28 TAC §§ 3.7003, 3.7004, 3.7006 and 3.7007
The Commissioner of Insurance adopts amendments to §§3.7003, 3.7004, 3.7006 and 3.7007 concerning minimum reserve standards for individual and group accident and health insurance. Section 3.7004 is adopted with a change to the proposed text published in the November 15, 2002, issue of the Texas Register (27 TexReg 107000). Sections 3.7003, 3.7006 and 3.7007 are adopted without changes and will not be republished.
The amendments are necessary to comply with Insurance Code Article 21.39 which directs the Commissioner of Insurance to adopt each current formula for establishing reserves applicable to each line of insurance recommended by the National Association of Insurance Commissioners (NAIC). Subchapter GG is the department's adaptation of the NAIC model regulation for minimum reserve standards for individual and group accident and health insurance. The NAIC has amended the model regulation, and the adopted amendments harmonize Subchapter GG with the amended model regulation.
The amendment to §3.7003(b(2) clarifies the minimum amount for unearned premium and contract reserves. The amendment to §3.7004 requires long-term care contract reserves to be calculated on the one year full preliminary term method and allows a rating block approach to be used when determining contract reserves for individual and group contracts. Section 3.7004 was changed to correct a typographical error. The amended §3.7006 adds a table containing adjusted claim termination rates and the 1983 Group Annuity Mortality Table without projection for the mortality basis for long-term care insurance individual policies or group certificates. Subsection (d) in §3.7006, concerning availability of tables, is deleted since it was obsolete as a result of the availability of the tables on the internet. Finally, new definitions for "level premiums" and "rating block" are adopted in the amendment to §3.7007.
No comments were received regarding adoption of the amendments.
The amendments are adopted under the Insurance Code Articles 21.39, 10.07, 18.08, 19.06 and 22.18, and §36.001. Article 21.39 requires the Commissioner of Insurance to adopt the current formula for establishing reserves applicable to each line of insurance as recommended by the NAIC. Articles 10.07, 18.08, 19.06 and 22.18 apply the requirements of Article 21.39 to certain types of insurers. Section 36.001 provides that the Commissioner of Insurance may adopt rules to execute the duties and functions of the Texas Department of Insurance as authorized by statute.
§3.7003. Premium Reserves.
(a) General.
(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, such premiums must be treated as premiums in force, subject to unearned premium reserve determination. The value of unpaid commissions, premium taxes, and the cost of collection associated with due and unpaid premiums must be carried as an offsetting liability.
(3) The gross premiums paid in advance for a period of coverage commencing after the next premium due date which follows the date of valuation may be appropriately discounted to the valuation date and shall be held 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.
(1) The minimum unearned premium reserve with respect to any contract is an amount which is not in excess of the amount or inconsistent with the methods established by the Insurance Code, Article 6.01. The minimum standard shall be the pro rata unearned modal premium that applies to the premium period beyond the valuation date, with such 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, in no event may the sum of the unearned premium and contract reserves for all contracts of the insurer subject to contract reserve requirements be less than the gross modal unearned premium reserve on all such contracts, as of the date of valuation. The reserve shall never be less than the expected claims for the period beyond the valuation date represented by the unearned premium reserve to the extent not provided for elsewhere.
(c) Premium reserve methods generally. The insurer may employ suitable approximations and estimates, including, but not limited to, groupings, averages, and aggregate estimation, in computing premium reserves. Such approximations or estimates should be tested periodically to determine their continuing adequacy and reliability.
§3.7004. Contract Reserves.
(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;
(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.
§3.7006. Specific Standards for Morbidity, Interest, and Mortality.
(a) Morbidity.
(1) Minimum morbidity standards for valuation of specified individual contract health insurance benefits are as follows.
(A) Disability income benefits due to accident or sickness.
(i) Contract reserves.
(I) Contracts issued on or after January 1, 1965, and prior to January 1, 1987: the 1964 Commissioners Disability Table (64 CDT). The 1964 Commissioners Disability Table (64 CDT) is adopted by reference for use in the manner indicated in these sections.
(II) Contracts issued on or after January 1, 1994: the 1985 Commissioners Individual Disability Tables A (85CIDA); or the 1985 Commissioners Individual Disability Tables B (85CIDB). The 1985 Commissioners Individual Disability Tables A (85CIDA) and the 1985 Commissioners Individual Disability Tables B (85CIDB) are adopted by reference for use in the manner indicated in these sections.
(III) Contracts issued during the years 1987 through 1993: optional use of either the 1964 table or the 1985 tables.
(IV) Each insurer shall elect, with respect to all individual contracts issued in any one statement year, whether it will use Tables A (85CIDA) or Tables B (85CIDB) as the minimum standard. The insurer may, however, elect to use the other tables with respect to any subsequent statement year.
(ii) Claim reserves.
(l) For claims incurred after December 31, 2002, the 1985 Commissioners Individual Disability Tables A (85CIDA) with claim termination rates multiplied by the following adjustment factors:
For further information regarding Disability Tables A (85CIDA), contact: ChiefClerk@tdi.texas.gov
(ll) For claims incurred on or before December 31, 2002, each insurer may elect to use item (-a-) or (-b-) of this subclause as the minimum standard for claims incurred on or before December 31, 2002.
(-a-) The minimum morbidity standard in effect for the contract reserves on currently issued contracts, as of the date the claim is incurred, or
(-b-) The standard as defined in clause (i) of this subparagraph, applied to all open claims. Once an insurer elects to calculate reserves for all open claims on the standard defined in clause (i) of this subparagraph, all future valuations must be on that basis.
(B) Hospital benefits, surgical benefits, and maternity benefits (scheduled benefits or fixed time period benefits only).
(i) Contract reserves.
(I) Contracts issued on or after January 1, 1955, and before January 1, 1982: the 1956 Intercompany Hospital-Surgical Tables. The 1956 Intercompany Hospital-Surgical Tables are adopted by reference for use as indicated in these sections.
(II) Contracts issued on or after January 1, 1982: the 1974 Medical Expense Tables, Table A, Transactions of the Society of Actuaries, Volume XXX, page 63. Refer to the paper (in the same volume, page 9) to which this table is appended, including its discussions, for methods of adjustment for benefits not directly valued in Table A: "Development of the 1974 Medical Expense Benefits," Houghton and Wolf. The 1974 Medical Expense Tables, Table A is adopted by reference for use in the manner indicated in these sections.
(ii) Claim reserves. No specific standard. See subparagraph (E) of this paragraph.
(C) Cancer expense benefits (scheduled benefits or fixed time period benefits only).
(i) Contract reserves. Contracts issued on or after January 1, 1986: the 1985 NAIC Cancer Claim Cost Tables. The 1985 NAIC Cancer Claim Cost Tables are adopted by reference for use in the manner specified in these sections.
(ii) Claim reserves. No specific standard. See subparagraph (E) of this paragraph.
(D) Accidental death benefits.
(i) Contract reserves. Contracts issued on or after January 1, 1965: the 1959 Accidental Death Benefits Table. The 1959 Accidental Death Benefits Table is adopted by reference for use in the manner specified in these sections.
(ii) Claim reserves. Actual amount incurred.
(E) Other individual contract benefits.
(i) Contract reserves. For all other individual contract benefits, morbidity assumptions are to be determined as provided in the reserve standards.
(ii) Claim reserves. For all benefits other than disability, claim reserves are to be determined as provided in the standards.
(2) Minimum morbidity standards for valuation of specified group contract health insurance benefits are as follows.
(A) Disability income benefits due to accident or sickness.
(i) Contract reserves. Contracts issued prior to January 1, 1994: the same basis, if any, as that employed by the insurer as of January 1, 1994. Contracts issued on or after January 1, 1994: the 1987 Commissioners Group Disability Income Table (87CGDT). The 1987 Commissioners Group Disability Income Table (87CGDT) is adopted herein by reference.
(ii) Claim reserves. For claims incurred on or after January 1, 1994: the 1987 Commissioners Group Disability Income Table (87CGDT); for claims incurred prior to January 1, 1994: use of the 87CGDT is optional.
(B) Other group contract benefits.
(i) Contract reserves. For all other group contract benefits, morbidity assumptions are to be determined as provided in the reserve standards.
(ii) Claim reserves. For all benefits other than disability, claim reserves are to be determined as provided in the standards.
(b) Interest.
(1) For contract reserves the maximum interest rate is the maximum rate permitted by law in the valuation of whole life insurance issued on the same date as the health insurance contract.
(2) For claim reserves on policies that require contract reserves, the maximum interest rate is the maximum rate permitted by law in the valuation of whole life insurance issued on the same date as the claim incurral date. For claim reserves on policies not requiring contract reserves, the maximum interest rate is the maximum rate permitted by law in the valuation of single premium immediate annuities issued on the same date as the claim incurral date, reduced by one percentage point.
(c) Mortality.
(1) Except as provided in paragraphs (2) and (3) of this subsection, the mortality basis used must be according to a table (but without use of selection factors) permitted by law for the valuation of whole life insurance issued on the same date as the health insurance contract.
(2) Other mortality rates may be used in the calculation of the minimum reserves, if appropriate for the type of benefits and if approved by the commissioner. The request for such approval must include the proposed mortality basis and the reason that the standard specified in paragraph (1) of this subsection is inappropriate.
(3) For long-term care insurance individual policies or group certificates the mortality basis used shall be the 1983 Group Annuity Mortality Table without projection.
§3.7007. Glossary of Technical Terms Used.
The following words and terms, when used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.
(1) Annual-claim cost--The net annual cost per unit of benefit before the addition of expenses, including claim settlement expenses, and a margin for profit or contingencies. 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 $6.00 would cover expenses and profit or contingencies.
(2) Claims accrued--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. 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.
(3) Claims reported--When an insurer has been informed that a claim has been incurred, if the date reported is on or prior to the valuation date, the claim is considered as a reported claim for annual statement purposes.
(4) Claims unaccrued--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. 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.
(5) Claims unreported--When an insurer has not been informed, on or before the valuation date, concerning a claim that has been incurred on or prior to the valuation date, the claim is considered as an unreported claim for annual statement purposes.
(6) Date of disablement--The earliest date the insured is considered as being disabled under the definition of disability in the contract, based on a doctor's evaluation or other evidence. Normally this date will coincide with the start of any elimination period.
(7) Elimination period--A specified number of days, weeks, or months starting at the beginning of each period of loss, during which no benefits are payable.
(8) Gross premium--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.
(9) Group insurance--The term "group insurance" includes blanket insurance and franchise insurance and any other forms of group insurance.
(10) Long-term care insurance--Any insurance policy or rider advertised, marketed, offered, or designed to provide coverage for not less than 12 consecutive months for each covered person on an expense incurred, indemnity, prepaid, or other basis: for one or more necessary or medically necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services, provided in a setting other than an acute care unit of a hospital. Such term also includes a policy or rider which provides for payment of benefits based upon cognitive impairment or the loss of functional capacity. Long-term care insurance may be issued by insurers; fraternal benefit societies; nonprofit health, hospital, and medical service corporations; prepaid health plans; health maintenance organizations; or any similar organization to the extent they are otherwise authorized to issue life or health insurance. Long-term care insurance shall not include any insurance policy which is offered primarily to provide basic Medicare supplement coverage, basic hospital expense coverage, basic medical-surgical expense coverage, hospital confinement indemnity coverage, major medical expense coverage, disability income or related asset-protection coverage, accident only coverage, specified disease or specified accident coverage, or limited benefit health coverage.
(11) Modal premium--This refers to the premium paid on a contract based on a premium term which could be annual, semiannual, quarterly, monthly, or weekly. Thus if the annual premium is $100 and if, instead, monthly premiums of $9.00 are paid then the modal premium is $9.00.
(12) Negative reserve--Normally the terminal reserve is a positive value. However, if the values of the benefits are decreasing with advancing age or duration it could be a negative value, called a negative reserve.
(13) Preliminary term reserve method--Under this method of valuation 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 reserves 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.
(14) Present value of amounts not yet due on claims--The reserve for "claims unaccrued" (see definition), which may be discounted at interest.
(15) Qualified actuary--An individual who:
(A) is a member in good standing of the American Academy of Actuaries;
(B) is familiar with the valuation requirements applicable to health insurance companies; and
(C) is qualified to calculate reserves for health insurance contracts in accordance with the American Academy of Actuaries qualification standards.
(16) Reserve--Used to include 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. An insurer under its contracts promises benefits which result in:
(A) claims which have been incurred, that is, for which the insurer has become obligated to make payment, on or prior to the valuation date. On these claims, 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
(B) 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.
(17) Terminal reserve--This is the reserve at the end of a contract year, and is defined as the present value of benefits expected to be incurred after that contract year minus the present value of future valuation net premiums.
(18) Unearned premium reserve--This reserve values that portion of the premium paid or due to the insurer which is applicable to the period of coverage extending beyond the valuation date. 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.
(19) Valuation net modal premium--This is 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.
(20) Level premium--The premium calculated to remain unchanged throughout either the lifetime of the policy or for some shorter projected period of years. The premium need not be guaranteed; in which case, although it was calculated to remain level, it may be changed if any of the assumptions on which it is 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 costs 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.
(21) Rating block--A grouping of contracts determined by the valuation actuary based on common characteristics, such as policy form or forms having similar benefit designs.