Current through Register 2024 Notice Reg. No. 52, December 27, 2024
(a) General Rules
(1) Contract reserves are required, unless
otherwise specified in paragraph (a)(2) for:
(A) All individual and group contracts with
which level premiums are used; or
(B) 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 paragraph shall be calculated based on
subsection §
2312.5(b).
(2) Contracts not requiring a contract
reserve are:
(A) Contracts which cannot be
continued after one year from issue; or
(B) Contracts already in force on the
effective date of this article for which no contract reserve is required under
Section
997 of the
Insurance Code.
(3) The
contract reserve shall be in addition to claim reserves and premium
reserves.
(4) The methods and
procedures for the calculation of contract reserves shall be consistent with
those for claim reserves for any contract, or else appropriate adjustment shall
be made when necessary to assure provision for the aggregate liability. The
definition of the date of incurral must be the same in both
determinations.
(5) The total
contract reserve established shall incorporate provisions for moderately
adverse deviations.
(b)
Minimum Standards for Contract Reserves
(1)
Basis.
(A) Morbidity or other Contingency.
Minimum standards with respect to morbidity are those set forth in §
2315. 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 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 §
2315 shall be valued using tables
established for reserve purposes by a qualified actuary with the approval of
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.
1. 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.
2.
Business in force as of the effective date of §
2312.5(b)(1)(C)2.
may be permitted to retain the original reserve basis which may not meet the
provisions of Item 1. above, subject to the acceptability to the
Commissioner.
(B)
Interest. The maximum interest rate is specified in §
2315.
(C) Termination Rates. Termination rates used
to compute reserves shall be on the basis of a mortality table as specified in
§
2315 except as noted in the
following paragraphs:
1. Under contracts for
which premiums 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, or
(ii) Eight percent.
2. 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 §
2315); and
(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%); and
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 Section
10231.6 of
the Insurance Code, where the 2% shall be three percent
(3%)
3. Where a
morbidity standard specified in §
2315 is on an aggregate basis,
such morbidity standard may be adjusted to reflect the effect of insurer
underwriting by policy duration. The adjustments shall be appropriate to the
underwriting and must be approved by the
Commissioner.
(2) Reserve Method.
(A) For all disability insurance as defined
in §
2310(a) except
for contracts issued on or after January 1, 1995, which provide long-term care
and return of premium or other deferred cash benefits, the minimum reserve
shall be 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.
(B)
For long-term care insurance issued on or after January 1, 1995, the minimum
reserve shall be the reserve calculated on the one-year full preliminary term
method.
(C) For return of premium
or other deferred cash benefits issued on or after January 1, 1995, the minimum
reserve shall be the reserve calculated as follows:
1. On the one year preliminary term method if
such benefits are provided at any time before the twentieth
anniversary;
2. On the two year
preliminary term method if such benefits are only provided on or after the
twentieth anniversary.
(D) The preliminary term method may be
applied only in relation to the date of issue of a contractual obligation.
Reserve adjustments introduced later, as a result of rate increases, revisions
in assumptions (e.g., projected inflation rates) or for other reasons, shall be
applied immediately as of the effective date of adoption of the adjusted
basis.
(3) 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 shall not be less than
zero.
(4) 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.
(c) 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/or mortality rates, and rates of morbidity or other contingency. Also
subject to the preceding condition, an 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 for all or any combination of the benefits included
in the contracts valued.
(d)
Tests For Adequacy and Reasonableness of Contract Reserves
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 increases to such tabular reserves if such tests
indicate that the basis of such reserves is no longer adequate subject to the
minimum standards in subsection (b).
If an insurer 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 insurer shall establish
contract reserves for such shortfall in the aggregate.
1. New
section filed 11-4-94; operative 12-5-94 (Register 94, No. 44).
2.
Amendment filed 12-13-2005; operative 12-13-2005 pursuant to Government Code
section
11343.4
(Register 2005, No. 50).
Note: Authority cited: Sections
997(a)
and
10489.95,
Insurance Code. Reference: Sections
985,
997 and
10489.15(a),
Insurance Code.
