Current through Register 2024 Notice Reg. No. 38, September 20, 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.
