§ 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.

   The provisions of this §  84a.4 amended under sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. § §  66, 186, 411 and 412); and sections 301.1 and 311.1 of The Insurance Department Act of 1921 (40 P. S. § §  71.1 and 93).

   The provisions of this §  84a.4 amended September 17, 1999, effective September 18, 1999, 29 Pa.B. 4864; amended July 14, 2006, effective January 1, 2007, 36 Pa.B. 3367. Immediately preceding text appears at serial pages (260247) to (260249).

   This section cited in 31 Pa. Code Ch. 84a Appendix A (relating to specific standards for morbidity, interest and mortality).