(1) PURPOSE. This
section establishes required minimum standards under ch. 623, Stats., for
claim, premium and contract reserves of insurers writing accident and sickness
insurance policies.
(2) SCOPE. This
section applies to any insurer, including a fraternal benefit society, issuing
a policy providing individual or group accident and sickness insurance
coverages as classified under s. Ins 6.75(1) (c) or (2) (c). This section does
not apply to credit insurance as classified under s. Ins 6.75(1) (c) 1. or (2)
(c) 1.
(3) DEFINITIONS. In this
section:
(a) "Annual claim cost" means the
net annual cost per unit of benefit before the addition of expenses, including
claim settlement expenses, and a margin for profit or contingencies.
Note: For example, the annual claim cost for a
$100 monthly disability benefit, for a maximum disability benefit period of one
year, with an elimination period of one week, with respect to a male at age 35,
in a certain occupation might be $12, while the gross premium for this benefit
might be $18. The additional $6 would cover expenses and profit or
contingencies.
(b) "Claims
accrued" means that portion of claims incurred on or prior to the valuation
date which result in liability of the insurer for the payment of benefits for
medical services which have been rendered on or prior to the valuation date,
and for the payment of benefits for days of hospitalization and days of
disability which have occurred on or prior to the valuation date, which the
insurer has not paid as of the valuation date, but for which it is liable, and
will have to pay after the valuation date.
Note: This liability is sometimes referred to as a
liability for accrued benefits. A claim reserve, which represents an estimate
of this accrued claim liability, must be established.
(c) "Claims incurred" means a claim for which
the insurer has become obligated to make payment, on or prior to the valuation
date.
(d) "Claims reported" means
those claims that have been incurred on or prior to the valuation date of which
the insurer has been informed, on or prior to the valuation date.
Note: These claims are considered as reported
claims for annual statement purposes.
(e) "Claims unaccrued" means that portion of
claims incurred on or prior to the valuation date which result in liability of
the insurer for the payment of benefits for medical services expected to be
rendered after the valuation date, and for benefits expected to be payable for
days of hospitalization and days of disability occurring after the valuation
date.
Note: This liability is sometimes referred to as a
liability for unaccrued benefits. A claim reserve, which represents an estimate
of the unaccrued claim payments expected to be made (which may or may not be
discounted with interest), must be established.
(f) "Claims unreported" means those claims
that have been incurred on or prior to the valuation date of which the insurer
has not been informed, on or prior to the valuation date.
Note: These claims are considered as unreported
claims for annual statement purposes.
(g) "Date of disablement" means the earliest
date on which the insured is considered as being disabled under the definition
of disability in the contract, based on a physician's evaluation or other
evidence.
(h) "Elimination period"
means a specified number of days, weeks, or months starting at the beginning of
each period of loss, during which no benefits are payable.
(i) "Gross premium" means the amount of
premium charged by the insurer. It includes the net premium, based on claim
cost, for the risk together with any loading for expenses, profit or
contingencies.
(j) "Group
insurance" includes blanket insurance.
(k) "Individual insurance" includes franchise
insurance.
(l) "Level premium" means
a premium calculated to remain unchanged throughout either the lifetime of the
policy, or for some shorter projected period of years.
Note: The level premium need not be guaranteed; in
which case, although it is calculated to remain level, it may be changed if any
of the assumptions on which it was based are revised at a later time.
Generally, the annual claim costs are expected to increase each
year and the insurer, instead of charging premiums that correspondingly
increase each year, charges a premium calculated to remain level for a period
of years or for the lifetime of the contract. In this case the benefit portion
of the premium is more than needed to provide for the cost of benefits during
the earlier years of the policy and less than the actual cost in the later
years. The building of a prospective contract reserve is a natural result of
level premiums.
(m) "Modal
premium" means the premium paid on a contract based on a premium term which
could be annual, semiannual, quarterly, monthly, or weekly.
Note: Thus if the annual premium is $100 and if,
instead, monthly premiums of $9 are paid then the modal premium is
$9.
(n) "Negative reserve"
means a negative terminal reserve value due to the values of the benefits
decreasing with advancing age or duration.
(o) "Preliminary term reserve method" means
the method of valuation under which the valuation net premium for each year
falling within the preliminary term period is exactly sufficient to cover the
expected incurred claims of that year, so that the terminal reserve will be
zero at the end of the year. As of the end of the preliminary term period, a
new constant valuation net premium, or stream of changing valuation premiums,
becomes applicable such that the present value of all such premiums is equal to
the present value of all claims expected to be incurred following the end of
the preliminary term period.
(p)
"Present value of amounts not yet due on claims" means the reserve for claims
unaccrued which may be discounted at interest.
(q) "Reserve" includes all items of benefit
liability, whether in the nature of incurred claim liability or in the nature
of contract liability relating to future periods of coverage, and whether the
liability is accrued or unaccrued.
Note: An insurer under its contracts promises
benefits which result in:
On claims incurred, payments expected to be made after the
valuation date for accrued and unaccrued benefits are liabilities of the
insurer which should be provided for by establishing claim reserves; or
Claims which are expected to be incurred after the valuation
date. Any present liability of the insurer for these future claims should be
provided for by the establishment of contract reserves and unearned premium
reserves.
(r) "Terminal
reserve" means the reserve at the end of the contract year which is the present
value of benefits expected to be incurred after that contract year minus the
present value of future valuation net premiums.
(s) "Unearned premium reserve" means that
portion of the premium paid or due to the insurer which is applicable to the
period of coverage extending beyond the valuation date.
Note: Thus if an annual premium of $120 was paid
on November 1, $20 would be earned as of December 31 and the remaining $100
would be unearned. The unearned premium reserve could be on a gross basis as in
this example, or on a valuation net premium basis.
(t) "Valuation net modal premium" means the
modal fraction of the valuation net annual premium that corresponds to the
gross modal premium in effect on any contract to which contract reserves apply.
Thus if the mode of payment in effect is quarterly, the valuation net modal
premium is the quarterly equivalent of the valuation net annual
premium.
(4) RESERVES IN
EXCESS OF MINIMUM RESERVE STANDARDS. An insurer subject to this section may
determine that the adequacy of its accident and sickness reserves requires
reserves in excess of the minimum standards specified in this section. The
insurer shall hold and consider the excess reserves as its minimum
reserves.
(5) PROSPECTIVE GROSS
PREMIUM VALUATION.
(a) With respect to any
block of contracts, or with respect to an insurer's accident and sickness
business as a whole, a prospective gross premium valuation is the ultimate test
of reserve adequacy as of a given valuation date. The gross premium valuation
shall take into account, for contracts in force, in a claims status, or in a
continuation of benefits status on the valuation date, the present value as of
the valuation date adjusted for future premium increases reasonably expected to
be put into effect, of:
1. All expected
benefits unpaid.
2. All expected
expenses unpaid.
3. All unearned or
expected premiums.
(b)
The insurer shall perform a gross premium valuation whenever a significant
doubt exists as to reserve adequacy with respect to any major block of
contracts, or with respect to the insurer's accident and sickness business as a
whole. In the event inadequacy is found to exist, the insurer shall make
immediate loss recognition and restore the reserves to adequacy. The insurer
shall hold adequate reserves, inclusive of claim, premium and contract
reserves, if any, with respect to all contracts, regardless of whether contract
reserves are required for the contracts under these standards.
(c) Whenever minimum reserves, as defined in
these standards, exceed reserve requirements as determined by a prospective
gross premium valuation, the minimum reserves remain the minimum requirement
under these standards.
(6) CLAIM RESERVES.
(a) General claim reserve requirements are:
1. Claim reserves are required for all
incurred but unpaid claims on all accident and sickness insurance
policies;
2. Appropriate claim
expense reserves are required with respect to the estimated expense of
settlement of all incurred but unpaid claims; and
3. The insurer shall test reserves for prior
valuation years for adequacy and reasonableness along the lines of claim
run-off schedules in accordance with the statutory financial statement
including consideration of any residual unpaid liability.
(b) Except as provided in par. (bm), minimum
standards for claim reserves are as follows:
1. For disability income:
a. The maximum interest rate for claim
reserves is specified in Appendix A;
b. Minimum standards with respect to
morbidity are those specified in Appendix A; except that, at the option of the
insurer, for claims with a duration from date of disablement of less than two
years, the insurer may base the reserves on the insurer's experience, if the
experience is considered credible, or upon other assumptions designed to place
a sound value on the liabilities;
c. For contracts with an elimination period,
the insurer shall measure the duration of disablement as dating from the time
that benefits would have begun to accrue had there been no elimination
period.
2. For all other
benefits:
a. The maximum interest rate for
claim reserves is specified in Appendix A;
b. The insurer shall base the reserve on the
insurer's experience, if this experience is considered credible, or upon other
assumptions designed to place a sound value on the liabilities;
(bm)
1. The
minimum claim reserve standards for contracts issued prior to January 1, 2017,
at the option of the insurer, shall be either the reserving requirements as set
forth in par. (b), or the reserving requirements set forth in the National
Association of Insurance Commissioners Accounting Practices and Procedures
Manual, Appendix A-010.
2. The
minimum claim reserve standards for contracts issued on or after January 1,
2017, shall be the standards set forth in the National Association of Insurance
Commissioners Valuation Manual as defined in s.
623.06(1) (j),
Stats.
(c) General claim reserve methods are as
follows:
1. The insurer may use any generally
accepted or reasonable actuarial method or combination of methods to estimate
all claim liabilities.
2. The
methods used for estimating liabilities generally may be aggregate methods, or
various reserve items may be separately valued. The insurer may also employ
approximations based on groupings and averages. The insurer shall, however,
determine adequacy of the claim reserves in the aggregate.
(7) PREMIUM RESERVES.
(a) General premium reserve requirements are:
1. Unearned premium reserves are required for
all contracts with respect to the period of coverage for which premiums, other
than premiums paid in advance, have been paid beyond the date of
valuation;
2. If premiums due and
unpaid are carried as an asset, the insurer shall treat the premiums as
premiums in force, subject to unearned premium reserve determination. The
insurer shall carry as an offsetting liability the value of unpaid commissions,
premium taxes, and the cost of collection associated with due and unpaid
premiums; and
3. Insurers may
appropriately discount to the valuation date the gross premiums paid in advance
for a period of coverage commencing after the next premium due date which
follows the date of valuation. The insurer shall hold this discounted premium
either as a separate liability or as an addition to the unearned premium
reserve which would otherwise be required as a minimum.
(b) Minimum standards for unearned premium
reserves are as follows:
1. The minimum
unearned premium reserve with respect to any contract is the pro rata unearned
modal premium that applies to the premium period beyond the valuation date,
with the premium determined on the basis of:
a. The valuation net modal premium on the
contract reserve basis applying to the contract; or
b. The gross modal premium for the contract
if no contract reserve applies.
2. However, the sum of the unearned premium
and contract reserves for all contracts of the insurer subject to contract
reserve requirements may not be less than the gross modal unearned premium
reserve on all of the contracts, as of the date of valuation. To the extent not
provided for elsewhere in this section, this reserve may not be less than the
expected claims for the period beyond the valuation date represented by the
unearned premium reserve.
(c) General premium reserve methods are as
follows:
1. In computing premium reserves, the
insurer may employ suitable approximations and estimates; including, but not
limited to, groupings, averages and aggregate estimation.
2. The insurer shall periodically test the
approximations or estimates to determine their continuing adequacy and
reliability.
(8) CONTRACT RESERVES.
(a) General contract reserve requirements
are:
1. Contract reserves are required,
unless otherwise specified in subd. 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. The insurer shall
determine the values specified in this subparagraph on the basis specified in
par. (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 these standards for which no contract reserve was required
under the immediately preceding standards;
3. The contract reserve is in addition to
claim reserves and premium reserves; and
4. The insurer shall use methods and
procedures for contract reserves that are consistent with those for claim
reserves for any contract, or else shall make appropriate adjustment when
necessary to assure provision for the aggregate liability. The insurer shall
use the same definition of the date of incurral in both
determinations.
(b)
Except as provided in par. (bm), the basis for determining minimum standards
for contract reserves are as follows:
1.
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 advancing age of insured, contract duration and period for which
gross premiums have been calculated. The insurer shall value contracts for
which tabular morbidity standards are not specified in Appendix A using tables
established for reserve purposes by a qualified actuary meeting the
requirements of s. Ins 6.12 and acceptable to the commissioner;
Note: The consistency between the gross premium
structure and the valuation net premium is required only at issue, because the
impact on the consistency after issue of regulatory restrictions on premium
rate increases is still under study.
2. The maximum interest rate is specified in
Appendix A;
3. The insurer shall
use termination rates in the computation of reserves on the basis of a
mortality table as specified in Appendix A except as noted in the following
paragraph.
3m. 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, the insurer may use total termination rates at ages and
durations where these exceed specified mortality table rates, but not in excess
of the lesser of:
a. Eighty percent of the
total termination rate used in the calculation of the gross premiums,
or
b. Eight percent.
3s. Where a morbidity standard
specified in Appendix A is on an aggregate basis, the insurer may adjust the
morbidity standard to reflect the effect of insurer underwriting by policy
duration. The adjustments shall be appropriate to the underwriting and
acceptable to the commissioner;
4.
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. The insurer may apply the two-year
preliminary term method only in relation to the date of issue of a contract.
The insurer shall apply reserve adjustments introduced later, as a result of
rate increases, revisions in assumptions or for other reasons, immediately as
of the effective date of adoption of the adjusted basis;
5. The insurer may offset negative reserves
on any benefit 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.
(bm)
1. The
minimum contract reserve standards for accident and sickness contracts issued
prior to January 1, 2017, at the option of the insurer, shall be either the
reserving requirements as set forth in par. (b), or the reserving requirements
set forth in the National Association of Insurance Commissioners Accounting
Practices and Procedures Manual, Appendix A-010.
2. The minimum contract reserve standards for
contracts issued on or after January 1, 2017, shall be the standards set forth
in the National Association of Insurance Commissioners Valuation Manual as
defined in s.
623.06(1) (j), Stats.
(c) 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 this section; an insurer may use any reasonable assumptions as to
interest rates, termination or mortality rates or both, and rates of morbidity
or other contingency. Also, subject to the preceding sentence, the insurer may
employ methods other than the methods stated in this section in determining a
sound value of its liabilities under the contracts, including, but not limited
to the following:
1. The net level premium
method;
2. The one-year full
preliminary term method;
3.
Prospective valuation on the basis of actual gross premiums with reasonable
allowance for future expenses;
4.
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;
5. 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
6. The use
of a composite annual claim cost for all or any combination of the benefits
included in the contracts valued.
(d)
1.
Annually, the insurer shall make an appropriate review 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 the tabular reserves if the tests indicate that the
basis of the reserves is no longer adequate. Any appropriate increments to
tabular reserves made by the insurer under this paragraph shall comply with the
minimum standards of par. (b).
2.
If an insurer has a contract or a group of related similar contracts, for which
future gross premiums will be restricted by the commissioner, the contract, or
some other reason, 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 the shortfall in the
aggregate.
(9)
DETERMINATION OF ADEQUACY. The insurer shall determine the adequacy of its
accident and health insurance reserves on the basis of the claim reserves,
premium reserves, and contract reserves combined. However, the standards
established in this section emphasize the importance of determining appropriate
reserves for each of these three reserve categories separately.
(10) REINSURANCE. The insurer shall
determine, in a manner consistent with these minimum reserve standards and with
all applicable provisions of the reinsurance contracts which affect the
insurer's liabilities, increases to, or credits against reserves carried,
arising because of reinsurance assumed or reinsurance
ceded.
