(a) General provisions.

1. (1) Except as provided for in paragraph (a)(2) of this section, calculate the amount of “benefits” by—

   1. (i) Adding the present values on the initial calculation date of—

      1. (A) Expected incurred benefits in the loss ratio calculation period, to—
      2. (B) The total policy reserve at the last day of the loss ratio calculation period: and
   2. (ii) Subtracting the total policy reserve on the initial calculation date from the sum of these values.
2. (2) To calculate the amount of “benefits” in the case of community or pool rated individual or group policies rerated on an annual basis, calculate the expected incurred benefits in the loss ratio calculation period.

(2) Total policy reserve: Federal provisions.

1. (i) “Total policy reserve” means the sum of—

   1. (A) Additional reserve; and
   2. (B) The reserve for future contingent benefits.

2. (ii) Additional reserve means the amount calculated on a net level reserve basis, using appropriate values to account for lapse, mortality, morbidity, and interest, that on the valuation date represents—

   1. (A) The present value of expected incurred benefits over the loss ratio calculation period; less—
   2. (B) The present value of expected net premiums over the loss ratio calculation period.
3. (iii) Net premium means the level portion of the gross premium used in calculating the additional reserve. On the day the policy is issued, the present value of the series of those portions equals the present value of the expected incurred claims over the period that the gross premiums are computed to provide coverage.

4. (iv) Reserve for future contingent benefits means the amounts, not elsewhere included, that provide for the extension of benefits after insurance coverage terminates. These benefits—

   1. (A) Are predicated on a health condition existing on the date coverage ends;
   2. (B) Accrue after the date coverage ends; and
   3. (C) Are payable after the valuation date.