Current through Reg. 50, No. 13; March 28, 2025
(a) General.
(1) Contract reserves are required, unless
otherwise specified in paragraph (2) of this subsection, 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 values specified
in this subparagraph must be determined on the basis specified in subsection
(b) of this section.
(2)
Contracts not requiring a contract reserve are as follows:
(A) contracts which cannot be continued after
one year from issue; or
(B)
contracts where each year's premium is priced to cover that year's cost without
any prefunding. 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. For either a contract specific
or rating block basis, the actuary must certify the premium development and
should state in the certification that premiums were developed such that each
year's premium was intended to cover that year's costs without any
prefundings.
(3) The
contract reserve is in addition to claim reserves and premium
reserves.
(4) The methods and
procedures for contract reserves must either be consistent with those for claim
reserves for any contract, or else appropriate adjustment must 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.
(b) Minimum standards for contract
reserves.
(1) Morbidity or other contingency.
Minimum standards with respect to morbidity are those set forth in §
3.7006 of this title (relating to
Specific Standards for Morbidity, Interest, and Mortality).
(A) Valuation net premiums used under each
contract must 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.
(B) Contracts for which tabular morbidity
standards are not specified in §
3.7006 of this title 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.
(2) Interest. The maximum interest
rate is specified in §
3.7006 of this title (relating to
Specific Standards for Morbidity, Interest, and Mortality).
(3) Termination rates. Termination rates used
in the computation of reserves shall be on the basis of a mortality table as
specified in §
3.7006 of this title (relating for
Specific Standards for Morbidity, Interest, and Mortality) except as noted in
this subparagraph.
(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% of the
total termination rate used in the calculation of the gross premiums, or
8.0%.
(B) For long-term care
individual policies or group certificates issued after December 31, 2002, the
contract reserve may be established on a basis of separate mortality as
specified in §
3.7006 of this title and
terminations other than mortality, where the terminations are not to exceed:
(i) For policy years one through four, the
lesser of 80% of the voluntary lapse rate used in the calculation of gross
premiums or 8%;
(ii) For policy
years five and later, the lesser of 100% of the voluntary lapse rate used in
the calculation of gross premiums or 4%;
(C) Where a morbidity standard specified in
§
3.7006 of this title is on an
aggregate basis, such 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.
(4) Reserve method.
(A) For insurance, except long-term care and
return of premium or other deferred cash benefits issues after December 31,
2002, 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.
(B) For long-term care insurance issued after
December 31, 2002, the minimum reserve is the reserve calculated on the
one-year full preliminary term method.
(C) For return of premium or other deferred
cash benefits issued after December 31, 2002, 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.
(D) The preliminary term method may be
applied only in relation to the date of issue of a contract or a rider. 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.
(5) 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.
(6) 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 paragraph (4) of this subsection.
(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 subsection
(b) of this section, 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, the insurer may
employ methods other than the methods stated in subsection (b) 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. Annually, an appropriate review must 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 subsection (b) of this section. 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.