§ 84a.6. Contract reserves.
(a) General requirements.
(1) Contract reserves are required for the following:
(i) The individual and group contracts with which level premiums are used.
(ii) The individual and group contracts with respect to which, due to the gross premium pricing structure at issue, the value of the future benefits at any time exceeds the value of any appropriate future valuation net premiums at that time. This evaluation may be applied on a rating block basis if the total premiums for the block were developed to support the total risk assumed and expected expenses for the block each year, and an actuary certifies the premium development. The actuary should state in the certification submitted to the Department with the reserve valuation data that premiums for the rating block were developed such that each year’s premium was intended to cover that year’s costs without any prefunding. If the premium is also intended to recover costs for prior years, the actuary shall also disclose the reasons for and magnitude of the recovery. The values specified in this subsection shall be determined on the basis specified in subsection (b).
(2) Contract reserves are not required for individual contracts and group certificates already in force on October 23, 1993, that are not guaranteed renewable or noncancellable as set forth in the contract or certificate or as prescribed under the Health Insurance Portability and Accountability Act (Pub. L. 104-191, 110 Stat. 1936).
(3) If this section requires contract reserves for individual contracts or group certificates already in force on October 23, 1993, for which contract reserves were not held as of December 31, 1998, the additional reserves may be phased in over a 3-year period with 1/3 of the required reserve at December 31, 1999, 2/3 of the required reserves at December 31, 2000, and 100% of the required reserve at December 31, 2001, and after.
(4) The contract reserve is in addition to claim reserves and premium reserves.
(5) The methods and procedures for contract reserves shall be consistent with those for claim reserves for a contract, or else appropriate adjustment shall be made when necessary to assure provision for the aggregate liability. The date of incurral shall be the same in determining both the contract reserves and the claim reserves.
(6) The total contract reserve established must incorporate provisions for moderately adverse deviations.
(b) Minimum standards for contract reserves.
(1) Morbidity or other contingency.
(i) Minimum standards with respect to morbidity are those in Appendix A (relating to specific standards for morbidity, interest and mortality). Valuation net premiums used under each contract shall have a structure consistent with the gross premium structure at issue of the contract as this relates to advancing age of the insured, contract duration and period for which gross premiums have been calculated.
(ii) Contracts for which tabular morbidity standards are not specified in Appendix A shall be valued using tables established for reserve purposes by a qualified actuary and acceptable to the Commissioner. The morbidity tables shall contain a pattern of incurred claim costs that reflect the underlying morbidity and may not be constructed for the primary purpose of minimizing reserves.
(iii) If a morbidity standard specified in Appendix A is on an aggregate basis, the morbidity standard may be adjusted to a select and ultimate basis to reflect the effect of insurer underwriting by policy duration. The adjustments shall be appropriate to the underwriting and be acceptable to the Commissioner.
(iv) In determining the morbidity assumptions, the actuary shall use assumptions that represent the best estimate of anticipated future experience but may not incorporate any expectation of future morbidity improvement for contracts issued on or after January 1, 2007. Morbidity improvement is a change in the combined effect of claim frequency and the present value of future expected claim payments given that a claim has occurred from the current morbidity tables or experience that will result in a reduction to reserves. The actuary can reflect the morbidity impact for a specific known event that has occurred and can be evaluated and quantified.
(2) Maximum interest rate. The maximum interest rate is specified in Appendix A.
(3) Termination rates.
(i) Termination rates used in the computation of reserves shall be on the basis of a mortality table as specified in Appendix A except as noted in subparagraphs (ii), (iii), (iv) and (v).
(ii) Total termination rates may be used at ages and durations when these exceed specified mortality table rates, but not in excess of the lesser of 80% of the total termination rate used in the calculation of the gross premiums or 8%.
(iii) For long-term care individual contracts and group certificates issued on and after January 1, 1999, termination rates in addition to the specified mortality table rates may be used. The termination rates other than mortality may not exceed the following:
(A) For policy years 1 through 4, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 8%.
(B) For policy years 5 and later, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 4%.
(iv) For long-term care individual contracts and group certificates issued on and after January 1, 2007, the following termination rates in addition to the mortality table rates specified in Appendix A may be used.
(A) For policy year 1, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 6%.
(B) For policy years 2 through 4, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 4%.
(C) For policy years 5 and later, the lesser of 100% of the voluntary lapse rate used in the calculation of gross premiums and 2%, except for group long-term care insurance where the 2% shall be 3%.
(v) For single premium credit disability insurance, termination rates may not be used.
(4) Reserve methods.
(i) For health and accident insurance except long-term care and return of premium or other deferred cash benefits, the minimum reserve is the reserve calculated on the 2-year full preliminary term method; that is, under which the terminal reserve is zero at the first and also the second contract anniversary.
(ii) For long-term care insurance, the minimum reserve is the reserve calculated as follows:
(A) For individual contracts and group certificates issued before October 23, 1993, reserves calculated on the 2-year preliminary term method.
(B) For individual contracts and group certificates issued on or after October 23, 1993, reserves calculated on the 1-year preliminary term method.
(iii) For return of premium or other deferred cash benefits in individual contracts and group certificates issued prior to October 23, 1993, the minimum reserve is the reserve calculated on the 2-year preliminary term method.
(iv) For return of premium or other deferred cash benefits in individual contracts and group certificates issued on or after October 23, 1993, the minimum reserve is the reserve calculated as follows:
(A) On the 1-year preliminary term method if the benefits are provided at any time before the twentieth anniversary.
(B) On the 2-year preliminary term method if the benefits are only provided on or after the twentieth anniversary. Under the Insurance Department (Department) guidelines for the review of return of premium option, the return of premium benefit shall be available beginning by the tenth anniversary. The reference to benefits provided on or after the twentieth anniversary does not modify the referenced Department guideline as it pertains to form approval. This reference to a minimum reserve standard for benefits beginning on or after the twentieth anniversary is necessary only as it pertains to forms that are sold in other states.
(v) The preliminary term method may be applied only in relation to the date of issue of a contract. Reserve adjustments introduced later, as a result of rate increases, revisions in assumptions—for example, projected inflation rates—or for other reasons, shall be applied immediately as of the effective date of adoption of the adjusted basis.
(5) Negative reserves. Negative reserves on a benefit may be offset against positive reserves for other benefits in the same contract, but the total contract reserve with respect to benefits combined may not be less than zero.
(6) Nonforfeiture benefits. The contract reserve on a policy basis may not be less than the net single premium for the nonforfeiture benefits at the appropriate policy duration, where the net single premium is computed according to the specifications listed in this section.
(c) Alternative valuation methods and assumptions. If the contract reserve on contracts to which an alternative basis is applied is not less in the aggregate than the amount determined according to the standards of subsection (b)(1)—(3), an insurer may use reasonable assumptions as to interest rates, termination or mortality rates, or both, and rates of morbidity or other contingency. Also, subject to the preceding condition, the insurer may employ methods other than the methods stated in subsection (b)(4) in determining a sound value of its liabilities under the contracts, including the following:
(1) The net level premium method.
(2) The 1-year full preliminary term method.
(3) Prospective valuation on the basis of actual gross premiums with reasonable allowance for future expenses.
(4) The use of approximations such as those involving age groupings, groupings of several years of issue, average amounts of indemnity and grouping of similar contract forms.
(5) The computation of the reserve for one contract benefit as a percentage of, or by other relation to the aggregate contract reserves exclusive of the benefit so valued.
(6) The use of a composite annual claim cost for all or a combination of the benefits included in the contracts valued.
(d) Tests for adequacy and reasonableness of contract reserves.
(1) Annually, an appropriate review shall be made of the insurer’s prospective contract liabilities on contracts valued by tabular reserves to determine the continuing adequacy and reasonableness of the tabular reserves giving consideration to future gross premiums. The insurer shall make appropriate increments to the tabular reserves if the tests indicate that the basis of the reserves is no longer adequate, subject to the minimum standards of subsection (b).
(2) If a company has a contract or a group of related similar contracts, for which future gross premiums will be restricted so that the future gross premiums reduced by expenses for administration, commissions and taxes will be insufficient to cover future claims, the company shall establish contract reserves for the shortfall in the aggregate.
Authority The provisions of this § 84a.6 amended under sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P.S. § § 66, 186, 411 and 412); sections 301.1 and 311.1 of The Insurance Department Act of 1921 (40 P.S. § § 71.1 and 93); and 40 Pa.C.S. § 7124(c)(1) and (2).
Source The provisions of this § 84a.6 amended September 17, 1999, effective September 18, 1999, 29 Pa.B. 4864; amended July 14, 2006, effective January 1, 2007, 36 Pa.B. 3667; corrected March 9, 2007, effective January 1, 2007, 37 Pa.B. 1125; amended October 22, 2021, effective October 23, 2021, 51 Pa.B. 6600. Immediately preceding text appears at serial pages (320429) to (320430) and (325879) to (325881).
Cross References This section cited in 31 Pa. Code Ch. 84a Appendix A (relating to specific standards for morbidity, interest and mortality).
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