Alabama Administrative Code
Title 482 - ALABAMA DEPARTMENT OF INSURANCE
Chapter 482-1-134 - HEALTH INSURANCE RESERVES
Section 482-1-134-.04 - Contract Reserves
Universal Citation: AL Admin Code R 482-1-134-.04
Current through Register Vol. 42, No. 5, February 29, 2024
(1) General
(a) Contract reserves are required,
unless otherwise specified in Rule subparagraph (b) for either of the
following:
1. All individual and group
contracts with which level premiums are used.
2. All individual and group contracts with
respect to which, due to the gross premium pricing structure at issue, the
value of the future benefits at any time exceeds the value of any appropriate
future valuation net premiums at that time. This evaluation may be applied on a
rating block basis if the total premiums for the block were developed to
support the total risk assumed and expected expenses for the block each year,
and a qualified actuary certifies the premium development. The actuary should
state in the certification that premiums for the rating block were developed
such that each year's premium was intended to cover that year's costs without
any prefunding. If the premium is also intended to recover costs for any prior
years, the actuary should also disclose the reasons for and magnitude of such
recovery. The values specified in this subparagraph shall be determined on the
basis specified in paragraph (2).
(b) Contracts not requiring a contract
reserve are either of the following:
1.
Contracts that cannot be continued after one year from issue.
2. Contracts already in force on the
effective date of these standards for which no contract reserve was required
under the immediately preceding standards.
(c) The contract reserve is in addition to
claim reserves and premium reserves.
(d) The methods and procedures for contract
reserves shall be consistent with those for claim reserves for a contract, or
else appropriate adjustment shall be made when necessary to assure provision
for the aggregate liability. The definition of the date of incurral shall be
the same in both determinations.
(e) The total contract reserve established
shall incorporate provisions for moderately adverse deviations.
(2) Minimum Standards for Contract Reserves
(a) Basis
1. Morbidity or Other Contingency. Minimum
standards with respect to morbidity are those set forth in Appendix A.
Valuation net premiums used under each contract shall have a structure
consistent with the gross premium structure at issue of the contract as this
relates to the advancing age of insured, contract duration and period for which
gross premiums have been calculated. Contracts for which tabular morbidity
standards are not specified in Appendix A shall be valued using tables
established for reserve purposes by a qualified actuary and acceptable to the
commissioner. The morbidity tables shall contain a pattern of incurred claims
cost that reflects the underlying morbidity and shall not be constructed for
the primary purpose of minimizing reserves.
(i) In determining the morbidity assumptions,
the actuary shall use assumptions that represent the best estimate of
anticipated future experience, but shall not incorporate any expectation of
future morbidity improvement. Morbidity improvement is a change, in the
combined effect of claim frequency and the present value of future expected
claim payments given that a claim has occurred, from the current morbidity
tables or experience that will result in a reduction to reserves. It is not the
intent of this provision to restrict the ability of the actuary to reflect the
morbidity impact for a specific known event that has occurred and that is able
to be evaluated and quantified.
(ii) Business in force as of the effective
date of subparagraph (a)3.(iii) of this paragraph (2) may be permitted to
retain the original reserve basis which may not meet the provisions of Item (i)
above, subject to the acceptability to the commissioner.
2. Interest. The maximum interest rate is
specified in Appendix A.
3.
Termination Rates. Termination rates used in the computation of reserves shall
be on the basis of a mortality table as specified in Appendix A except as noted
in the following items:
(i) Under contracts
for which premium rates are not guaranteed, and where the effects of insurer
underwriting are specifically used by policy duration in the valuation
morbidity standard or for return of premium or other deferred cash benefits,
total termination rates may be used at ages and durations where these exceed
specified mortality table rates, but not in excess of the lesser of:
(I) Eighty percent of the total termination
rate used in the calculation of the gross premiums.
(II) Eight percent.
(ii) For long-term care individual policies
or group certificates issued after January 1, 1997, the contract reserve may be
established on a basis of separate:
(I)
Mortality (as specified in Appendix A).
(II) Terminations other than mortality, where
the terminations are not to exceed:
I. For
policy years one (1) through four (4), the lesser of eighty percent (80%) of
the voluntary lapse rate used in the calculation of gross premiums and eight
percent (8%).
II. For policy years
five (5) and later, the lesser of one hundred percent (100%) of the voluntary
lapse rate used in the calculation of gross premiums and four percent
(4%).
(iii)
For long-term care individual policies or group certificates issued on or after
January 1, 2005, the contract reserve shall be established on the basis of:
(I) Mortality (as specified in Appendix
A).
(II) Terminations other than
mortality, where the terminations are not to exceed:
I. For policy year one, the lesser of eighty
percent (80%) of the voluntary lapse rate used in the calculation of gross
premiums and six percent (6%).
II.
For policy years two (2) through four (4), the lesser of eighty percent (80%)
of the voluntary lapse rate used in the calculation of gross premiums and four
percent (4%).
III. For policy years
five (5) and later, the lesser of one hundred percent (100%) of the voluntary
lapse rate used in the calculation of gross premiums and two percent (2%),
except for group insurance as defined in §
27-19-100, et
seq., Code of Ala. 1975, where the 2% shall be three
percent (3%).
(iv) Where a morbidity standard specified in
Appendix A is on an aggregate basis, the morbidity standard may be adjusted to
reflect the effect of insurer underwriting by policy duration. The adjustments
must be appropriate to the underwriting and be acceptable to the commissioner.
(b) Reserve
Method.
1. For insurance except long-term
care and return of premium or other deferred cash benefits, the minimum reserve
is the reserve calculated on the two-year full preliminary term method; that
is, under which the terminal reserve is zero at the first and also the second
contract anniversary.
2. For
long-term care insurance, the minimum reserve is the reserve calculated as
follows:
(i) For individual policies and
group certificates issued on or before December 31, 1991, reserves calculated
on the two-year full preliminary term method.
(ii) For individual policies and group
certificates issued on or after January 1, 1992, reserves calculated on the
one-year full preliminary term method.
3.
(i) For
return of premium or other deferred cash benefits, the minimum reserve is the
reserve calculated as follows:
(I) On the
one-year preliminary term method if the benefits are provided at any time
before the twentieth anniversary.
(II) On the two-year preliminary term method
if the benefits are only provided on or after the twentieth
anniversary.
(ii) The
preliminary term method may be applied only in relation to the date of issue of
a contract. Reserve adjustments introduced later, as a result of rate
increases, revisions in assumptions (e.g., projected inflation rates) or for
other reasons, are to be applied immediately as of the effective date of
adoption of the adjusted basis.
(c) Negative Reserves. Negative Reserves on
any benefit may be offset against positive reserves for other benefits in the
same contract, but the total contract reserve with respect to all benefits
combined may not be less than zero.
(d) Nonforfeiture Benefits for Long-Term Care
Insurance. The contract reserve on a policy basis shall not be less than the
net single premium for the nonforfeiture benefits at the appropriate policy
duration, where the net single premium is computed according to the above
specifications.
(3) Alternative Valuation Methods and Assumptions Generally. Provided the contract reserve on all contracts to which an alternative method or basis is applied is not less in the aggregate than the amount determined according to the applicable standards specified above; an insurer may use any reasonable assumptions as to interest rates, termination and mortality rates, and rates of morbidity or other contingency. Also, subject to the preceding condition, the insurer may employ methods other than the methods stated above in determining a sound value of its liabilities under such contracts, including, but not limited to the following: the net level premium method; the one-year full preliminary term method; prospective valuation on the basis of actual gross premiums with reasonable allowance for future expenses; the use of approximations such as those involving age groupings, groupings of several years of issue, average amounts of indemnity, grouping of similar contract forms; the computation of the reserve for one contract benefit as a percentage of, or by other relation to, the aggregate contract reserves exclusive of the benefit or benefits so valued; and the use of a composite annual claim cost for all or any combination of the benefits included in the contracts valued.
(4) Tests For Adequacy and Reasonableness of Contract Reserves.
(a) Annually, an
appropriate review shall be made of the insurer's prospective contract
liabilities on contracts valued by tabular reserves, to determine the
continuing adequacy and reasonableness of the tabular reserves giving
consideration to future gross premiums. The insurer shall make appropriate
increments to such tabular reserves if such tests indicate that the basis of
such reserves is no longer adequate; subject, however, to the minimum standards
of paragraph (2).
(b) In the event
a company has a contract or a group of related similar contracts, for which
future gross premiums will be restricted by contract, insurance department
regulations, or for other reasons, such that the future gross premiums reduced
by expenses for administration, commissions, and taxes will be insufficient to
cover future claims, the company shall establish contract reserves for such
shortfall in the aggregate.
Author: Commissioner of Insurance
Statutory Authority: Code of Ala. 1975, §§ 27-2-17, 27-36A-1, et al.
Disclaimer: These regulations may not be the most recent version. Alabama may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
