Assurant 2014 Annual Report Download - page 50

36 ASSURANT, INC. – 2014 Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Estimates
Certain items in our consolidated fi nancial statements are
based on estimates and judgment. Differences between
actual results and these estimates could in some cases have
material impacts on our consolidated fi nancial statements.
The following critical accounting policies require signifi cant
estimates. The actual amounts realized in these areas could
ultimately be materially different from the amounts currently
provided for in our consolidated fi nancial statements.
Health Insurance Premium Rebate Liability
The Affordable Care Act was signed into law in March 2010.
One provision of the Affordable Care Act, effective January 1,
2011, established a minimum medical loss ratio (“MLR”)
designed to ensure that a minimum percentage of premiums
is paid for clinical services or health care quality improvement
activities. The Affordable Care Act established an MLR of 80%
for individual and small group business and 85% for large group
business. If the actual loss ratios, calculated in a manner
prescribed by the Department of Health and Human Services
(“HHS”), are less than the required MLR, premium rebates are
payable to the policyholders by August 1 of the subsequent year.
The Assurant Health loss ratio reported in “Results of
Operations” below (the “GAAP loss ratio”) differs from
the loss ratio calculated under the MLR rules. The most
signifi cant differences include: the fact that the MLR is
calculated separately by state, legal entity and type of
coverage (individual or group); the MLR calculation includes
credibility adjustments for each state/entity/coverage cell,
which are not applicable to the GAAP loss ratio; the MLR
calculation applies only to some of our health insurance
products, while the GAAP loss ratio applies to the entire
portfolio, including products not governed by the Affordable
Care Act; the MLR includes quality improvement expenses,
taxes and fees; changes in reserves and Affordable Care Act
risk mitigation program amounts are treated differently in
the MLR calculation; the MLR premium rebate amounts are
considered adjustments to premiums for GAAP reporting
whereas they are reported as additions to incurred claims
in the MLR rebate estimate calculations; and the MLR is
calculated using a rolling three years of experience while
the GAAP loss ratio represents the current year only.
Assurant Health has estimated the 2014 impact of this
regulation based on defi nitions and calculation methodologies
outlined in the HHS regulations and guidance. The estimate was
based on separate projection models for individual medical and
small group business using projections of expected premiums,
claims, and enrollment by state, legal entity and market for
medical businesses subject to MLR requirements for the MLR
reporting year. In addition, the projection models include
quality improvement expenses, state assessments, taxes, and
estimated impacts of the Affordable Care Act risk mitigation
programs (commonly referred to as the “3R’s”). The premium
rebate is presented as a reduction of net earned premiums
in the consolidated statement of operations and included
in unearned premiums in the consolidated balance sheet.
Affordable Care Act Risk Mitigation Programs
Beginning in 2014, the Affordable Care Act introduced new and
signifi cant premium stabilization programs. These programs,
discussed in further detail below, are meant to mitigate
the potential adverse impact to individual health insurers
as a result of Affordable Care Act provisions that became
effective January 1, 2014.
A three-year (2014-2016) reinsurance program provides
reimbursement to insurers for high cost individual business
sold on or off the public marketplaces. The reinsurance entity
established by HHS is funded by a per-member reinsurance
fee assessed on all commercial medical plans, including
self-insured group health plans. Only Affordable Care Act
individual plans are eligible for recoveries if claims exceed
a specifi ed threshold, up to a reinsurance cap. Reinsurance
contributions associated with Affordable Care Act individual
plans are reported as a reduction in net earned premiums in
the consolidated statements of operations, and estimated
reinsurance recoveries are established as reinsurance
recoverables in the consolidated balance sheets with an
offsetting reduction in policyholder benefi ts in the consolidated
statement of operations. Reinsurance fee contributions for
non-Affordable Care Act business are reported in underwriting,
general and administrative expenses in the consolidated
statement of operations.
A permanent risk adjustment program transfers funds from
insurers with lower risk populations to insurers with higher risk
populations based on the relative risk scores of participants
in Affordable Care Act plans in the individual and small group
markets, both on and off the public marketplaces. Based
on the risk of its members compared to the total risk of all
members in the same state and market, considering data
obtained from industry studies, the Company estimates its
year-to-date risk adjustment transfer amount. The Company
records a risk adjustment transfer receivable (payable) in
premiums and accounts receivable (unearned premium) in the
consolidated balance sheets, with an offsetting adjustment
to net earned premiums in the consolidated statements of
operations when the amounts are reasonably estimable and
collection is reasonably assured.
A three-year (2014-2016) risk corridor program limits insurer
gains and losses by comparing allowable medical costs to
a target amount as defi ned by HHS. This program applies
to a subset of Affordable Care Act eligible individual and
small group products certifi ed as Qualifi ed Health Plans.
The public marketplace can only sell Qualifi ed Health Plans.
In addition, carriers who sell Qualifi ed Health Plans on
the public marketplace can also sell them off the public
marketplace. Variances from the target amount exceeding
certain thresholds may result in amounts due to or due from
HHS. During 2014, the Company did not participate in any
insurance public marketplaces so the risk corridor program
had no impact on the Company’s 2014 operations.