Texas Register
(27 TexReg 10700). Sections 3.7003,
3.7006 and 3.7007 are adopted without changes and will not be republished.
The amendments are necessary to comply with Insurance Code Article 21.39
which directs the Commissioner of Insurance to adopt each current formula
for establishing reserves applicable to each line of insurance recommended
by the National Association of Insurance Commissioners (NAIC). Subchapter
GG is the department's adaptation of the NAIC model regulation for minimum
reserve standards for individual and group accident and health insurance.
The NAIC has amended the model regulation, and the adopted amendments harmonize
Subchapter GG with the amended model regulation.
The amendment to §3.7003(b(2) clarifies the minimum amount for unearned
premium and contract reserves. The amendment to §3.7004 requires long-term
care contract reserves to be calculated on the one year full preliminary term
method and allows a rating block approach to be used when determining contract
reserves for individual and group contracts. Section 3.7004 was changed to
correct a typographical error. The amended §3.7006 adds a table containing
adjusted claim termination rates and the 1983 Group Annuity Mortality Table
without projection for the mortality basis for long-term care insurance individual
policies or group certificates. Subsection (d) in §3.7006, concerning
availability of tables, is deleted since it was obsolete as a result of the
availability of the tables on the internet. Finally, new definitions for "level
premiums" and "rating block" are adopted in the amendment to §3.7007.
No comments were received regarding adoption of the amendments.
The amendments are adopted under the Insurance Code Articles
21.39, 10.07, 18.08, 19.06 and 22.18, and §36.001. Article 21.39 requires
the Commissioner of Insurance to adopt the current formula for establishing
reserves applicable to each line of insurance as recommended by the NAIC.
Articles 10.07, 18.08, 19.06 and 22.18 apply the requirements of Article 21.39
to certain types of insurers. Section 36.001 provides that the Commissioner
of Insurance may adopt rules to execute the duties and functions of the Texas
Department of Insurance as authorized by statute.
§3.7004.Contract Reserves.
(a)
General.
(1)
Contract reserves are required, unless otherwise specified
in paragraph (2) of this subsection, for:
(A)
all individual and group contracts with which level premiums
are used; 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. This evaluation may be applied on a rating block
basis if the total premiums for the block were developed to support the total
risk assumed and expected expenses for the block each year, and a qualified
actuary certifies the premium development. The values specified in this subparagraph
must be determined on the basis specified in subsection (b) of this section.
(2)
Contracts not requiring a contract reserve are as follows:
(A)
contracts which cannot be continued after one year from
issue; or
(B)
contracts where each year’s premium is priced to
cover that year’s cost without any prefunding. This evaluation may be
applied on a rating block basis if the total premiums for the block were developed
to support the total risk assumed and expected expenses for the block each
year. For either a contract specific or rating block basis, the actuary must
certify the premium development and should state in the certification that
premiums were developed such that each year’s premium was intended to
cover that year’s costs without any prefundings.
(3)
The contract reserve is in addition to claim reserves and
premium reserves.
(4)
The methods and procedures for contract reserves must either
be consistent with those for claim reserves for any contract, or else appropriate
adjustment must be made when necessary to assure provision for the aggregate
liability. The definition of the date of incurral must be the same in both
determinations.
(b)
Minimum standards for contract reserves.
(1)
Morbidity or other contingency. Minimum standards with
respect to morbidity are those set forth in §3.7006 of this title (relating
to Specific Standards for Morbidity, Interest, and Mortality).
(A)
Valuation net premiums used under each contract must have
a structure consistent with the gross premium structure at issue of the contract
as this relates to advancing age of insured, contract duration, and period
for which gross premiums have been calculated.
(B)
Contracts for which tabular morbidity standards are not
specified in §3.7006 of this title shall be valued using tables established
for reserve purposes by a qualified actuary and acceptable to the commissioner.
The morbidity tables shall contain a pattern of incurred claims cost that
reflects the underlying morbidity and shall not be constructed for the primary
purpose of minimizing reserves.
(2)
Interest. The maximum interest rate is specified in §3.7006
of this title (relating to Specific Standards for Morbidity, Interest, and
Mortality).
(3)
Termination rates. Termination rates used in the computation
of reserves shall be on the basis of a mortality table as specified in §3.7006
of this title (relating for Specific Standards for Morbidity, Interest, and
Mortality) except as noted in this subparagraph.
(A)
Under contracts for which premium rates are not guaranteed,
and where the effects of insurer underwriting are specifically used by policy
duration in the valuation morbidity standard or for return of premium or other
deferred cash benefits, total termination rates may be used at ages and durations
where these exceed specified mortality table rates, but not in excess of the
lesser of: 80% of the total termination rate used in the calculation of the
gross premiums, or 8.0%.
(B)
For long-term care individual policies or group certificates
issued after December 31, 2002, the contract reserve may be established on
a basis of separate mortality as specified in §3.7006 of this title and
terminations other than mortality, where the terminations are not to exceed:
(i)
For policy years one through four, the lesser of 80% of
the voluntary lapse rate used in the calculation of gross premiums or 8%;
(ii)
For policy years five and later, the lesser of 100% of
the voluntary lapse rate used in the calculation of gross premiums or 4%;
(C)
Where a morbidity standard specified in §3.7006 of
this title is on an aggregate basis, such morbidity standard may be adjusted
to reflect the effect of insurer underwriting by policy duration. The adjustments
must be appropriate to the underwriting and be acceptable to the commissioner.
(4)
Reserve method.
(A)
For insurance, except long-term care and return of premium
or other deferred cash benefits issues after December 31, 2002, the minimum
reserve is the reserve calculated on the two-year full preliminary term method;
that is, under which the terminal reserve is zero at the first and also the
second contract anniversary.
(B)
For long-term care insurance issued after December 31,
2002, the minimum reserve is the reserve calculated on the one-year full preliminary
term method.
(C)
For return of premium or other deferred cash benefits issued
after December 31, 2002, the minimum reserve is the reserve calculated as
follows:
(i)
on the one year preliminary term method if the benefits
are provided at any time before the twentieth anniversary
(ii)
on the two year preliminary term method if the benefits
are only provided on or after the twentieth anniversary.
(D)
The preliminary term method may be applied only in relation
to the date of issue of a contract or a rider. Reserve adjustments introduced
later, as a result of rate increases, revisions in assumptions (e.g., projected
inflation rates) or for other reasons, are to be applied immediately as of
the effective date of adoption of the adjusted basis.
(5)
Negative reserves. Negative reserves on any benefit may
be offset against positive reserves for other benefits in the same contract,
but the total contract reserve with respect to all benefits combined may not
be less than zero.
(6)
Nonforfeiture Benefits for Long-term Care Insurance. The
contract reserve on a policy basis shall not be less than the net single premium
for the nonforfeiture benefits at the appropriate policy duration, where the
net single premium is computed according to paragraph (4) of this subsection.
(c)
Alternative valuation methods and assumptions generally.
Provided the contract reserve on all contracts to which an alternative method
or basis is applied is not less in the aggregate than the amount determined
according to the applicable standards specified in subsection (b) of this
section, an insurer may use any reasonable assumptions as to interest rates,
termination and/or mortality rates, 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) of this section in determining a
sound value of its liabilities under such contracts, including, but not limited
to, the following: the net level premium method; the one-year full preliminary
term method; prospective valuation on the basis of actual gross premiums with
reasonable allowance for future expenses; the use of approximations such as
those involving age groupings, groupings of several years of issue, average
amounts of indemnity, grouping of similar contract forms; 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 or benefits so
valued; and the use of a composite annual claim cost for all or any combination
of the benefits included in the contracts valued.
(d)
Tests for adequacy and reasonableness of contract reserves.
Annually, an appropriate review must 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 such tabular reserves if such tests indicate that the basis
of such reserves is no longer adequate; subject, however, to the minimum standards
of subsection (b) of this section. In the event a company has a contract or
a group of related similar contracts, for which future gross premiums will
be restricted by contract, insurance department regulations, or for other
reasons, such 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 such shortfall in the aggregate.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of
the Secretary of State on February 28, 2003.
TRD-200301478
Gene C. Jarmon
General Counsel and Chief Clerk
Texas Department of Insurance
Effective date: March 20, 2003
Proposal publication date: November 15, 2002
For further information, please call: (512) 463-6327