PROPOSED RULEMAKING
INSURANCE DEPARTMENT
[31 PA. CODE CH. 84a]
Minimum Reserve Standards for Individual and Group Health and Accident Insurance Contracts
[28 Pa.B. 4927] The Insurance Department (Department) proposes to amend Chapter 84a (relating to minimum reserve standards for individual and group health and accident insurance contracts) to read as set forth in Annex A, under the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412) and sections 301.1 and 311.1 of The Insurance Department Act of 1921 (40 P. S. §§ 71.1 and 93).
Purpose
The purpose of the proposed amendments is to update the chapter by clarifying and modifying the minimum standards for an insurance company in calculating financial reserves for a health and accident insurance contract. The proposed amendments also modify the minimum contract reserve standards for long-term care insurance.
A Department notice, dated July 7, 1994, clarified the applicability of of Chapter 84a to contracts issued prior to October 23, 1993. The proposed rulemaking incorporates some minimum standards for reserves provided in the notice and also changes other requirements regarding minimum standards for reserves.
Most of the proposed amendments were patterned after the amendments to the National Association of Insurance Commissioners' (NAIC) Minimum Reserve Standards For Individual and Group Health Insurance Contracts Model Regulation adopted by the NAIC after October 23, 1993.
In developing the proposed rulemaking, comments were solicited and received from the Insurance Federation of Pennsylvania, Inc (IFP). Comments from this organization were taken into consideration in preparing the proposed amendments to Chapter 84a.
Explanation of Regulatory Requirements
The following is a description of the significant features of the changes contained in the proposed rulemaking:
Section 84a.3 (relating to definitions) was modified to add definitions of ''operative date'' and ''rating block.''
Section 84a.6 (relating to contract reserves) establishes minimum standards for contract reserves and defines the contracts that are subject to the minimum standards. Additionally, the proposed amendments to Chapter 84a permit the use of termination rates that exceed mortality table rates for all contracts. Also, new termination standards are established for individual long-term care contracts and group certificates issued on and after January 1, 1999. The proposed rulemaking clarifies that the minimum standard requirements of Chapter 84a may be applied to a block of contracts, instead of on a per contract basis. Additionally, a minimum standard is established for contracts providing a nonforfeiture benefit. Finally, the proposed rulemaking clarifies the applicability of Chapter 84a to contracts issued prior to October 23, 1993.
Appendix A (relating to specific standards for morbidity, interest and mortality) establishes the minimum standards for morbidity, interest and mortality used in calculating claim, premium and contract reserves. The morbidity standards for group contract health and accident insurance benefits are being modified to clarify that the standards apply to group certificates instead of group policy contracts. The interest standards were modified to clearly identify the interest rate requirement in calculating minimum reserves. The Appendix is amended to clarify the mortality standards for individual contracts and group certificates issued prior to October 23, 1993, and to establish a new mortality standard for long term care individual contracts and group certificates issued on and after January 1, 1999.
Affected Parties
The proposed amendments to Chapter 84a will apply to life insurance companies, property and casualty insurance companies and fraternal benefit societies marketing health and accident insurance in this Commonwealth.
Fiscal Impact
State Government
There will be no increase in cost to the Department due to the adoption of the proposed modifications to Chapter 84a. As part of its solvency surveillance responsibilities the Department currently reviews the methodology used by an insurance company to calculate health and accident reserves to ensure that the reserves are adequate and comply with the minimum standard requirements. The proposed revisions and clarifications of the minimum standards will not create additional staff time to perform the analysis.
General Public
Since the proposed amendments to Chapter 84a concern the solvency requirements applied to insurance companies, the public will benefit from a financially sound insurance industry in the ability of insurers to fulfill their contractual obligations.
Political Subdivisions
The proposed amendments will not impose additional costs on political subdivisions. However, because the proposed rulemaking promotes stability in the insurance industry in this Commonwealth, political subdivisions' tax revenues would benefit as a result of fewer insurer insolvencies. Fewer insolvencies would result in less unemployment and would increase incentives for insurers to market new insurance products in this Commonwealth.
Private Sector
The proposed amendments to Chapter 84a may have some fiscal impact on insurers. To the extent that reserves for business issued prior to October 23, 1993, do not comply with the minimum standard reserve requirements, an insurance company will need to increase the reserves. The proposed amendments to the minimum contract reserve standards that apply specifically to long-term care insurance will not affect current business. These amendments apply only to contracts issued after the adoption of this proposed rulemaking. There may be some expense incurred by an insurance company in modifying the reserve calculation system to comply with amended minimum reserve standards.
Paperwork
The adoption of this proposed rulemaking will not impose additional paperwork on the Department or the insurance industry. The clarifications and new requirements of the amendments apply to the reserve calculations but will not result in additional paperwork.
Effective/Sunset Date
The proposed rulemaking will become effective upon final adoption and publication in the Pennsylvania Bulletin as final rulemaking. No sunset date has been assigned.
Contact Person
Questions or comments concerning this proposed rulemaking may be addressed in writing to Peter J. Salvatore, Regulatory Coordinator, 1326 Strawberry Square, Harrisburg, PA 17120, within 30 days of the publication of this proposed rulemaking in the Pennsylvania Bulletin.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on September 23, 1998, the Department submitted a copy of these proposed amendments to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Insurance Committee and the Senate Banking and Insurance Committee. In addition to submitting the proposed amendments, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of that material is available to the public upon request.
If IRRC has objections to any portion of the proposed amendments, it will notify the Department within 10 days of the close of the Committees' review period. The notification shall specify the regulatory review criteria, which have not been met by that portion. The Regulatory Review Act specifies detailed procedures for the Department, the Governor and the General Assembly to review these objections before final publication of the amendments.
M. DIANE KOKEN,
Insurance CommissionerFiscal Note: 11-190. No fiscal impact; (8) recommends adoption.
Annex A
TITLE 31. INSURANCE
PART IV. LIFE INSURANCE
CHAPTER 84a. MINIMUM RESERVE STANDARDS FOR INDIVIDUAL AND GROUP HEALTH AND ACCIDENT INSURANCE CONTRACTS § 84a.1. Purpose.
This chapter implements sections 301.1 and 311.1 of The Insurance Department Act of [one thousand nine hundred and twenty-one] 1921 (40 P. S. §§ 71.1 and 93) which authorize the Commissioner to promulgate regulations specifying appropriate reserve standards.
§ 84a.3. Definitions.
The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:
* * * * * Department--The Insurance Department of the Commonwealth.
* * * * * Long-term care insurance--An insurance contract advertised, marketed, offered or designed to provide coverage for at least 12 consecutive months for each covered person on an expense incurred, indemnity, prepaid or other basis; for functionally 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:
(i) The term includes a policy or rider [which] that provides for payment of benefits based upon cognitive impairment or the loss of functional capacity.
(ii) The term does not include an insurance contract 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 coverage, accident only coverage, specified disease coverage or specified accident coverage [or limited benefit health and accident coverage].
Modal premium--The premium paid on a contract based on a premium term [which] that could be annual, semiannual, quarterly, monthly or weekly. For example, if the annual premium is $100 and if, instead, monthly premiums of $9 are paid, the modal premium is $9.
* * * * * Operative date--The effective date of the approval by the Commissioner for an insurer to use the 1980 CSO Mortality Table to calculate nonforfeiture values and reserves for life insurance contracts.
* * * * * Rating block--A grouping of contracts based on common characteristics, such as a policy form or forms having similar benefit designs.
* * * * * § 84a.4. Claim reserves.
* * * * * (b) Minimum standards for claim reserves of disability income benefits.
* * * * * (2) Minimum standards with respect to morbidity are those specified in Appendix A; except that, at the option of the insurer:
* * * * * (ii) For group disability income claims with a duration from date of disablement of more than 2 years but less than 5 years, reserves may, with the approval of the Commissioner, be based upon the insurer's experience for which the insurer maintains underwriting and claim administration control if the experience is considered credible. For an insurer's experience to be considered credible, the insurer shall be able to provide claim termination patterns over no more than 6 years reflecting at least 5,000 claim terminations during the third through fifth claim durations on reasonably similar applicable policy forms. Reserve tables based on credible experience shall be adjusted regularly to maintain reasonable margins. [Demonstrations may be required by the Commissioner based on published literature.] The Commissioner, based on published literature, may require demonstrations. The request for approval of a plan of modification to the reserve basis shall include the following:
* * * * * (d) Claim reserve methods. [Generally accepted or] A reasonable actuarial [methods] method or combination of methods may be used to estimate claim liabilities. The methods used for estimating liabilities generally may be aggregate methods, or various reserve items may be separately valued. Approximations based on groupings and averages may also be employed. Adequacy of the claim reserves shall be determined in the aggregate.
§ 84a.6. Contract reserves.
(a) General requirements.
(1) Contract reserves are required for the following:
* * * * * (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 so 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 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 the following:
(i) Contracts which cannot be continued after 1 year from issue.
(ii) Contracts already in force on October 23, 1993, for which no contract reserve was required under the standards in effect prior to October 23, 1993.
(3)] (2) * * *
[(4)] (3) * * *
(b) Minimum standards for contract reserves.
(1) Morbidity or other contingency.
* * * * * (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.
* * * * * (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 [subparagraph] subparagraphs (ii) and (iii).
(ii) [Under contracts for which premium rates are not guaranteed, and when 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] 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 five and later, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 4%.
(4) Reserve method.
* * * * * (ii) For long-term care insurance, the minimum reserve is the reserve calculated [on the 1-year full preliminary term method.] 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 [as follows:]
(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) * * *
(B) * * *
[(iv)] (v) * * *
* * * * * (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, when the net single premium is computed according to the specifications in this section.
* * * * * (d) Tests for adequacy and reasonableness of contract reserves.
* * * * * (2) If a company has a contract or a group of related similar contracts, for which future gross premiums will be restricted [by contract] 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.
APPENDIX A
SPECIFIC STANDARDS FOR MORBIDITY, INTEREST AND MORTALITY I. MORBIDITY.
* * * * * (b) Minimum morbidity standards for valuation of specified group contract health and accident insurance benefits are as follows:
(1) Disability income benefits due to accident or sickness.
(i) Contract reserves.
(A) [Contracts] Certificates issued prior to January 1, 1993: The same basis, if any, as that employed by the insurer as of January 1, 1993.
(B) [Contracts] Certificates issued on or after January 1, 1993: The 1987 Commissioners Group Disability Income Table (87CGDT).
(ii) Claim reserves.
(A) For claims incurred on or after January 1, 1993: The 1987 Commissioners Group Disability Income Table (87CGDT).
(B) For claims incurred prior to January 1, 1993: [Use of the 87CGDT is optional] Claim reserves are to be determined as provided in § 84a.4(c)(2) (relating to claim reserves).
(2) Other group contract benefits.
(i) Contract reserves. For other group contract benefits, morbidity assumptions are to be determined as provided in [the reserve standards] § 84a.6(b)(1)(ii) (relating to contract reserves).
(ii) Claim reserves. For benefits other than disability, claim reserves are to be determined as provided in [the standards] § 84a.4(c)(2).
II. INTEREST
(a) Contract reserves.
(1) The maximum interest rate is the maximum rate permitted by [law] section 301 of The Insurance Department Act of 1921 (40 P. S. § 71) in the valuation of whole life insurance issued on the same date as the health and accident insurance contract and with a guarantee duration of more than 20 years.
(b) Claim reserves.
(1) For claim reserves on policies that require contract reserves, the maximum interest rate is the maximum rate permitted by [law] section 301 of The Insurance Department Act of 1921, in the valuation of whole life insurance issued on the same date as the claim incurral date and with a guarantee duration equal to the maximum benefit period.
(2) For claim reserves on policies not requiring contract reserves, the maximum interest rate is the maximum rate permitted by [law] section 301 of The Insurance Department Act of 1921 in the valuation of single premium immediate annuities issued on the same date as the claim incurral date, reduced by 100 basis points.
III. MORTALITY
(a) For individual contracts and group certificates issued prior to the insurer's operative date, the mortality basis used shall be according to a table permitted by law for the valuation of whole life insurance issued on the same date as the health and accident insurance individual contract or group certificate.
(b) For individual contracts and group certificates issued on or after the insurer's operative date and prior to January 1, 1989, the mortality basis shall be according to either the 1958 CSO Mortality Table or the 1980 CSO Male and Female Mortality Tables, but without use of selection factors.
[(a) Except as provided in] (c) Unless subsection [(b)] (d) applies, the mortality basis used for individual contracts and group certificates issued on or after January 1, 1989, except long-term care individual contracts and group certificates issued on or after January 1, 1999, shall 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 and accident insurance contract. For long-term care individual contracts and group certificates issued on or after January 1, 1999, the mortality basis used shall be the 1983 Group Annuity Mortality Table without projection.
[(b)] (d) Other mortality tables adopted by the National Association of Insurance Commissioners (NAIC) and promulgated by the Commissioner 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 approval shall include the proposed mortality table and the reason that the standard specified in subsection [(a)] (c) is inappropriate.
[Pa.B. Doc. No. 98-1600. Filed for public inspection October 2, 1998, 9:00 a.m.]
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