A.
General
(1) Contract reserves
are required, unless otherwise specified in Section 7(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. For products that are community
rated or that use other rating methodology based on cross-subsidies among
contracts within the block, this evaluation may be applied on a rating block
basis provided that 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. If rates are determined such that each year's premium is intended to
cover that year's cost, the rating block approach results in no contract
reserves unless required by subsection D. If rates are designed to prefund
future years' costs, contract reserves will be required. The values specified
in this subparagraph (b) shall be determined on the basis specified in Section
7(B).
(2) Contracts not
requiring a contract reserve are:
(a)
Contracts that 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.
(4) The methods and procedures for contract
reserves shall 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.
(5)
The total contract reserve established shall incorporate provisions for
moderately adverse deviations.
B.
Minimum Standards for Contract
Reserves
(1) Morbidity or Other
Contingency. Minimum standards with respect to morbidity are those set forth in
Appendix 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. This requirement only applies 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 net premium structure. If for a policy form there is no gross premium
variation by age, the valuation net premiums 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 claim costs.
Contracts for which tabular morbidity standards are not
specified in Appendix A 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 cost that reflects
the underlying morbidity and shall not be constructed for the primary purpose
of minimizing reserves.
(a) 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 from the current morbidity tables or experience that
will result in a reduction to reserves, taking into account the combined effect
of claim frequency and the present value of future expected claim payments
given that a claim has occurred. 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, such as a new drug release. However, such events are
rare.
(b) Business in force as of
the effective date of Section 7(B)(3)(c) may be permitted to retain the
original reserve basis which may not meet the provisions of subparagraph (a)
above, subject to the acceptability to the Superintendent.
(2) Interest. The maximum interest rate is
specified in Appendix A.
(3)
Termination Rates. Termination rates used in the computation of reserves shall
be on the basis of a mortality table as specified in Appendix A except as noted
in the following items:
(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:
(i) Eighty percent of the total termination
rate used in the calculation of the gross premiums, or
(ii) Eight percent;
(b) For long-term care individual policies or
group certificates issued on or after January 1, 2007, the contract reserve
shall be established on the basis of:
(i)
Mortality (as specified in Appendix A); and
(ii) Terminations other than mortality, where
the terminations are not to exceed:
(I) For
policy year one, the lesser of 80% of the voluntary lapse rate used in the
calculation of gross premiums and 6%;
(II) For policy years two through four, the
lesser of 80% of the voluntary lapse rate used in the calculation of gross
premiums and 4%; and
(III) For
policy years five and later, the lesser of 100% of the voluntary lapse rate
used in the calculation of gross premiums and 2%, except for group long-term
care insurance as defined in
24-A M.R.S.A.
§5072(3) where the 2%
shall be 3%.
(c) Where a morbidity standard specified in
Appendix A 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
Superintendent.
(4)
Reserve Method.
(a) For insurance except
long-term care insurance or nursing home care insurance as defined in Title
24-A M.R.S.A.,
Sections5051 or
5072, 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.
(b) Prior to December
31, 1993, for long-term care insurance or nursing home care insurance as
defined in Title
24-A M.R.S.A.,
Section5051, and for riders (or policy
provisions) which only provide return of premium or other deferred cash
benefits, the minimum reserve is the reserve calculated on the two-year full
preliminary term method.
(c)
Effective December 31, 1993, for long-term care insurance or nursing home care
insurance as defined in Title
24-A M.R.S.A.,
Sections5051 or
5072, the minimum
reserve is the reserve calculated on the one-year full preliminary term
method.
(d) Effective December 31,
1993, for riders (or policy provisions) which only provide return of premium or
other deferred cash benefits, the minimum reserve is the reserve calculated as
follows:
(i) On the one-year full preliminary
term method if benefits are provided at any time before the rider's (or
policy's) twentieth anniversary; and
(ii) On the two-year preliminary term method
if benefits are only provided on or after the rider's (or policy's) twentieth
anniversary.
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.
(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 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, the 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 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 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 the tabular reserves if such tests
indicate that the basis of such reserves is no longer adequate; subject,
however, to the minimum standards of Section 7(B).
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.
