SECTION 3.7002. 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 must 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.

(4) Claim reserves for single premium credit accident and health insurance contracts issued on or after January 1, 2009, must comply with the claim reserve requirements in this section. Claim reserves for all other credit accident and health insurance contracts must comply with the claim reserve requirements in §3.6102 of this chapter (relating to Claims Reserves).

(b) Minimum standards for claim reserves.

(1) Disability income.

(A) Interest. The maximum interest rate for claim reserves is specified in §3.7006 of this title (relating to Specific Standards for Morbidity, Interest, and Mortality).

(B) Morbidity. Minimum standards with respect to morbidity are those specified in §3.7006 of this title, except that, at the option of the insurer:

(i) for claims with a duration from date of disablement of less than two years, reserves may be based on the insurer's 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 with a duration from date of disablement of more than two years but less than five years, reserves 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:

(I) an analysis of the credibility of the experience;

(II) a description of how all of 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) any other information deemed necessary by the commissioner.

(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.

(D) Credibility. For experience to be considered credible for purposes of subparagraph (B)(ii) of this paragraph, the company should 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. For claim reserves to reflect "sound values" and/or reasonable margins, reserve tables based on credible experience should be adjusted regularly to maintain reasonable margins. Demonstrations may be required by the commissioner based on published literature.

(2) All other benefits.

(A) Interest. The maximum interest rate for claim reserves is specified in §3.7006 of this title (relating to Specific Standards for Morbidity, Interest, and Mortality).

(B) Morbidity or other contingency. The reserve must be based on the insurer's 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.

Source Note: The provisions of this §3.7002 adopted to be effective July 6, 1992, 17 TexReg 4541; amended to be effective June 26, 1995, 20 TexReg 4269; amended to be effective January 26, 2010, 35 TexReg 485