG. It is available on the OSIP website under Regulations (http://www.dir.ca.gov/sip/sip.html), and contains the following requirements: 1. Actuarial reports must be performed by an actuary with experience performing actuarial estimates involving California workers’ compensation and be an Associate or Fellow of the Casualty Actuarial Society, or a Member of the American Academy of Actuaries; 2. The actuary’s estimate of unpaid loss must include a liability for incurred but not reported claims (IBNR); 3. The actuary’s estimate of unpaid loss must include a liability for unallocated loss adjustment expenses (ULAE); 4. The actuarial report must present the liability for unpaid loss and loss adjustment expenses at both the expected and 80% confidence levels; 5. The Actuary’s report must be presented to the Group Administrator and Board of Trustees within ninety days after the SIG’s fiscal year end, and made available to the Board of Trustees and any group member; 6. The Group Administrator must submit the actuarial report to OSIP within 100 days of the end of the SIG’s fiscal year end; 7. The actuarial report submitted to OSIP must include an exhibit that contains the following for each program year presented in the report: 1) ultimate losses at the 80% and expected confidence levels, inclusive of IBNR and ULAE, 2) total member contributions for each program year, 3) total surplus funds distributed to members for each program year. An actuarial exhibit of program year profitability will satisfy this requirement as long as it contains the required information ; and 8. The Board of Trustees must ensure that contribution rates for the initial funding of claims for each program year are based on the actuarial projection at the 80% confidence level. CCR § 15475 (d)(8) addresses the responsibilities of the Board of Trustees to ensure that contributions are collected for each program year based upon projected losses calculated at the 80% actuarial confidence level, inclusive of IBNR and ULAE. The regulation further requires that if factors reflecting loss histories such as experience modification calculations (e.g. ex-mods) are utilized to modify group self insurer or individual member contributions, the contributions for the funding of group self insurer claims for the program year shall be calculated at the overall 80% confidence level as determined by the SIG’s actuary. Group’s should ensure their consulting actuaries are aware of these requirements if the actuary assists in the development of experience modification factors or other mechanisms designed to adjust contributions for member’s experience. In addition to the regulatory requirements described above, OSIP provides the following guidance to the Board of Trustees, Group Administrator, and consulting actuaries when preparing actuarial reports to be submitted to the OSIP. 1. Estimates of the liabilities for unpaid loss and loss adjustment expenses should be presented on an undiscounted and net present value basis; 2. Estimates of the liabilities for unpaid loss and loss adjustment expenses should be presented on a gross, ceded, and net basis; 3. Estimates of unallocated loss adjustment expenses (ULAE) should be actuarially determined; 4. Projections at the expected and 80% confidence level should be point estimates and not ranges; 5. The actuarial report should document significant changes in the composition of the group over time. Furthermore the actuarial report should specifically address whether or not changes in the mix of the group required adjustments in the actuary’s assumption, methods, or selections of ultimate loss; 6. Historical loss development and claim reporting patterns should be compiled in the actuarial study for SIGs operating more than two years; 7. Actuarial reports must conform to actuarial standards as detailed in Actuarial Standard of Practice #43. 8. Each actuarial report prepared for a SIG should include a letter of acknowledgement signed by a credentialed actuary affirming a) compliance with the credential requirements required by the regulations, b) adherence to the Actuarial Standards Board’s Code of Professional Conduct and Actuarial Standards of Practice, c) compliance with relevant regulatory requirements for actuarial reports prepared for SIGs, and d) the actuary’s understanding that the OSIP and the SIG may rely on the actuary’s work to determine the financial health of the group and compliance with the rules and regulations.
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