Practice_Note_small_group_market_dec2009

approach since the handling of the change in group demographics and benefit design is intrinsically multiplicative.

Q18. May a sample be tested to demonstrate compliance? If so, how may the sample be determined?

A18. Sampling is not the preferred method of testing if the actuary is able to test all small groups using a seriatim method and high speed information technology. However, in situations where a seriatim review is not practical or where the actuary believes that sampling would yield a nearly equivalent result, a sample may be tested to demonstrate compliance.

When a sample is used to demonstrate compliance, the actuary should first determine if the particular state’s certification requirements mandate a specific sample size or sampling method. If so, the actuary should use this method. In any event, the actuary should choose a method that is unbiased and fairly represents the range of rating and business practices employed by and the groups insured by the carrier.

Both random and non-random sampling techniques may be appropriate to use. When choosing a sampling technique, the actuary should consider the rating and business practices of the carrier. A random sample generally produces a better representation of the entire population, but a nonrandom sample may be more appropriate if the actuary can determine specific groupings of cases that are more likely to represent problems.

The appropriate sample size will vary, depending on the size of the class of business and the rating practices of the small employer carrier. The actuary usually attempts to determine a sample size that fairly represents the total book of business of the carrier in the state and that adequately demonstrates complete compliance with the state’s small group rating regulations.

Advanced statistical sampling techniques may be employed to determine the minimum sample size necessary to represent the block of business for a given set of criteria. However, the actuary may find that a more subjective determination, based on an analysis of the rating practices of the carrier, may yield a more meaningful sample size for the demonstration.

The actuary will generally document the methods used to select the samples, along with an appropriate statement describing the rationale for choosing the method. The actuary generally should also keep detailed records of the samples chosen.

Q19. What should the actuary do if the sample yields groups that are non-compliant?

A19. If a sample yields one or more groups that are non-compliant, then the actuary would usually note the non-compliant groups and review with the carrier the reasons that the groups were non-compliant. If there are only a few such groups, and if, upon review with the carrier, the non-compliance was only the result of random and unintended calculation errors, rather than the rating methods, factors, and practices themselves being out of compliance, then the actuary should still be able to render a qualified opinion of compliance. In that case, the actuary would typically note in the report the non-compliant groups found, the results of the review of the problems with the carrier, and the actions planned or taken by the carrier Page 23 of 57