A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Actuarial Oversight

10/14/2011

Actuarial oversight plays a significant role according to the statute. “The Secretary, in consultation with appropriate actuaries and other experts, shall develop at least 3 actuarially sound benefit plans as alternatives for consideration for designation by the Secretary as the CLASS Independence Benefit Plan”49.

With respect to actuarial analysis, the statute requires:

(III) “a statement of the actuarial status of the CLASS Independence Fund for the current fiscal year, each of the next 2 fiscal years, and as projected over the 75-year period beginning with the current fiscal year; and

(IV) an actuarial opinion by the Chief Actuary of the Centers for Medicare & Medicaid Services certifying that the techniques and methodologies used are generally accepted within the actuarial profession and that the assumptions and cost estimates used are reasonable;”50.

With regard to the CMS Chief Actuary’s responsibility, there is a wide range of what can be considered as ‘reasonable’ assumptions. Because of the sensitivity of results from changes in assumptions and the potential negative impact from mispricing, reasonableness should have a stringent connotation. The assumptions chosen for the CLASS plan should produce premiums that have a good chance to be stable. This applies both to assumption settings for the purpose of developing plan premiums and for assessment of actuarial soundness of the Program in the future.

Accordingly, we believe it is prudent that the process of assumption setting follows these guidelines:

  • Recognizing the extreme difficulty in estimating the effect of adverse selection, plan designs should avoid the potential for adverse selection and moral hazard as much as possible.

  • Assumptions must be chosen with extreme care and after considerable deliberation. Obtain as much relevant experience as possible from multiple sources. Appropriate credibility standards should be followed.

  • Include margins for adverse deviation in the assumptions. Use sensitivity testing of projected financial results to evaluate the margins.

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