31 Pa. Code § 84a.6 - Contract reserves
(a)
General requirements.
(1)
Contract reserves are required for the following:
(i) The individual and group contracts with
which level premiums are used.
(ii)
The 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 an actuary certifies the premium
development. The actuary should state in the certification submitted to the
Department with the reserve valuation data 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 prior years, the actuary shall also disclose the reasons for and magnitude
of the recovery. The values specified in this subsection shall be determined on
the basis specified in subsection (b).
(2) Contract reserves are not required for
individual contracts and group certificates already in force on October 23,
1993, that are not guaranteed renewable or noncancellable as set forth in the
contract or certificate or as prescribed under the Health Insurance Portability
and Accountability Act (Pub. L. 104-191 , 110 Stat.
1936).
(3) If this section requires
contract reserves for individual contracts or group certificates already in
force on October 23, 1993, for which contract reserves were not held as of
December 31, 1998, the additional reserves may be phased in over a 3-year
period with 1/3 of the required reserve at December 31, 1999, 2/3 of the
required reserves at December 31, 2000, and 100% of the required reserve at
December 31, 2001, and after.
(4)
The contract reserve is in addition to claim reserves and premium
reserves.
(5) 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 date of incurral
shall be the same in determining both the contract reserves and the claim
reserves.
(6) The total contract
reserve established must incorporate provisions for moderately adverse
deviations.
(b)
Minimum standards for contract reserves.
(1)
Morbidity or other
contingency.
(i) Minimum standards
with respect to morbidity are those in Appendix A (relating to specific
standards for morbidity, interest and mortality). 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 the
insured, contract duration and period for which gross premiums have been
calculated.
(ii) 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 Commissioner. The morbidity tables shall contain a pattern of
incurred claim costs that reflect the underlying morbidity and may not be
constructed for the primary purpose of minimizing reserves.
(iii) If a morbidity standard specified in
Appendix A is on an aggregate basis, the morbidity standard may be adjusted to
a select and ultimate basis to reflect the effect of insurer underwriting by
policy duration. The adjustments shall be appropriate to the underwriting and
be acceptable to the Commissioner.
(iv) In determining the morbidity
assumptions, the actuary shall use assumptions that represent the best estimate
of anticipated future experience but may not incorporate any expectation of
future morbidity improvement for contracts issued on or after January 1, 2007.
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. The actuary can reflect the morbidity impact for a
specific known event that has occurred and can be evaluated and
quantified.
(2)
Maximum interest rate. The maximum interest rate is specified
in Appendix A.
(3)
Termination rates.
(i)
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 subparagraphs
(ii), (iii), (iv) and (v).
(ii)
Total termination rates may be used at ages and durations when 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%.
(iii) For long-term care
individual contracts and group certificates issued on and after January 1,
1999, termination rates in addition to the specified mortality table rates may
be used. The termination rates other than mortality may not exceed the
following:
(A) For policy years 1 through 4,
the lesser of 80% of the voluntary lapse rate used in the calculation of gross
premiums and 8%.
(B) For policy
years 5 and later, the lesser of 100% of the voluntary lapse rate used in the
calculation of gross premiums and 4%.
(iv) For long-term care individual contracts
and group certificates issued on and after January 1, 2007, the following
termination rates in addition to the mortality table rates specified in
Appendix A may be used.
(A) For policy year 1,
the lesser of 80% of the voluntary lapse rate used in the calculation of gross
premiums and 6%.
(B) For policy
years 2 through 4, the lesser of 80% of the voluntary lapse rate used in the
calculation of gross premiums and 4%.
(C) For policy years 5 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 where the 2% shall be
3%.
(v) For single
premium credit disability insurance, termination rates may not be
used.
(4)
Reserve
methods.
(i) For health and accident
insurance except long-term care and return of premium or other deferred cash
benefits, the minimum reserve is the reserve calculated on the 2-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 contracts and group
certificates issued before October 23, 1993, reserves calculated on the 2-year
preliminary term method.
(B) For
individual contracts and group certificates issued on or after October 23,
1993, reserves calculated on the 1-year preliminary term method.
(iii) For return of premium or
other deferred cash benefits in individual contracts and group certificates
issued prior to October 23, 1993, the minimum reserve is the reserve calculated
on the 2-year preliminary term method.
(iv) For return of premium or other deferred
cash benefits in individual contracts and group certificates issued on or after
October 23, 1993, the minimum reserve is the reserve calculated as follows:
(A) On the 1-year preliminary term method if
the benefits are provided at any time before the twentieth
anniversary.
(B) On the 2-year
preliminary term method if the benefits are only provided on or after the
twentieth anniversary. Under the Insurance Department (Department) guidelines
for the review of return of premium option, the return of premium benefit shall
be available beginning by the tenth anniversary. The reference to benefits
provided on or after the twentieth anniversary does not modify the referenced
Department guideline as it pertains to form approval. This reference to a
minimum reserve standard for benefits beginning on or after the twentieth
anniversary is necessary only as it pertains to forms that are sold in other
states.
(v) 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-for example, projected inflation rates-or
for other reasons, shall be applied immediately as of the effective date of
adoption of the adjusted basis.
(5)
Negative reserves.
Negative reserves on a benefit may be offset against positive reserves for
other benefits in the same contract, but the total contract reserve with
respect to benefits combined may not be less than zero.
(6)
Nonforfeiture benefits.
The contract reserve on a policy basis may 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 specifications listed
in this section.
(c)
Alternative valuation methods and assumptions. If the contract
reserve on contracts to which an alternative basis is applied is not less in
the aggregate than the amount determined according to the standards of
subsection (b)(1)-(3), an insurer may use reasonable assumptions as to interest
rates, termination or mortality rates, or both, 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)(4) in determining a
sound value of its liabilities under the contracts, including the following:
(1) The net level premium method.
(2) The 1-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 and 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 so valued.
(6) The use of a composite annual claim cost
for all or a 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 the tabular reserves if the tests indicate
that the basis of the reserves is no longer adequate, subject to the minimum
standards of subsection (b).
(2) If
a company has a contract or a group of related similar contracts, for which
future gross premiums will be restricted so 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 the shortfall in the aggregate.
Notes
The provisions of this § 84a.6 amended under sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P.S. §§ 66, 186, 411 and 412); sections 301.1 and 311.1 of The Insurance Department Act of 1921 (40 P.S. §§ 71.1 and 93); and 40 Pa.C.S. § 7124(c)(1) and (2).
This section cited in 31 Pa. Code Ch. 84a Appendix A (relating to specific standards for morbidity, interest and mortality).
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