PROPOSED RULEMAKING
INSURANCE DEPARTMENT
[ 31 PA. CODE CH. 84a ]
Minimum Reserve Standards for Individual and Group Health and Accident Insurance Contracts
[50 Pa.B. 5260]
[Saturday, September 26, 2020]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. This proposed rulemaking is proposed under the Department's general rulemaking authority as set forth in sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P.S. §§ 66, 186, 411 and 412) and the Insurance Commissioner's (Commissioner) authority to set forth minimum valuation and reserve standards in paragraphs (c)(1) and (2) of section 7124 of the act of June 30, 2016 (P.L. 399, No. 59) known as the Standard Valuation Law (40 Pa.C.S. § 7124(c)(1) and (2)).
Purpose
Chapter 84a governs the minimum reserve standards to which insurers issuing individual and group health and accident insurance contracts must adhere. Among other standards, the regulation establishes standards for claim reserves, contract reserves and premium reserves. These standards are in place to ensure that insurers maintain sufficient financial wherewithal to support long-term solvency. Chapter 84a, originally adopted in 1993, is based on the National Association of Insurance Commissioners (NAIC) Health Insurance Reserves Model Regulation (# 10).
The purpose of this proposed rulemaking is to update the Commonwealth's standards to align with the most recent updates to the NAIC Health Insurance Reserves Model Regulation, which were incorporated in 2017. These proposed amendments clarify that the minimum reserve standards contained in Chapter 84a apply to individual and group health and accident insurance coverages, including single premium credit health and accident insurance, issued prior to January 1, 2017. The amendments specify the use of new valuation tables for certain individual disability and group disability policies and claims. By incorporating these standards for coverages issued prior to January 1, 2017, the Department is seeking to promote the continuity of applicable reserving standards for those older coverages issued prior to the operative date of the NAIC Valuation Manual. Moreover, the proposed amendments would indicate that the claim reserve requirements for all claims incurred on or after January 1, 2017, are as described in the NAIC Valuation Manual. As indicated in Department Notice 2016-10 entitled ''Principle-Based Reserving Operative Date'' published at 46 Pa.B. 5867 (September 10, 2016), the operative date of the NAIC Valuation Manual was January 1, 2017.
Explanation of Regulatory Requirements
The following sets forth the proposed amendments that would be incorporated in Chapter 84a by this proposed rulemaking. The noted substantive proposed amendments are based on the updates to the NAIC Model; the remaining text in the following Annex is intended to match the current text of Chapter 84a with amendments made for clarity and improved organization. While the organization may differ, the content of Chapter 84a as amended by this proposed rulemaking remains substantially similar to the updated NAIC Model.
Section 84a.1 (relating to purpose) is proposed to be amended to remove the existing statutory authority sections, which were repealed in 2016, and replace them with the updated citations to the Standard Valuation Law, which authorizes the Commissioner to promulgate regulations specifying appropriate reserve standards.
Section 84a.2 (relating to applicability and scope) is proposed to be amended in accordance with changes to the NAIC Model. Specifically, subsection (b) would provide that the minimum reserve standards in the chapter would apply to individual and group health and accident insurance coverages, including single premium credit health and accident insurance, issued prior to January 1, 2017.
Section 84a.3 (relating to definitions) is proposed to be amended in accordance with changes to the NAIC Model. Specifically, definitions for ''Group long-term disability income contract'' and ''Worksite disability policies'' would be added to clarify the applicability of the reserve standards set forth in the chapter.
Section 84a.4 (relating to claim reserves) is proposed to be amended in accordance with changes to the NAIC Model. For clarity, section 84a.4 in the following Annex appears as entirely new text. It incorporates some of the text of Chapter 84a as it is currently constituted and includes the following amendments in accordance with the NAIC Model:
• The amendments to subsection (a) would provide additional general requirements for claim reserves.
• The amendments to subsection (b) would provide updated minimum morbidity standards for claim reserves of individual disability income benefits.
• The amendments to subsection (c) would provide updated minimum morbidity standards for claim reserves of group disability income benefits.
• Subsection (d) sets forth minimum morbidity standards for health insurance claim reserves for health insurance other than set forth in subsections (a)—(c), including single premium credit health and accident insurance.
• Subsection (e) is substantively the same as subsection (d) in Chapter 84a as it is currently constituted but has been rearranged for improved clarity. Despite the NAIC Model, Chapter 84a as it is currently does not contain a provision providing for a public hearing on claim reserve methods and that remains the case in this proposed rulemaking.
Section 84a.5 (relating to premium reserves) is proposed to be amended in accordance with changes to the NAIC Model and sets forth that unearned premium reserves are required for all contracts, except single premium credit health and accident insurance contracts.
Appendix A (relating to specific standards for morbidity, interest and mortality) is proposed to be amended in accordance with changes to the NAIC Model. Specifically, it incorporates standards for individual and group disability income contracts issued on or after January 1, 2020, a restated maximum interest rate standard for claim reserves, and clarification regarding the mortality standard for single premium credit insurance. It also includes editorial changes for increased clarity. The restated maximum interest rate standard for claim reserves appears in the updated Appendix A in subsection II(b)(2). The updated subsection includes the applicable restated formula.
External Comments
The Department circulated an exposure draft substantially similar to this proposed rulemaking to several industry participants including the Insurance Federation of Pennsylvania, the American Council of Life Insurers, America's Health Insurance Plans and Life Insurance Company of North America. Comments received were carefully considered in developing this proposed rulemaking.
Affected Parties
This proposed rulemaking applies to all entities with the authority to issue individual and group health and accident insurance coverages, including single premium credit health and accident insurance, including licensed insurers as defined in section 201-A of The Insurance Department Act of 1921 (40 P.S. § 65.1-A) and entities doing the business of insurance under The Insurance Company Law of 1921 (40 P.S. §§ 341—991.2707).
Fiscal Impact
State government
There will not be any fiscal impact to the Department as a result of this proposed rulemaking.
General public
This proposed rulemaking will have no fiscal impact upon the general public.
Political subdivisions
This proposed rulemaking will have no fiscal impact upon political subdivisions.
Private sector
This proposed rulemaking will have no fiscal impact upon the private sector, except for a possible minimal impact to the regulated entities affected.
Paperwork
This proposed rulemaking would not impose additional paperwork on the Department because no additional filing is required to be made by insurers that must comply with this proposed rulemaking.
Effectiveness/Sunset Date
This proposed rulemaking will become effective immediately upon final-form publication in the Pennsylvania Bulletin. The Department continues to monitor the effectiveness of regulations on a triennial basis; therefore, no sunset date has been assigned.
Contact Person
Questions or comments regarding this proposed rulemaking may be addressed in writing to Richard L Hendrickson, Department Counsel, Insurance Department, 1341 Strawberry Square, Harrisburg, PA 17120, within 30 days following publication in the Pennsylvania Bulletin. Questions and comments may also be e-mailed to rihendrick@pa.gov or faxed to (717) 772-1969.
Regulatory Review
Under Section 5(a) of the Regulatory Review Act (71 P.S. § 745.5(a)), on September 10, 2020, the Department submitted a copy of this proposed rulemaking and a copy of a Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Insurance Committee and the Senate Banking and Insurance Committee. A copy of this material is available to the public upon request.
Under section 5(g) of the Regulatory Review Act, IRRC may convey any comments, recommendations or objections to the proposed rulemaking within 30 days of the close of the public comment period. The comments, recommendations or objections must specify the regulatory review criteria in section 5.2 of the Regulatory Review Act (71 P.S. § 745.5b) that have not been met. The Regulatory Review Act specifies detailed procedures for review, prior to final delivery of the rulemaking, by the Department, the General Assembly and the Governor.
JESSICA K. ALTMAN,
Insurance CommissionerFiscal Note: 11-259. 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 1921 (40 P.S. §§ 71.1 and 93) which authorizes the Commissioner to promulgate regulations specifying appropriate reserve standards.] The purpose of this chapter is to set forth the minimum standards of valuation required by 40 Pa.C.S. § 7124(c)(1) and (2) (relating to minimum standard for accident and health insurance contracts).
§ 84a.2. Applicability and scope.
(a) This chapter shall take effect for annual statements for the year 1993.
(b) The minimum reserve standards of this chapter apply to individual and group health and accident insurance coverages, including single premium credit health and accident insurance, [written] issued prior to January 1, 2017, by life insurance companies [and], property insurance companies, casualty insurance companies and fraternal benefit societies. Monthly premium credit health and accident insurance is not subject to this chapter, but instead is subject to the reserve standards in Chapter 73 (relating to credit life and credit accident and health insurance).
(c) When an insurer determines that adequacy of its health and accident insurance reserves requires reserves in excess of the minimum standards specified in this chapter, the increased reserves shall be held and shall be considered the minimum reserves for that insurer.
(d) With respect to a block of contracts, or with respect to an insurer's health and accident business as a whole, a prospective gross premium valuation is the ultimate test of reserve adequacy as of a given valuation date. The gross premium valuation will take into account, for contracts in force, in a claims status, or in a continuation of benefits status on the valuation date, the present value as of the valuation date of expected benefits unpaid, expected expenses unpaid and unearned or expected premiums, adjusted for future premium increases reasonably expected to be put into effect.
(e) The gross premium valuation is to be performed whenever a significant doubt exists as to reserve adequacy with respect to a major block of contracts, or with respect to the insurer's health and accident business as a whole. If inadequacy is found to exist, immediate loss recognition shall be made and the reserves restored to adequacy. Adequate reserves, inclusive of claim, premium and contract reserves, if any, shall be held with respect to all contracts, regardless of whether contract reserves are required for the contracts under this chapter.
(f) Whenever minimum reserves, as defined in this chapter, exceed reserve requirements as determined by a prospective gross premium valuation, the minimum reserves remain the minimum requirement under this chapter.
(g) Minimum standards for three categories of health and accident insurance reserves are established. These categories are claim reserves, premium reserves and contract reserves.
(h) Adequacy of an insurer's health and accident insurance reserves is to be determined on the basis of the three categories of subsection (g) combined. These minimum standards emphasize the importance of determining appropriate reserves for each of the three categories separately.
§ 84a.3. Definitions.
The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:
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 1 year, with an elimination period of 1 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 would cover expenses and profit or contingencies.
Claims accrued—The 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, shall be established.
Claims reported—A claim that has been incurred on or prior to the valuation date is considered as a reported claim for annual statement purposes if the date the claim is reported to the insurer is on or prior to the valuation date.
Claims unaccrued—The 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, shall be established.
Claims unreported—A claim incurred on or prior to the valuation date is considered as an unreported claim for annual statement purposes if the insurer has not been informed of the claim on or before the valuation date.
Commissioner—The Insurance Commissioner of the Commonwealth.
Credit insurance—Insurance which falls within the regulatory scope of the Model Act for the Regulation of Credit Life Insurance and Credit Accident and Health Insurance (40 P.S. §§ 1007.1—1007.15).
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 an elimination period.
Department—The Insurance Department of the Commonwealth.
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.
Gross premium—The amount of premium charged by the insurer, which includes the net premium based on claim-cost for the risk, together with loading for expenses, profit or contingencies.
Group insurance—The term includes blanket insurance and other forms of group insurance.
Group long-term care insurance—A long-term care insurance policy that is delivered or issued for delivery in this Commonwealth and issued to one or more employers or labor organizations, or to a trust or to the trustees of a fund established by one or more employers or labor organizations, or a combination thereof, for employees or former employees or a combination thereof or for members or former members or a combination thereof, of the labor organizations.
Group long-term disability income contract—A group contract providing group disability income coverage with a maximum benefit duration longer than 2 years that is based on a group pricing structure. The term does not include any of the following:
(i) Group short-term disability (coverage with benefit periods of 2 years or less in maximum duration).
(ii) Voluntary group disability income coverage that is priced on an individual risk structure and generally sold in the workplace.
Level premium—A 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 is calculated to remain level, it may be changed if any of the assumptions on which it was based are revised at a later time. 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 cost 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.
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 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.
Modal premium—The premium paid on a contract based on a premium term 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.
Negative reserve—A terminal reserve which is a negative value.
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.
Preliminary term reserve method—A reserve method under which 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 so that the present value of the net premiums is equal to the present value of the claims expected to be incurred following the end of the preliminary term period.
Present value of amounts not yet due on claims—The reserve for claims unaccrued, which may be discounted at interest.
Rating block—A grouping of contracts based on common characteristics, such as a policy form or forms having similar benefit designs.
Reserve—The term 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 contract promises benefits which result in claims which have been incurred, that is, for which the insurer has become obligated to make payment, on or prior to the valuation date and in claims which are expected to be incurred after the valuation date. For the incurred 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. For the expected claims, present liability of the insurer for these future claims should be provided for by the establishment of contract reserves and unearned premium reserves.
Terminal reserve—The reserve at the end of a contract year. It is the present value of benefits expected to be incurred after that contract year minus the present value of future valuation net premiums.
Unearned premium reserve—The reserve that 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.
Valuation net modal premium—The modal fraction of the valuation net annual premium that corresponds to the gross modal premium in effect on a contract to which contract reserves apply. For example, if the mode of payment in effect is quarterly, the valuation net modal premium is the quarterly equivalent of the valuation net annual premium.
Worksite disability policies—Individual short-term disability policies that are sold at the worksite through employer-sponsored enrollment, that cover normal pregnancy, and that have benefit periods up to 24 months. The term does not include any of the following:
(i) Personal disability policies sold to an individual and not associated with employer-sponsored enrollment.
(ii) Business overhead expense, disability buyout, or key person policies, in whatever manner those policies are sold.
§ 84a.4. Claim reserves.
[(a) General requirements.
(1) Claim reserves are required for incurred but unpaid claims on health and accident insurance contracts.
(2) Appropriate claim expense reserves are required with respect to the estimated expense of settlement of incurred but unpaid claims.
(3) The reserves for prior valuation years are to be tested for adequacy and reasonableness along the lines of claim runoff schedules in accordance with the statutory financial statement including consideration of residual unpaid liability.
(b) Minimum standards for claim reserves of disability income benefits, excluding single premium credit health and accident insurance.
(1) The maximum interest rate for claim reserves is specified in Appendix A (relating to specific standards for morbidity, interest and mortality).
(2) Minimum standards with respect to morbidity are those specified in Appendix A; except that, at the option of the insurer:
(i) For claims incurred on or after January 1, 2007, assumptions regarding claim termination rates for the period less than 2 years from the date of disablement may be based on the insurer's experience, if the experience is considered credible, or upon other assumptions designed to place a sound value on the liabilities.
(ii) For group disability income claims incurred on or after January 1, 2007, assumptions regarding claim termination rates for the period of 2 or more years but less than 5 years from the date of disablement 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 request for approval of a plan of modification to the reserve basis must include the following:
(A) An analysis of the credibility of the experience.
(B) A description of how the insurer's experience is proposed to be used in setting reserves.
(C) A description and quantification of the margins to be included.
(D) A summary of the financial impact that the proposed plan of modification would have had on the insurer's last filed annual statement.
(E) A copy of the approval of the proposed plan of modification by the Commissioner of the state of domicile.
(F) Other information deemed necessary by the Commissioner.
(iii) For claims incurred prior to January 1, 2007, each insurer may elect one of the following as the minimum standard.
(A) For claims with a duration from the date of disablement of less than 2 years, reserves may be based on the insurer's experience, if the experience is considered credible, or upon other assumptions designed to place a sound value on the liabilities. For group disability income claims with a duration from the 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 request for approval of a plan of modification to the reserve basis must include the following:
(I) An analysis of the credibility of the experience.
(II) A description of how the insurer's experience is proposed to be used in setting reserves.
(III) A description and quantification of the margins to be included.
(IV) A summary of the financial impact that the proposed plan of modification would have had on the insurer's last filed annual statement.
(V) A copy of the approval of the proposed plan of modification by the Commissioner of the state of domicile.
(VI) Other information deemed necessary by the Commissioner.
(B) The standards as defined in subparagraph (i) and (ii) applied to all open claims. If reserves are calculated on the standards defined in subparagraph (i) and (ii), future calculations must be on that basis.
(3) For contracts with an elimination period, the duration of disablement shall be measured, as dating from the time that benefits would have begun to accrue had there been no elimination period.
(c) Minimum standards for claim reserves of other benefits, including single premium credit health and accident insurance.
(1) The maximum interest rate for claim reserves is specified in Appendix A.
(2) Minimum standards with respect to morbidity and other contingencies shall be based on the insurer's experience, if the experience is considered credible, or upon other assumptions designed to place a sound value on the liabilities.
(d) Claim reserve methods. A reasonable actuarial 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.]
(a) General requirements.
(1) Claim reserves are required for incurred but unpaid claims on health and accident insurance contracts. When reserving for contracts with an elimination period, the duration of disablement commences on the date that benefits would have begun to accrue had there been no elimination period.
(2) Appropriate claim expense reserves are required with respect to the estimated expense of settlement of incurred but unpaid claims.
(3) The reserves for prior valuation years are to be tested for adequacy and reasonableness along the lines of claim runoff schedules in accordance with the statutory financial statement including consideration of residual unpaid liability.
(4) For claim reserves on policies that require contract reserves, the claim incurral date constitutes the ''issue date'' for determining the table and interest rate for claim reserves.
(5) The maximum interest rate for claim reserves is specified in Appendix A (relating to specific standards for morbidity, interest and mortality).
(6) The requirements for claims reserves on all claims incurred on or after January 1, 2017 will be as described in the Valuation Manual based on the incurred date of the claim.
(b) Minimum morbidity standards for claim reserves of individual disability income benefits, excluding single premium credit health and accident insurance.
(1) For claims incurred prior to January 1, 2007, each insurer may elect any of the following standards to use as the minimum morbidity standard for claim reserves:
(i) The minimum morbidity standard in effect for claim reserves as of the date the claim was incurred.
(ii) The standards as defined in paragraphs (2) or (3) applied to all open claims. Once an insurer elects to calculate reserves for all open claims on the standard defined in either paragraph (2) or (3), all future valuations must be on that basis.
(2) For claims incurred on or after January 1, 2007, and prior to the effective date for the company as determined in paragraph (5), the minimum standards with respect to morbidity are those specified in Appendix A, except that, at the option of the insurer, assumptions regarding claim termination rates for the period less than 2 years from the date of disablement may be based on the insurer's experience, if such experience is considered credible, or upon other assumptions designed to place a sound value on the liabilities.
(3) For claims incurred on or after January 1, 2020, the minimum standards with respect to morbidity are those specified in Appendix A, including all of the following (as derived in accordance with Actuarial Guideline L):
(i) The use of the insurer's own experience.
(ii) An adjustment to include an own experience measurement margin.
(iii) The application of a credibility factor.
(4) In determining the minimum reserves in accordance with paragraph (3), the provisions in subparagraphs (i), (ii) and (iii) of paragraph (3) are not applicable to any of the following circumstances:
(i) Where the insurer meets the Own Experience Measurement Exemption provided in Actuarial Guideline L.
(ii) Where, for worksite disability policies with benefit periods of up to 2 years, the insurer chooses to base its disabled life reserves on the insurer's experience, if such experience is considered credible, or on other assumptions and methods designed to place a sound value on the liabilities.
(5) An insurer may begin to use the minimum reserve standards in paragraph (3) at a date earlier than January 1, 2020, but not prior to January 1, 2017.
(6) An insurer may, within 3 years of January 1, 2020, or an earlier date the insurer elects under paragraph (5), apply the new standards in paragraph (3) to all open claims incurred prior to the effective date for paragraph (3) for the insurer. Once an insurer elects to calculate reserves for all open claims based on paragraph (3), all future valuations must be on that basis.
(c) Minimum morbidity standards for claim reserves of group disability income benefits, excluding single premium credit health and accident insurance.
(1) For claims incurred prior to January 1, 2007, each insurer may elect any of the following standards to use as the minimum morbidity standard for claim reserves:
(i) The minimum morbidity standard in effect for claim reserves as of the date the claim was incurred.
(ii) After the effective date selected by the company in paragraph (2), the standards as defined in paragraph (2), applied to all open group long term disability income claims. Once an insurer elects to calculate reserves for all open claims on a more recent standard, all future valuations must be based on that more recent standard.
(iii) The standards as defined in paragraph (3), applied to all open group disability income claims. Once an insurer elects to calculate reserves for all open claims on a more recent standard, all future valuations must be based on that more recent standard.
(2) For group long-term disability income claims incurred on or after January 1, 2007, but before the effective date selected by the company in paragraph (4), and group disability income claims incurred on or after January 1, 2007, that are not group long-term disability income, the minimum standards with respect to morbidity are those specified in Appendix A except that, at the option of the insurer:
(i) Assumptions regarding claim termination rates for the period less than 2 years from the date of disablement may be based on the insurer's experience, if the experience is considered credible, or upon other assumptions designed to place a sound value on the liabilities.
(ii) Assumptions regarding claim termination rates for the period 2 or more years but less than 5 years from the date of disablement may, with the approval of the Commissioner, be based on the insurer's experience for which the insurer maintains underwriting and claim administration control. The request for such approval of a plan of modification to the reserve basis must include:
(A) An analysis of the credibility of experience.
(B) A description of how all of the insurer's experience is proposed to be used in setting reserves.
(C) A description and quantification of the margins to be included.
(D) A summary of the financial impact that the proposed plan of modification would have had on the insurer's last filed annual statement.
(E) A copy of the approval of the proposed plan of modification by the commissioner of the state of domicile.
(F) Any other information the Commissioner deems necessary to review the plan of modification.
(iii) Each insurer may elect any of the following standards to use as the minimum morbidity standard for group long term disability income claim reserves:
(A) The minimum morbidity standard in effect for claim reserves as of the date the claim was incurred.
(B) The standards as defined in paragraph (3), applied to all open claims. Once an insurer elects to calculate reserves for all open claims on a more recent standard, all future valuations must be on that basis.
(3) For group long-term disability income claims incurred on or after January 1, 2017, the minimum standards with respect to morbidity must be based on the 2012 GLTD termination table or subsequent table with consideration of all of the following:
(i) The insurer's own experience computed in accordance with Actuarial Guideline XLVII, as included in the most current version of the NAIC Accounting Practices and Procedures Manual.
(ii) An adjustment to include an own experience measurement margin derived in accordance with Actuarial Guideline XLVII, as included in the most current version of the NAIC Accounting Practices and Procedures Manual.
(iii) A credibility factor derived in accordance with Actuarial Guideline XLVII, as included in the most current version of the NAIC Accounting Practices and Procedures Manual.
(4) An insurer may begin to use the minimum reserve standards in paragraph (3) for dates earlier than January 1, 2017, but not prior to October 1, 2014. The date the insurer selects between January 1, 2017, and October 1, 2014, to begin to use the minimum reserve standards in paragraph (3) will be considered the effective date.
(5) An insurer may apply the standards in paragraph (3) to all open claims incurred prior to the effective date of paragraph (3) for the insurer. Once an insurer elects to calculate reserves for all open claims based on paragraph (3), all future valuations must be on that basis.
(d) Minimum morbidity standards for other health insurance claim reserves, including single premium credit health and accident insurance. The minimum standards with respect to morbidity and other contingencies must be based on the insurer's experience, if the experience is considered credible, or upon other assumptions designed to place a sound value on the liabilities.
(e) Claim reserve methods. An insurer may use a generally accepted actuarial reserving method or combination of methods to estimate claim liabilities.
(1) Methods used for estimating liabilities generally may be aggregate methods or various reserve items may be separately valued.
(2) Approximations may be based on groupings and averages.
(3) Adequacy of the claim reserves shall be determined in the aggregate.
§ 84a.5. Premium reserves.
(a) General requirements.
(1) Unearned premium reserves are required for all contracts, except single premium credit health and accident insurance 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, the premiums shall 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 shall 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.
* * * * * § 84a.6. Contract reserves.
* * * * * (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) [Reserved] 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.
* * * * *
Appendix A
SPECIFIC STANDARDS FOR MORBIDITY, INTEREST AND MORTALITY I. MORBIDITY.
(a) Minimum morbidity standards for valuation of specified individual contract health and accident insurance benefits are as follows:
(1) Disability income benefits due to accident or sickness.
(i) Contract reserves.
(A) Contracts issued on or after January 1, 1965, and prior to January 1, 1986: The 1964 Commissioners Disability Table (64 CDT).
(B) Contracts issued on or after January 1, 1993, and before January 1, 2020: The 1985 Commissioners Individual Disability Tables A (85 CIDA) or The 1985 Commissioners Individual Disability Tables B (85 CIDB).
(C) Contracts issued on or after January 1, 1986, and prior to January 1, 1993: Optional use of either the 1964 Table or the 1985 Tables.
(D) Each insurer shall elect, with respect to all individual contracts issued in any one statement year, whether it will use Tables A or Tables B as the minimum standard. The insurer may elect to use the other tables with respect to a subsequent statement year.
(E) Contracts issued on or after January 1, 2020: The 2013 IDI Valuation Table with modifiers as described in Actuarial Guideline L.
(F) An insurer may begin to use the 2013 IDI Valuation Table with modifiers at a date earlier than January 1, 2020, but not prior to January 1, 2017.
(G) Within 3 years of 2020 or the earlier date an insurer begins to use the 2013 IDI Valuation Table, the insurer may elect to apply that morbidity standard for all policies issued subject to other valuation tables. This may be done if the following conditions are met:
(I) The insurer applies the morbidity standard to all inforce policies and incurred claims.
(II) The insurer elects or has elected to apply the 2013 IDI Valuation Table to all claims incurred regardless of incurral date.
(III) The insurer maintains adequate policy records on policies issued prior to 2020 that allow the insurer to apply the 2013 IDI Valuation Table appropriately.
(IV) Once an insurer elects to calculate reserves for all inforce policies based on the current morbidity standard, all future valuations must be on that basis.
(ii) Claim reserves.
(A) Claims incurred on or after January 1, 2007, and prior to January 1, 2020: The 1985 Commissioners Individual Disability Table A (85CIDA) with claim termination rates multiplied by the following adjustment factors:
Duration Adjustment Factor Week 1 0.366 2 0.366 3 0.366 4 0.366 5 0.365 6 0.365 7 0.365 8 0.365 9 0.370 10 0.370 11 0.370 12 0.370 13 0.370 Month 4 0.391 5 0.371 6 0.435 7 0.500 8 0.564 9 0.613 10 0.633 11 0.712 12 0.756 13 0.800 14 0.844 15 0.888 16 0.932 17 0.976 18 1.020 19 1.049 20 1.078 21 1.107 22 1.136 23 1.165 24 1.195 Year 3 1.369 4 1.204 5 1.199 6 and later 1.000 The 85 CIDA so adjusted for the computation of claim reserves shall be known as The 1985 Commissioners Individual Disability Table C (85 CIDC).
[(B) Claims incurred prior to January 1, 2007: Optional use of either the minimum morbidity standard in effect for contract reserves on contracts issued on the same date the claim is incurred, or 85 CIDC, applied to all claims.
(C) If reserves for all claims are calculated on 85 CIDC, future calculations must be on 85 CIDC.]
(B) For claims incurred on or after January 1, 2020, the 2013 IDI Valuation Table with modifiers and adjustments for company experience as prescribed in the Actuarial Guideline L, except for worksite disability policies with benefit periods of 24 months or less.
(C) For worksite disability policies, claim reserves may be calculated using claim run-out analysis or claim triangles or other methods that place a sound value on the reserves that are appropriate for the business and risks involved.
(D) For claims incurred prior to January 1, 2020, each insurer may elect any of the following standards to use as the minimum standard for claims incurred:
(I) The minimum morbidity standard in effect for contract reserves on currently issued contracts, as of the date the claim is incurred.
(II) The standard as defined in Clause (A) or (B) applied to all open non-worksite claims, if the insurer maintains adequate claim records to allow the insurer to apply the standard defined in Clause (A) or (B) appropriately. Once an insurer elects to calculate reserves for all open claims on the standard defined in Clause (A) or (B), all future valuations must be on that basis. This option, with respect to Clause (B), may be selected only if the insurer maintains adequate claims records for all claims incurred to use the 2013 IDI Valuation Table appropriately.
(2) Hospital benefits, surgical benefits and maternity benefits (scheduled benefits or fixed time period benefits only).
(i) Contract reserves.
* * * * * (ii) Claim reserves. Claim reserves are to be determined as provided in [§ 84a.4(c)(2)] § 84a.4(d) (relating to claim reserves).
(3) 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.
(ii) Claim reserves. Claim reserves are to be determined as provided in [§ 84a.4(c)(2)] § 84a.4(d).
(4) Accidental death benefits.
(i) Contract reserves. Contracts issued on or after January 1, 1965: The 1959 Accidental Death Benefits Table.
(ii) Claim reserves. Actual amount incurred.
(5) Single Premium Credit Health and Accident Insurance.
(i) Contract reserves:
* * * * * (ii) Claim Reserves: Claim reserves are to be determined as defined in [§ 84a.4(c)(2)] § 84a.4(d).
(6) Other individual contract benefits.
(i) Contract reserves. For other individual contract benefits, morbidity assumptions are to be determined as provided in § 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 [§ 84a.4(c)(2)] § 84a.4(d).
(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) Where the regulation references this Appendix.
[(i)] (A) Contract reserves.
[(A)] (I) Certificates issued prior to January 1, 1993: The same basis, if any, as that employed by the insurer as of January 1, 1993.
[(B)] (II) Certificates issued on or after January 1, 1993: The 1987 Commissioners Group Disability Income Table (87CGDT).
[(ii)] (B) Claim reserves.
[(A)] (I) For claims incurred on or after January 1, 1993: The 1987 Commissioners Group Disability Income Table (87CGDT).
[(B)] (II) For claims incurred prior to January 1, 1993: Claim reserves are to be determined as provided in [§ 84a.4(c)(2)] § 84a.4(d) (relating to claim reserves).
(ii) Where the regulation does not reference this Appendix, the minimum morbidity standards are set forth in Actuarial Guideline XLVII.
(2) Single Premium Credit Health and Accident Insurance.
* * * * * (ii) Claim reserves. Claim reserves are to be determined as defined in [§ 84a.4(c)(2)] § 84a.4(d).
(3) Other group contract benefits.
(i) Contract reserves. For other group contract benefits, morbidity assumptions are to be determined as provided in § 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 [§ 84a.4(c)(2)] § 84a.4(d).
II. INTEREST
(a) Contract reserves.
(1) The maximum interest rate is the maximum rate permitted by [section 301 of The Insurance Department Act of 1921 (40 P.S. § 71)] 40 Pa.C.S. §§ 7111—7127 (relating to valuation of reserves for contracts and policies) 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 [section 301 of The Insurance Department Act of 1921 (40 P.S. § 71)] 40 Pa.C.S. §§ 7111—7127 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 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.]
(2) For claim reserves on policies not requiring contract reserves, the maximum interest rate (I) shall be the calendar year statutory valuation interest rates as defined by:
I = .02 + .8 * (R − .03)
Where R is the average, over a period of 12 months, ending June 30 of the calendar year of the claim incurral date, of the monthly average of the composite yield on seasoned corporate bonds, as published by Moody's Investors Service, Inc. and the results rounded to the nearer 1/4 of 1%.
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.
* * * * * (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 (c) is inappropriate.
(e) For single premium credit insurance using the 85CIDA table, no separate mortality shall be assumed.
[Pa.B. Doc. No. 20-1307. Filed for public inspection September 25, 2020, 9:00 a.m.]
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