PDR

Question 1

Premium Deficiency Reserve (PDR) Formula

Answer 1

PV of Future Paid Claims + PV of Future Expenses + PV of Future Claim and Contract Reserves - Current Claims Reserves/Contract Rsv/Premium Rsv - PV of Future Earned Premiums - Any Current Balance Sheet Accrual for Future Expenses

Question 2

Purpose of PDR from statutory reporting perspective (2)

Answer 2

Focus is on solvency:

1. ) PDR helps to ensure adequate funding of the contractual obligations of an entity
2. ) PDR helps to identify situations where the ability of an entity to meet its obligations may be uncertain

Question 3

Purpose of PDR from GAAP reporting perspective (2)

Answer 3

For GAAP, focus in entity from a going concern-perspective (profitability in the future):

1. ) PDR demonstrates the impact of an unfunded financial obligation on an entity’s financial condition
2. ) PDR results in a better representation of an entity’s future earnings

Question 4

Principles when establishing PDRs (3)

Answer 4

1. ) Scenarios that result in a PDR over the projection period:
   a. ) bock expected to have near-term losses
   b. ) block expected to be profitable in near term but not long-term
2. ) Determined to minimize false positives - no PDR should be required unless there’s a meaningful potential for loss
3. ) Determined to minimize false negatives - a PDR should be required whenever there is an expectation for loss

Question 5

Assumptions needed to estimate PDR (9)

Answer 5

1. ) Rate increases - must be reasonable and likely to be implemented
   2) Enrollment - can’t project that new entrants will improve morbidity unless there is historical experience to justify this assumption
2. ) Lapses - should reflect any potential anti-selection, particularly if induced by rating actions
3. ) Expenses - if other policies can be expected to cover overhead, then zero overhead cost may be assumed (reflect only operating cost)
4. ) Claims trend - reflect reasonable increases in claim cst
5. ) Interest rates - reasonable interest rate assumptions should be used to discount deficiencies
6. ) Taxes - these reserves are calculated on an after-tax basis
7. ) Provider arrangements:
   a. ) Provider settlements under risk sharing arrangements shouldn’t be used to offset claims unless they have been specifically determined and billed to the providers
   b. ) Include capitations as claim cost at the level currently negotiated. Recognize that if the provider goes insolvent, the discounts are lost & cost will rise
8. ) Reinsurance - the calc of reserve is usually net of reinsurance

Question 6

Contract groupings for PDR calculations (3)

Answer 6

1. ) Should be grouped in a manner consistent with how policies are marketed, serviced, and measured
2. ) Deficiencies on a product can be offset by profits on other products within its group, but no b profits in other contract grouping
3. ) Recommended groupings from Health Reserves Guidance Manual are:
   a. ) Comprehensive major medical
   b. ) LTC
   c. ) Income protection (disability income)
   d. ) Limited benefit plans

Question 7

Items to NOT include in PDR (4)

Answer 7

1. ) Taxes
2. ) Reinsurance
3. ) Profits
4. ) Risk sharing arrangements