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Subchapter GG. Minimum Reserve Standards For Individual and Group Accident and Health Insurance

28 TAC §§ 3.7003, 3.7004, 3.7006 and 3.7007

The Texas Department of Insurance proposes amendments to §§3.7003, 3.7004, 3.7006 and 3.7007 concerning minimum reserve standards for individual and group accident and health insurance. 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 these proposed amendments will harmonize Subchapter GG with the amended model regulation. The proposed amendments clarify the minimum amount for unearned premium and contract reserves by amending §3.7003(b)(2); require long-term care contract reserves to be calculated on the one year full preliminary term method and allow a rating block approach to be used when determining contract reserves for individual and group contracts by amending §3.7004; add 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or group certificates by amending §3.7006; delete subsection (d) in §3.7006 concerning availability of tables since it is obsolete as a result of the availability of the tables on the internet; and add two new definitions to §3.7007.

Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that for each year of the first five years the proposed sections will be in effect, there will be no fiscal impact to state and local governments as a result of the enforcement or administration of the rule. There will be no measurable effect on local employment or the local economy as a result of the proposal.

Ms. Patterson has determined that for each year of the first five years the proposed sections are in effect, the public benefits anticipated as a result of the amendments will be improved standards for reserves for individual and group accident and health insurance contracts which will enhance the solvency of insurers writing the affected lines of accident and health insurance. Since the sections are required by statute, the cost of compliance is attributable to the statute and not the sections. Costs will be incurred in the first year to change the accounting systems to calculate the new reserve requirements. Costs will also be incurred in those cases where the proposed sections will require an increase in reserves. In the first year, the probable economic cost to insurers required to comply with the proposed sections will be a result of programming and accounting changes. The department estimates that insurers required to comply with the proposed sections will incur expenses for 100 to 200 hours of programming and accounting costs depending on the type of products offered and volume of business. On average, compensation to perform these tasks will range from $30 to $70 an hour, based on the department's experience. At the low end of the range, an insurer would use in-house staff to perform the programming changes. At the high-end of the range an insurer would hire a consultant to perform the programming changes. No additional programming and accounting costs should be incurred beyond the first year. For insurers with long-term care business, the proposed sections will require increased reserves. The increase in reserves is anticipated to be zero in the first year and, depending on the valuation interest rate, approximately twelve percent at durations two through five and diminishing to lesser percentages thereafter. For companies that already follow the NAIC Accounting Practices and Procedures Manual, the greater consistency in reserving requirements for products offered in multiple states may actually result in a decrease in cost. For small and micro businesses required to comply with the proposed sections, the costs are expected to be the same as those for other companies, although fewer hours of programming and accounting costs are likely since they typically offer fewer products than larger companies. The department finds it neither legal nor feasible to reduce the effect of the proposed sections on micro or small insurers since the standards established by Subchapter GG of this title are minimum standards necessary to assure solvency of the affected insurers.

To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on December 16, 2002 to Gene C. Jarmon, Acting General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comment must be simultaneously submitted to Betty Patterson, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. A request for a public hearing should be submitted separately to the Office of the Chief Clerk.

The amendments are proposed 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 National Association of Insurance Commissioners. 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.

The following articles are affected by this proposal: Article 21.39

§3.7003. Premium Reserves.

(a) (No change.)

(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) (No change.)

§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 [ guaranteed renewable coverages, non-cancellable coverages with guaranteed rates, long-term care coverages, and disability income coverages] 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 values specified in this subparagraph must be determined on the basis specified in subsection (b) of this section.] 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 prefunding. [ contracts already in force on the effective date of these standards for which no contract reserve was required under the immediately preceding standards; or]

[ (C) contracts which are not priced to provide for claims to be incurred in future years and which allow the insurer to increase premium rates in future years.]

(3) - (4) (No change.)

(b) Minimum standards for contract reserves.

(1) Basis.

(A) 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).

(i) 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.

(ii) 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.

(B) (No change.)

(C) 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.

(i) 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%.

(ii) 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:

(l) For policy years one through four, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums or 8%;

(ll) For policy years five and later, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums or 4%;

(iii) 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.

(D) Reserve method.

(i) For insurance, except long-term care and return of premium or other deferred cash benefits issued after December 31, 2002, the [ 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.

(ii) 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.

(iii) For return of premium or other deferred cash benefits issued after December 31, 2002, the minimum reserve is the reserve calculated as follows:

(l) on the one year preliminary term method if the benefits are provided at any time before the twentieth anniversary

(ll) on the two year preliminary term method if the benefits are only provided on or after the twentieth anniversary.

(iv) 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.

(E) (No change.)

(F) 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 subparagraph (D) of this paragraph.

(c) - (d) (No change.)

§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 COPIES OF THE TABLE 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)-(E) (No change.)

(2) (No change.)

(b) Interest.

(1) (No change.)

(2) For claim reserves[ , except for disability income benefits in policies not requiring contract 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 [ disability income benefits in] 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 [ paragraph] (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) (No change.)

(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.

[ (d) Tables. Copies of the 1964 Disability Table (64 CDT); the 1985 Commissioners Individual Disability Tables A (85CIDA); the 1985 Commissioners Individual Disability Tables B (85CIDB); the 1956 Intercompany Hospital-Surgical Tables; the 1974 Medical Expense Tables, Table A; the 1985 NAIC Cancer Claim Cost Tables; the 1959 Accidental Death Benefits Table; and the 1987 Commissioners Group Disability Income Table (87CGDT) may be obtained by contacting the Actuarial Division, Texas Department of Insurance, P.O. Box 149104, Mail Code 304-3A, Austin, Texas 78714-9104.]

§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) - (19) (No change.)

(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.



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