D.7.
What, if any, special considerations are needed for non-calendar year plans?
The use of the term “plan year” within §2718 has been a source of confusion for those interested in understanding the statute. As such we are using this question as the appropriate forum for discussing issues surrounding how to define, temporally, which sets of premiums and claims are included in an annual §2718 calculation. Existing NAIC financial reporting is performed on a calendar year basis. The premium and claim values included in 2011 calendar year financial reporting would typically represent a mixture of the following types of information: (a) (b) (c) (d)
Premiums earned and claims incurred in 2011 for policies issued in 2011;10 Premiums earned and claims incurred in 2011 for policies renewed in 2011; Premiums earned and claims incurred in 2011 for policies issued or renewed in 2010; Premiums and claims recognized in the 2011 financial statements but attributable to incurral years prior to 2011, resulting from differences between accruals established in the Dec. 31, 2010 financial statements and the amounts paid in 2011 relating to those accruals (plus the remaining accruals in the Dec. 31, 2011 financial statements attributable to years prior to 2011).
In many respects this calendar year basis would be the most natural way of implementing §2718 requirements, given that existing financial accounting systems of issuers are already organized around this concept. An alternative approach would be to base §2718 requirements on “policy years starting within a calendar year.” Under that approach, 2011 policy year reporting would differ from 2011 calendar year reporting in that it would exclude items (c) and (d) above, but would instead include: (e) Premiums earned and claims incurred in 2012 for policies issued or renewed in 2011. Another alternative approach would be to base §2718 requirements on “deductible years starting within a calendar year.” Under this approach, 2011 deductible year reporting would include premiums earned and claims incurred in 2011 or 2012 under policies in which the deductible year started in 2011, but it would exclude premiums earned and claims incurred in 2011 under policies in which the deductible year started in 2010. If “plan year” was intended to refer to a year defined in an employer’s underlying benefit plan documents, then in principle one could consider annual reporting for “plan years starting within a calendar year.” In this case, 2011 plan year reporting would include premiums earned and claims incurred in 2011 or 2012 for policies in which the plan year started in 2011, but it would exclude 10
We note that, with the exception of policies issued on Jan. 1, 2011, the premiums and claims included from this category in a 2011 calendar year report would represent less than a full year of policy experience. In light of deductibles, the loss ratio for such partial year experience included in the 2011 calendar year will often be less than the loss ratio for the full policy year. This observation provides theoretical grounds, in the context of a calendar year MLR calculation, for considering an exclusion from the calculation scope for new policies issued in the current calendar year, similar to what is done in the Medicare Supplement refund calculation.
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