N.Y. Comp. Codes R. & Regs. tit. 11 § 94.6

Current through Register Vol. 46, No. 53, December 31, 2024

Section 94.6 - Contract reserves

(a) General.

(1) Contract reserves are required, unless otherwise specified in paragraph (2) of this subdivision for:

(i) all individual and group contracts with which level premiums, whether or not such premiums are guaranteed, are used; or

(ii) 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 or where the contract provides for the extension of benefits after the termination of the coverage, e.g., deferred maternity and other similar benefits. 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 actuary should state in the certification 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 any prior years, the actuary should also disclose the reasons for and magnitude of such recovery. The values specified in this subparagraph shall be determined on the basis specified in subdivision (b) of this section.

(2) Contracts that cannot be continued after one year from issue do not require a contract reserve.

(3) The contract reserve is in addition to claim reserves and premium reserves.

(4) 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 definition of the date of incurral shall be the same in both determinations. The methods and procedures for contract reserves shall also be consistent with those used for setting premium reserves.

(5) The total contract reserve established shall incorporate provisions for moderately adverse deviations.

(b) Minimum standards for contract reserves.

(1) Basis.

(i) Morbidity or other contingency.

(a) Minimum standards with respect to morbidity are those set forth in section 94.10 of this Part. Valuation net premiums used under each contract shall be a uniform percentage of 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) Clause (a) of this subparagraph applies only to the premium structure applicable to each contract. The relationship among gross premiums for different contracts (e.g., variations by age) has no bearing on the new premium structure. If, for a policy form, there is no gross premium variation by age, the valuation net premium will nonetheless vary based on age at issue for each contract since, at issue, the present value of valuation net premiums for a contract must equal the present value of tabular net costs.

(c) Contracts for which tabular morbidity standards are not specified in section 94.10 of this Part shall be valued using tables established for reserve purposes by a qualified actuary and acceptable to the superintendent. The morbidity tables shall contain a pattern of incurred claims so that it reflects the underlying morbidity and shall not be constructed for the primary purpose of minimizing reserves.

In determining the morbidity assumptions, the actuary shall use assumptions that represent the best estimate of anticipated future experience, but shall not incorporate any expectation of future morbidity improvement. 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. It is not the intent of this provision to restrict the ability of the actuary to reflect the morbidity impact for a specific known event that has occurred and that is able to be evaluated and quantified. The last sentence is intended to provide allowances for a known event, such as a new drug release. At the time of adoption, there were no specific examples that could be pointed to in the recent past that would have met this standard. This is intended to be an extremely rare event.

(ii) Interest. The maximum interest rate is specified in section 94.10 of this Part.

(iii) Termination rates. Termination rates used in the computation of reserves shall be on the basis of a mortality table as specified in section 94.10 of this Part except as noted in the following clauses:

(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 percent of the total termination rate used in the calculation of the gross premiums, or eight percent.

(b) For long-term care individual policies or group certificates issued on or after January 1, 1997 and before January 1, 2003, the contract reserve may be established on a basis of separate:

(1) mortality (as specified in section 94.10 of this Part); and

(2) terminations other than mortality, where the terminations are not to exceed:

(i) for policy years one through four, the lesser of 80 percent of the voluntary lapse rate used in the calculation of gross premiums or eight percent;

(ii) for policy years five and later, the lesser of 100 percent of the voluntary lapse rate used in the calculation of gross premiums or four percent.

(c) For long-term care individual policies or group certificates issued on or after January 1, 2003, the contract reserve shall be established on the basis of:

(1) mortality (as specified in section 94.10 of this Part); and

(2) terminations other than mortality, where the terminations are not to exceed:

(i) for policy year one, the lesser of 80 percent of the voluntary lapse rate used in the calculation of gross premiums or six percent;

(ii) for policy years two through four, the lesser of 80 percent of the voluntary lapse rate used in the calculation of gross premiums or four percent; and

(iii) for policy years five and later:

(A) for individual policies, the lesser of 100 percent of the voluntary lapse rate used in the calculation of gross premiums or two percent; and

(B) for group certificates, the lesser of 100 percent of the voluntary lapse rate used in the calculation of gross premiums or three percent.

(d) Where a morbidity standard specified in section 94.10 of this Part is on an aggregate basis, the 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 superintendent.

(2) Reserve method.

(i) For insurance, except long-term care and return of premium or other deferred cash benefits, the minimum reserve is the reserve calculated on the two-year full preliminary term method; that is, under which the terminal reserve is zero at the first and also the second contract anniversary.

(ii) For long-term care insurance, the minimum reserve is the reserve calculated as follows:

(a) for individual policies and group certificates issued on or before December 31, 1994, reserves calculated on the two-year full preliminary term method; and

(b) for individual policies and group certificates issued on or after January 1, 1995, reserves calculated on the one-year full preliminary term method.

(iii) For return of premium or other deferred cash benefits, excluding the premium refund reserve on single premium credit disability insurance, the minimum reserve is the reserve calculated as follows:

(a) on the one-year preliminary term method if the benefits are provided at any time before the 20th anniversary; and

(b) on the two-year preliminary term method if the benefits are only provided on or after the 20th anniversary.

(iv) 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 (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.

(3) 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.

(4) Nonforfeiture benefits. The contract reserve for each policy 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 the above specifications.

(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 subdivision (b) of this section; an insurer may use any reasonable assumptions as to interest rates, termination and 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 paragraph (b)(2) 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.

(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 such tabular reserves if such tests indicate that the basis of such reserves is no longer adequate; subject, however, to the minimum standards of subdivision (b) of this section.

(2) In the event an insurer has a contract or a group of related similar contracts, for which future gross premiums will be restricted by contract, Insurance Department regulations, regulatory approval for rate changes, 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 insurer shall establish contract reserves for such shortfall in the aggregate.

N.Y. Comp. Codes R. & Regs. Tit. 11 § 94.6