Current through Register Vol. 46, No. 39, September 25, 2024
(a)
General.
(1) Contract reserves are required,
unless otherwise specified in paragraph (2) of this subdivision for:
(i) all individual and group contracts with
which level premiums, whether or not such premiums are guaranteed, are used;
or
(ii) 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 or where the contract
provides for the extension of benefits after the termination of the coverage,
e.g., deferred maternity and other similar benefits. 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 subdivision (b) of this section.
(2) Contracts that cannot be
continued after one year from issue do not require a contract
reserve.
(3) The contract reserve
is in addition to claim reserves and premium reserves.
(4) 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. The methods and procedures for contract
reserves shall also be consistent with those used for setting premium
reserves.
(5) The total contract
reserve established shall incorporate provisions for moderately adverse
deviations.
(b) Minimum
standards for contract reserves.
(1) Basis.
(i) Morbidity or other contingency.
(a) Minimum standards with respect to
morbidity are those set forth in section
94.10 of this Part. Valuation net
premiums used under each contract shall be a uniform percentage of 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.
(b) Clause (a) of this
subparagraph applies only to the premium structure applicable to each contract.
The relationship among gross premiums for different contracts (e.g., variations
by age) has no bearing on the new premium structure. If, for a policy form,
there is no gross premium variation by age, the valuation net premium will
nonetheless vary based on age at issue for each contract since, at issue, the
present value of valuation net premiums for a contract must equal the present
value of tabular net costs.
(c)
Contracts for which tabular morbidity standards are not specified in section
94.10 of this Part shall be valued
using tables established for reserve purposes by a qualified actuary and
acceptable to the superintendent. The morbidity tables shall contain a pattern
of incurred claims so that it reflects the underlying morbidity and shall not
be constructed for the primary purpose of minimizing reserves.
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. The last sentence is intended to provide allowances for a known
event, such as a new drug release. At the time of adoption, there were no
specific examples that could be pointed to in the recent past that would have
met this standard. This is intended to be an extremely rare event.
(ii) Interest. The
maximum interest rate is specified in section
94.10 of this Part.
(iii) Termination rates. Termination rates
used in the computation of reserves shall be on the basis of a mortality table
as specified in section
94.10 of this Part except as noted
in the following clauses:
(a) 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 80 percent
of the total termination rate used in the calculation of the gross premiums, or
eight percent.
(b) For long-term
care individual policies or group certificates issued on or after January 1,
1997 and before January 1, 2003, the contract reserve may be established on a
basis of separate:
(1) mortality (as
specified in section
94.10 of this Part); and
(2) terminations other than mortality, where
the terminations are not to exceed:
(i) for
policy years one through four, the lesser of 80 percent of the voluntary lapse
rate used in the calculation of gross premiums or eight percent;
(ii) for policy years five and later, the
lesser of 100 percent of the voluntary lapse rate used in the calculation of
gross premiums or four percent.
(c) For long-term care individual policies or
group certificates issued on or after January 1, 2003, the contract reserve
shall be established on the basis of:
(1)
mortality (as specified in section
94.10 of this Part); and
(2) terminations other than mortality, where
the terminations are not to exceed:
(i) for
policy year one, the lesser of 80 percent of the voluntary lapse rate used in
the calculation of gross premiums or six percent;
(ii) for policy years two through four, the
lesser of 80 percent of the voluntary lapse rate used in the calculation of
gross premiums or four percent; and
(iii) for policy years five and later:
(A) for individual policies, the lesser of
100 percent of the voluntary lapse rate used in the calculation of gross
premiums or two percent; and
(B)
for group certificates, the lesser of 100 percent of the voluntary lapse rate
used in the calculation of gross premiums or three percent.
(d) Where a
morbidity standard specified in section
94.10 of this Part 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 superintendent.
(2) Reserve method.
(i) 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.
(ii) For long-term
care insurance, the minimum reserve is the reserve calculated as follows:
(a) for individual policies and group
certificates issued on or before December 31, 1994, reserves calculated on the
two-year full preliminary term method; and
(b) for individual policies and group
certificates issued on or after January 1, 1995, reserves calculated on the
one-year full preliminary term method.
(iii) For return of premium or other deferred
cash benefits, excluding the premium refund reserve on single premium credit
disability insurance, the minimum reserve is the reserve calculated as follows:
(a) on the one-year preliminary term method
if the benefits are provided at any time before the 20th anniversary;
and
(b) on the two-year preliminary
term method if the benefits are only provided on or after the 20th
anniversary.
(iv) 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.
(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 may not be less than zero.
(4) Nonforfeiture benefits. The contract
reserve for each policy 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 in
subdivision (b) of this section; 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 in paragraph (b)(2) of this
section 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.
(d) Tests for adequacy and
reasonableness of contract reserves.
(1)
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 subdivision (b) of this section.
(2) In the event 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, regulatory approval
for rate changes, 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.
