Ch. 130: Minimum Reserve Standards for Individual and Group Health Insurance Contracts

Section 1. Purpose

Section 2. Authority

Section 3. Scope

Section 4. General Requirements and Structure of Rule

Section 5. Claim Reserves

Section 6. Premium Reserves

Section 7. Contract Reserves

Section 8. Reinsurance

Section 9. Effective Date

Appendix A. Specific Standards for Morbidity, Interest and Mortality

Appendix B. Glossary of Technical Terms Used

Appendix C. Reserves for Waiver of Premium

Section 1. Purpose

This rule establishes appropriate standards for claim reserves, premium reserves, and contract reserves on individual and group health insurance.

Section 2. Authority

This rule is promulgated by the Superintendent pursuant to Title 24-A M.R.S.A., Sections 212 and 959(1).

Section 3. Scope

The standards set forth in Sections 4 through 8 and the Appendices apply to all claims incurred before January 1, 2020 under individual and group health insurance coverages issued by insurance companies doing business in this State, except as provided in this section.

A. Claims incurred on and after January 1, 2020, shall be valued in accordance with the applicable standards as specified in Valuation Manual as adopted in accordance with 24-A M.R.S.A. §959, including guidance applicable to coverage issued before 2020 as set forth in the NAIC Accounting Practices and Procedures Manual, or its successor publication, as adopted in accordance with 24-A M.R.S.A. §901-A(1)(A).

B. Open claims incurred before January 1, 2020 may, at the option of the insurer, be valued in accordance with applicable standards as specified in the Valuation Manual, including any applicable adjustments, modifications, or exceptions, provided that the election is made consistently for all open claims.

C. Once an insurer has exercised an option to value previously-incurred claims on the basis of a more recent valuation standard, all future valuations of those claims must be made on the same basis, applied consistently to all open claims, unless and until the insurer updates to a still more recent standard.

Section 4

exceptions, provided that the election is made consistently for all open claims.

C. Once an insurer has exercised an option to value previously-incurred claims on the basis of a more recent valuation standard, all future valuations of those claims must be made on the same basis, applied consistently to all open claims, unless and until the insurer updates to a still more recent standard.

Section 4. General Requirements and Structure of Rule

A. General Requirements

When an insurer determines that adequacy of its health insurance reserves requires reserves in excess of the minimum standards specified herein, such increased reserves shall be held and shall be considered the minimum reserves for that insurer.

With respect to any block of contracts, or with respect to an insurers health business as a whole, a prospective gross premium valuation is the ultimate test of reserve adequacy as of a given valuation date. Such a 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: all expected benefits unpaid, all expected expenses unpaid, and all unearned or expected premiums, adjusted for future premium increases reasonably expected to be put into effect.

Such a gross premium valuation is to be performed whenever a significant doubt exists as to reserve adequacy with respect to any major block of contracts, or with respect to the insurers health business as a whole. In the event 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 such contracts under these standards

or with respect to the insurers health business as a whole. In the event 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 such contracts under these standards. Whenever minimum reserves, as defined in these standards, exceed reserve requirements as determined by a prospective gross premium valuation, such minimum reserves remain the minimum requirement under these standards.

B. Categories of reserves

The following sections set forth minimum standards for three categories of health insurance reserves:

Section 5. Claim Reserves

Section 6. Premium Reserves

Section 7. Contract Reserves

Adequacy of an insurer's health insurance reserves is to be determined on the basis of all three categories combined. However, these standards emphasize the importance of determining appropriate reserves for each of the three categories separately.

C. Appendices

These standards contain two appendices which are an integral part of the standards, and one additional "supplementary" appendix which is not part of the standards as such, but is included for explanatory and illustrative purposes only.

Appendix A. Specific minimum standards with respect to morbidity, mortality, and interest, which apply to claim reserves according to year of incurral and to contract reserves according to year of issue.

Appendix B. Glossary of Technical Terms used.

Appendix C. (Supplementary) Waiver of Premium Reserves.

Section 5. Claim Reserves

A. General

(1) Claim reserves are required for all incurred but unpaid claims on all health insurance policies.

(2) Appropriate claim expense reserves are required with respect to the estimated expense of settlement of all incurred but unpaid claims.

ing to year of issue.

Appendix B. Glossary of Technical Terms used.

Appendix C. (Supplementary) Waiver of Premium Reserves.

Section 5. Claim Reserves

A. General

(1) Claim reserves are required for all incurred but unpaid claims on all health insurance policies.

(2) Appropriate claim expense reserves are required with respect to the estimated expense of settlement of all incurred but unpaid claims.

(3) All such 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 any residual unpaid liability.

B. Minimum Standards for Claim Reserves

(1) Disability Income

(a) Interest. The maximum interest rate for claim reserves is specified in Appendix A.

(b) Morbidity. Minimum standards with respect to morbidity are those specified in Appendix A; except that, at the option of the insurer:

(i) For individual disability income claims incurred on or after , assumptions regarding claim termination rates for the period less than two years from the date of disablement may be based on the insurers experience, if such 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:

(I) Assumptions regarding claim termination rates for the period less than two 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 two or more years but less than five 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

e 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 two or more years but less than five 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:

An analysis of the credibility of the experience. For experience to be considered credible for purposes of this provision, the insurer must be able to provide claim termination patterns over no more than six years reflecting at least 5,000 claims terminations during the third through fifth claims durations on reasonably similar applicable policy forms;

A description of how all of the insurers experience is proposed to be used in setting reserves; and

A description and quantification of the margins to be included.

A summary of the financial impact that the proposed plan of modification would have had on the insurer’s last filed annual statement;

A copy of the approval of the proposed plan of modification by the commissioner of the state of domicile; and

Any other information deemed necessary by the commissioner.

(iii) For disability income claims incurred prior to , each insurer may elect which of the following 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, or

(II) The standards as defined in Items (i) and (ii), applied to all open claims. Once an insurer elects to calculate reserves for all open claims on the standard defined in Items (i) and (ii), all future valuations must be on that basis.

se 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, or

(II) The standards as defined in Items (i) and (ii), applied to all open claims. Once an insurer elects to calculate reserves for all open claims on the standard defined in Items (i) and (ii), all future valuations must be on that basis.

(iv) For claim reserves to reflect sound values and reasonable margins, reserve tables based on credible experience should be adjusted regularly to maintain reasonable margins. Demonstrations may be required by the Superintendent based on published literature.

(c) Duration of Disablement. For contracts with an elimination period, the duration of disablement should be measured as dating from the time that benefits would have begun to accrue had there been no elimination period.

(2) All Other Benefits

(a) Interest. The maximum interest rate for claim reserves is specified in Appendix A.

(b) Morbidity or other Contingency. The reserve should be based on the insurers experience, if such experience is considered credible, or upon other assumptions designed to place a sound value on the liabilities.

C. Claim Reserve Methods Generally

Any generally accepted or reasonable actuarial method or combination of methods may be used to estimate all 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, however, shall be determined in the aggregate.

Section 6. Premium Reserves

A. General

(1) Except as provided in paragraph (2), unearned premium reserves are required for all 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.

roupings and averages may also be employed. Adequacy of the claim reserves, however, shall be determined in the aggregate.

Section 6. Premium Reserves

A. General

(1) Except as provided in paragraph (2), unearned premium reserves are required for all 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) Single premium credit disability insurance, both individual and group, is excluded from unearned premium reserve requirements of this Section 6.

(3) If premiums due and unpaid are carried as an asset, such premiums must 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 must be carried as an offsetting liability.

(4) 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.

B. Minimum Standards for Unearned Premium Reserves

(1) The minimum unearned premium reserve with respect to any contract is the pro rata unearned modal premium that applies to the premium period beyond the valuation date, with such premium determined on the basis of:

(a) The valuation net modal premium on the contract reserve basis applying to the contract; or

d otherwise be required as a minimum.

B. Minimum Standards for Unearned Premium Reserves

(1) The minimum unearned premium reserve with respect to any contract is the pro rata unearned modal premium that applies to the premium period beyond the valuation date, with such premium determined on the basis of:

(a) The valuation net modal premium on the contract reserve basis applying to the contract; or

(b) The gross modal premium for the contract if no contract reserve applies.

(2) However, in no event may the sum of the unearned premium and contract reserves for all contracts of the insurer subject to contract reserve requirements be less than the gross modal unearned premium reserve on all such contracts, as of the date of valuation. Such reserve shall never be less than the expected claims for the period beyond the valuation date represented by the unearned premium reserve, to the extent not provided for elsewhere.

C. Premium Reserve Methods Generally

The insurer may employ suitable approximations and estimates; including, but not limited to groupings, averages and aggregate estimation; in computing premium reserves. Such approximations or estimates should be tested periodically to determine their continuing adequacy and reliability.

Section 7. Contract Reserves

A. General

(1) Contract reserves are required, unless otherwise specified in Section 7(A)(2) for:

(a) All individual and group contracts with which level premiums are used; or

groupings, averages and aggregate estimation; in computing premium reserves. Such approximations or estimates should be tested periodically to determine their continuing adequacy and reliability.

Section 7. Contract Reserves

A. General

(1) Contract reserves are required, unless otherwise specified in Section 7(A)(2) 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. For products that are community rated or that use other rating methodology based on cross-subsidies among contracts within the block, this evaluation may be applied on a rating block basis provided that 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. If rates are determined such that each year’s premium is intended to cover that year’s cost, the rating block approach results in no contract reserves unless required by subsection D. If rates are designed to prefund future years’ costs, contract reserves will be required. The values specified in this subparagraph (b) shall be determined on the basis specified in Section 7(B).

(2) Contracts not requiring a contract reserve are:

(a) Contracts that cannot be continued after one year from issue; or

ing block approach results in no contract reserves unless required by subsection D. If rates are designed to prefund future years’ costs, contract reserves will be required. The values specified in this subparagraph (b) shall be determined on the basis specified in Section 7(B).

(2) Contracts not requiring a contract reserve are:

(a) Contracts that cannot be continued after one year from issue; or

(b) Contracts already in force on the effective date of these standards for which no contract reserve was required under the immediately preceding standards.

(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 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.

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

B. Minimum Standards for Contract Reserves

(1) Morbidity or Other Contingency. Minimum standards with respect to morbidity are those set forth in Appendix 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. This requirement only applies 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 net premium structure. If for a policy form there is no gross premium variation by age, the valuation net premiums 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 claim costs

ship among gross premiums for different contracts (e.g., variations by age) has no bearing on the net premium structure. If for a policy form there is no gross premium variation by age, the valuation net premiums 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 claim costs.

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 Superintendent. 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.

(a) 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 from the current morbidity tables or experience that will result in a reduction to reserves, taking into account the combined effect of claim frequency and the present value of future expected claim payments given that a claim has occurred. 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, such as a new drug release. However, such events are rare.

(b) Business in force as of the effective date of Section 7(B)(3)(c) may be permitted to retain the original reserve basis which may not meet the provisions of subparagraph (a) above, subject to the acceptability to the Superintendent.

(2) Interest. The maximum interest rate is specified in Appendix A.

(3) Termination Rates. 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 the following items:

etain the original reserve basis which may not meet the provisions of subparagraph (a) above, subject to the acceptability to the Superintendent.

(2) Interest. The maximum interest rate is specified in Appendix A.

(3) Termination Rates. 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 the following items:

(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:

(i) Eighty percent of the total termination rate used in the calculation of the gross premiums, or

(ii) Eight percent;

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

(i) Mortality (as specified in Appendix A); and

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

(I) For policy year one, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 6%;

(II) For policy years two through four, the lesser of 80% of the voluntary lapse rate used in the calculation of gross premiums and 4%; and

(III) For policy years five 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 as defined in 24-A M.R.S.A. §5072(3) where the 2% shall be 3%.

(c) Where a morbidity standard specified in Appendix A 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 Superintendent.

(4) Reserve Method.

or group long-term care insurance as defined in 24-A M.R.S.A. §5072(3) where the 2% shall be 3%.

(c) Where a morbidity standard specified in Appendix A 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 Superintendent.

(4) Reserve Method.

(a) For insurance except long-term care insurance or nursing care insurance as defined in Title 24-A M.R.S.A., Sections 5051 or 5072, 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.

(b) Prior to December 31, 1993, for long-term care insurance or nursing home care insurance as defined in Title 24-A M.R.S.A., Section 5051, and for riders (or policy provisions) which only provide return of premium or other deferred cash benefits, the minimum reserve is the reserve calculated on the two-year full preliminary term method.

(c) Effective December 31, 1993, for long-term care insurance or nursing care insurance as defined in Title 24-A M.R.S.A., Sections 5051 or 5072, the minimum reserve is the reserve calculated on the one-year full preliminary term method.

(d) Effective , for riders (or policy provisions) which only provide return of premium or other deferred cash benefits, the minimum reserve is the reserve calculated as follows:

cember 31, 1993, for long-term care insurance or nursing care insurance as defined in Title 24-A M.R.S.A., Sections 5051 or 5072, the minimum reserve is the reserve calculated on the one-year full preliminary term method.

(d) Effective , for riders (or policy provisions) which only provide return of premium or other deferred cash benefits, the minimum reserve is the reserve calculated as follows:

(i) On the one-year full preliminary term method if benefits are provided at any time before the rider's (or policy's) twentieth anniversary; and

(ii) On the two-year preliminary term method if benefits are only provided on or after the rider's (or policy's) twentieth anniversary.

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.

(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 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 above; an insurer may use any reasonable assumptions as to interest rates, termination and/or mortality rates, and rates of morbidity or other contingency

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 above; 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 above 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 shall be made of the insurers 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 such tests indicate that the basis of such reserves is no longer adequate; subject, however, to the minimum standards of Section 7(B)

tive 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 such tests indicate that the basis of such reserves is no longer adequate; subject, however, to the minimum standards of Section 7(B).

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.

Section 8. Reinsurance

Increases to, or credits against reserves carried, arising because of reinsurance assumed or reinsurance ceded, must be determined in a manner consistent with these minimum reserve standards and with all applicable provisions of the reinsurance contracts which affect the insurers liabilities.

Section 9. Effective Date

Prior to , the new standards set forth in this Rule will apply only to those insurers who elect in writing to use these standards. All others will be subject to the previously existing standards. The new standards will be effective for all insurers on . The 2006 amendments will be effective . The 2022 amendments will be effective August 2, 2022.