(a) General.

1. (1) Claim reserves are required for all incurred but unpaid claims on all disability insurance policies.
2. (2) Appropriate claim expenses reserves are required with respect to the estimated expense of settlement of all incurred but unpaid claims.
3. (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. (1) Disability income.

   1. (A) Interest. The maximum interest rate for claim reserves is specified in Appendix A.
   2. (B) Morbidity. Minimum standards with respect to morbidity are those specified in Appendix A, except that, at the option of the insurer:

(b) (b) Other assumptions designed to place a sound valuation on the liabilities; and

1. (ii)

(b)

1. (1) (b)(1) The request for such approval of a plan of modification to the reserve basis must include:

   1. (A) (A) An analysis of the credibility of the experience;
   2. (B) (B) A description of how all of the insurer's experience is proposed to be used in setting reserves;
   3. (C) (C) A description and quantification of the margins to be included;
   4. (D) (D) A summary of the financial impact that the proposed plan of modification would have had on the insurer's last filed annual statement;
   5. (E) (E) A copy of the approval of the proposed plan of modification by the insurance commissioner of the state of domicile; and
   6. (F) (F) Any other information deemed necessary by the Insurance Commissioner.

2. (2) (2) Note.

   1. (A) (A) For experience to be considered credible for purposes of subdivision (b)(1)(B)(ii)(b)(1)(B), the company should be able to provide claim termination patterns over no more than six (6) years reflecting at least five thousand (5,000) claims terminations during the third through fifth claims durations on reasonably similar applicable policy forms.

   2. (B)

      1. (i) (B)(i) For claim reserves to reflect "sound values" and reasonable margins, reserve tables based on credible experience should be adjusted regularly to maintain reasonable margins.
      2. (ii) (ii) Demonstrations may be required by the insurance commissioner of the state of domicile based on published literature (e.g., Goldman, TSA XLII).
   3. (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.

3. (2) All other benefits.

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

   2. (B) Morbidity or other contingency. The reserve should be based on:

      1. (i) The insurer's experience, if the experience is considered credible; or
      2. (ii) Upon other assumptions designed to place a sound value on the liabilities.
      3. (c) Claim reserves methods generally.
4. (1) A generally accepted actuarial reserving method or other reasonable method, if, after a public hearing, the method is approved by the Insurance Commissioner prior to the statement date, or a combination of methods may be used to estimate all claim liabilities.
5. (2) The methods used for estimating liabilities generally may be aggregate methods, or various reserve items may be separately valued.
6. (3) Approximations based on groupings and averages may also be employed.
7. (4) Adequacy of the claim reserves, however, shall be determined in the aggregate.