SECTION 13.101. Establishment and Maintenance of Permissive Deficiency Reserve

(a) At the time of reinsurance of a Chapter 14 association or company:

(1) Determine on a reasonable basis the amount of net assets of the mutual assessment company attributable to the various blocks of life and health and accident business. The various blocks of business to which proportionate parts of the net assets are to be allocated includes those blocks for which a separation of accounting for rating or other purposes has been required by the board or by the commissioner of insurance under various reinsurance and/or merger agreements or are otherwise required by law. In the absence of adequate records for determining the net assets applicable to the various blocks, such allocations may be made on a reasonable basis taking into consideration past and prospective claim experience of such blocks.

(2) Allocate the amount of permissive deficiency reserve in the stipulated premium company which will be applied against the reserves for the various blocks of life and health and accident business.

(b) After the reinsurance has been consummated, the company will maintain sufficient data recorded in its premium history and/or reserve valuation cards so as to make possible calculations of reserves when required and for determining rate increases or for reinsurance purposes, for board or commissioner approval based on the following separate blocks of business:

(1) life policies assumed from the first mutual assessment company reinsured;

(2) life policies issued by the stipulated premium company;

(3) life policies assumed by reinsurance of other mutual assessment companies;

(4) life policies assumed by partial reinsurance of business from other stipulated premium companies if the block of business reinsured has a deficiency reserve;

(5) accident and health policies assumed from the first mutual assessment company reinsured;

(6) accident and health policies issued by the stipulated premium company;

(7) accident and health policies assumed by reinsurance of other mutual assessment companies; and

(8) accident and health policies assumed by partial reinsurance of business from other stipulated premium companies if the block of business reinsured has a deficiency reserve.

(c) The permissive deficiency reserves for the separate blocks of business shall be reduced annually. The required annual reduction in the amount of permissive deficiency reserve may be accomplished by any legal plan or method acceptable to the State Board of Insurance which produces reductions in such deficiency not less than the reductions determined in accordance with paragraph (1) of this subsection or the company may, at its option, elect permissive deficiency reduction procedures in accordance with either paragraph (1) or (2) of this subsection.

(1) Procedure 1--applicable to each separate block of business.

(A) Upon the determination of the amount of the initial permissive deficiency in accordance with the applicable statutes and these sections, a deficiency ratio will be determined by dividing the amount of the initial deficiency by the amount of the initial reserve.

(B) The initial deficiency ratio will be decreased in 10 equal annual reductions to 0 with the first reduction to be made at the end of the calendar year following the year in which the initial deficiency was established.

(C) Upon the valuation each year of the permissive deficiency, the required reserve will be calculated and the appropriate deficiency ratio for that year as prescribed in subparagraphs (A) and (B) of this paragraph will be applied to the calculated reserve to determine the dollar amount of the permissive deficiency; provided, however, that the reductions required by this paragraph shall not be less in the aggregate than the cumulative amount of 10% per annum of the initial permissive deficiency.

(2) Procedure 2--applicable to each separate block of business. Following determination of the total of the initial permissive deficiency on all policies in accordance with the applicable statutes and these sections, the amount of the permissive deficiency at each subsequent accounting date shall be determined as follows:

(A) determine the sum of the amounts of the initial permissive deficiency on each policy remaining in force on such accounting dates;

(B) deduct therefrom at least 10% per annum of the total of the initial permissive deficiency, as originally determined on all policies, at each of such subsequent accounting dates.

(d) The permissive deficiency reserve for a block of business shall only be allowed against the aggregate reserves for that block of business. If the company reinsures a block of business from another stipulated premium company upon which a permissive deficiency reserve exists, the remaining unpaid balance of the permissive deficiency reserve shall be transferred to the assuming stipulated premium company provided that the assuming company reduces the permissive deficiency reserve as would be required of the original stipulated premium company subject to applicable provisions of these sections.

(e) The board may, in lieu of approving a rate increase, accept an application for the restoration of a company or association's permissive deficiency reserve which has been reduced under the provisions of subsection (c) of this section, if such company or association can demonstrate that its rate of mortality has been in excess of either assumed mortality or the rates of withdrawal have been less than the assumed rates or both.

Source Note: The provisions of this §13.101 adopted to be effective January 1, 1976; amended to be effective November 8, 1984, 9 TexReg 5544.