Requiring Actuarial Soundness

States may require that premiums be “actuarially sound.” This means that insurers must follow standards, such as those set by the American Academy of Actuaries and the Actuarial Standards Board, to determine if premiums can reasonably be expected to cover losses and if the plan has adequate financial reserves. The test for actuarial soundness in health insurance often includes a medical loss ratio, but insurers may be allowed to make further adjustments to premiums based on their predictions of medical inflation over a several year period, anticipated swings in the economy, the mix of businesses that they serve, and other factors. States that require actuarially sound premiums generally require insurers to file forms and memoranda explaining how their rates are calculated, and these filings are subject to review by the state’s insurance department.

Example: Kansas requires actuarial soundness, and the state has developed guidelines governing this practice. Insurers must file their proposed premium rates with the state. Because the state uses a stringent review process, insurers do not usually implement premium increases until the department places the new rates on file. In practice, the examiner for the Kansas Insurance Department often asks insurers to lower their proposed premium increases based on his analysis of insurance company’s filings.¹