A. Construction
This section shall be liberally construed to ensure that the
insurer shall establish and maintain reserves which place a sound value on its
liabilities and which make a good and sufficient provision for all unpaid
obligations and contingencies.
B. Definitions
(1) Claim Reserve -- The reserve that
recognizes the liability for unpaid benefits under the contract on claims which
have been reported to the insurer.
(2) Incurred but not Reported Reserve -- The
reserve to recognize liability for claims not yet reported or recorded by the
insurer, for reopened claims, and for future development on known
claims.
C. Standards
(1) In addition to any other statutory
requirements the legal services insurance policy reserves shall not be less
than the aggregate claim reserve plus incurred but not reported (IBNR) reserves
for all outstanding policies and contracts.
a.
Claim reserve. The claim reserve for each insured shall be the insurer's
estimate of the unpaid liability, and shall be based on the insurer's
experience or assumptions designed to place a sound value on the liability
outstanding.
b. Incurred but not
Reported Reserve. The IBNR reserve for each insured shall not be less than the
reserve calculated by the following formula:
IBNR reserve = W X IBNR based on actual experience X A +
(1-W) X expected IBNR X A where W is weighting factor varying from zero to 1.0
giving appropriate credibility to actual experience, and A is an adjustment
factor, if any, to reflect changes in claim costs due to changing utilization,
exposure, inflation, benefit changes, or any other appropriate
adjustments.
(2)
Interest. The maximum interest rate which may be used to value reserves shall
be 4 percent.
(3) Aggregate
reserves for group legal services insurance may be calculated, at the option of
the insurer, according to any standards which produce greater aggregate
reserves than those calculated according to the minimum standard provided in
this regulation.
