Adequacy of an insurer’s health insurance reserves shall be determined on the basis of all three categories combined. However, these standards emphasize the importance of determining appropriate reserves for each of the three categories separately.

1. (1) Claim Reserves.

   1. (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 reserves for prior valuation years shall be tested for adequacy and reasonableness along the lines of claim runoff schedules in accordance with the financial statement pursuant to Section 625.121(14), F.S., including consideration of any residual unpaid liability.

   2. (b) Minimum Standards for Claim Reserves.

      1. (I) For claims incurred on or before December 31, 2006, with a duration from date of disablement of less than two years, reserves may at the option of the insurer 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. Each insurer may elect one of the following to use as the minimum morbidity standard for claim reserves:
      2. (A) The minimum morbidity standard in effect for claim reserves as of the date the claim was incurred, or
      3. (B) The standards as defined in (II) applied to all open claims. Once an insurer elects to calculate reserves for all open claims on the standard defined in (II), all future valuations must be on that basis.
      4. (II) For individual disability income claims incurred on or after January 1, 2007, the minimum standards with respect to morbidity are those specified in Rule 69O-154.204, F.A.C., except that, at the option of the insurer, assumptions regarding claim termination rates for the period less than two years from the date of disablement may, at the option of the insurer, 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.
      5. (III) For group disability income claims incurred on or before December 31, 2006, with a duration from date of disablement of more than two (2) years but less than five (5) years, reserves may at the option of the insurer, be based on the insurer’s experience for which the insurer maintains underwriting and claim administration control, and in accordance with commonly accepted actuarial practice.
      6. (IV) For group disability income claims incurred on or after January 1, 2007 and on or before September 30, 2014.
      7. (A) Assumptions regarding claim termination rates for the period less than two years from the date of disablement may, at the option of the insurer, 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.
      8. (B) Assumptions regarding claim termination rates for the period two or more years but less than five years from the date of disablement may, with the approval of the Office, be based on the insurer’s experience, if such experience is considered credible, and 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:
      9. (i) An analysis of the credibility of the experience;
      10. (ii) A description of how all of the insurer’s experience is proposed to be used in setting reserves;
      11. (iii) A description and quantification of the margins to be included;
      12. (iv) A summary of the financial impact that the proposed plan of modification would have had on the insurer’s last filed annual statement;
      13. (v) A copy of the approval of the proposed plan of modification by the commissioner of the state of domicile; and,
      14. (vi) Any other information deemed necessary, to provide clarity and completeness, by the office.
      15. (C) Each insurer may elect one of the following to use as the minimum morbidity standard for group long-term disability income claim reserves:
      16. (i) The minimum morbidity standard in effect for claim reserves as of the date the claim was incurred, or
      17. (ii) The standards as defined in sub-sub-sub-sub-subparagraph (1)(b)1.b.(IV)(B)(iii) above, applied to all open claims. Once an insurer elects to calculate reserves for all open claims on a more recent standard then all future valuations must be on that basis.
      18. (V) With respect to sub-sub-subparagraph (1)(a)1.b.(III) and sub-sub-sub-subparagraph (1)(a)1.b.(IV)(B) above, for experience to be considered credible, the company should be able to provide claim termination patterns over no more than six (6) years reflecting at least 5,000 claims terminations during the third through fifth claims durations on reasonably similar applicable policy forms.
      19. (VI) For group long-term disability income claims incurred on or after October 1, 2014, and on or before December 31, 2016, the minimum standards with respect to morbidity may be based on the 2012 GLTD termination table (http://www.naic.org/documents/01_naic_2012_group_long-term_disability_valuation_table.xls) HYPERLINK "http://www.flrules.org/Gateway/reference.asp?No=Ref-05857" http://www.flrules.org/Gateway/reference.asp?No=Ref-05857 which is incorporated herein by reference or subsequent table with considerations of:
      20. (A) The insurer’s own experience computed in accordance with Actuarial Guideline XLVII as included in the NAIC Accounting Practices and Procedures Manual, adopted by subsection 69O-137.001(4), F.A.C.; and,
      21. (B) An adjustment to include an own experience measurement margin derived in accordance with Actuarial Guideline XLVII, as included in the NAIC Accounting Practices and Procedures Manual; and,
      22. (C) A credibility factor derived in accordance with Actuarial Guideline XLVII.
      23. (D) Subject to the conditions in this paragraph, the 2012 GLTD or subsequent table with considerations outlined in sub-sub-sub-sub-subparagraph (B) shall be used in determining minimum standards with respect to morbidity for group long term disability claims incurred on or after January 1, 2017.
      24. (VII) Subject to the conditions in this Section, the 2012 GLTD or subsequent table with considerations outlined in subparagraph (1)(b)1. shall be used in determining minimum standards with respect to morbidity for group long term disability claims incurred on or after January 1, 2017.

      25. (A) The request for approval of a plan of modification to the reserve basis shall include:

          1. (I) An analysis of the credibility of the experience;
          2. (II) A description of how all of the insurer’s experience is proposed to be used in setting reserves;
          3. (III) A description and qualification of the margins to be included;
          4. (IV) A summary of the financial impact that the proposed plan of modification would have had on the insurer’s last filed annual statement;
          5. (V) For a company not domiciled in this state, a copy of the approval of the proposed plan of modification by the commissioner of the state of domicile.
          6. (VI) Information necessary for the Office to verify that the claim reserve makes adequate provision for accrued and unaccrued benefits. In determining information, the insurer shall use the NAIC Financial Examiners Handbook as referred to in Rule 69O-138.001, F.A.C.

      26. (B) For claim reserves to reflect “sound values” and/or reasonable margins, reserve tables based on credible experience shall be adjusted regularly to maintain reasonable margins.

          1. (I) A reserving method shall be used to estimate claim liabilities if it is:
          2. (A) A generally accepted actuarial reserving method following commonly accepted actuarial practice; or
          3. (B) A reasonable method approved by the Office after a public hearing prior to the statement date. A reasonable method is one where the company is able to demonstrate that the claim reserves calculated using the company’s method would not be less than those calculated using a generally accepted actuarial method; or

          4. (C) A combination of these methods.

             At its option, an insurer may estimate some of all of its claim liabilities either separately or by using aggregate methods. Approximations based on groupings and averages may also be employed. Adequacy of the claim reserves, however, shall be determined in the aggregate.

          c. Duration of Disablement. 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.

          2. All Other Benefits.

          a. Interest. The maximum interest rate for claim reserves is specified in subsection 69O-154.204(2), F.A.C.

          b. Morbidity or other Contingency. The reserve shall be based on the insurer’s experience, if that experience is considered credible, or upon other assumptions used by the company designed to place a sound value on the liabilities.

          c. Claim Reserve Methods Generally.

      1. Disability Income.

      a. Interest. The maximum interest rate for claim reserves is specified in subsection 69O-154.204(2), F.A.C.

      b. Morbidity. Minimum standards for morbidity are those specified in subsection 69O-154.204(1), F.A.C., except that, at the option of the insurer:

2. (2) Premium Reserves.

   1. (a) General.

      1. Except as noted in subparagraph (2)(a)2., unearned premium reserves shall be required for all contracts for the period of coverage for which premiums, other than premiums paid in advance, have been paid beyond the date of valuation.

      2. Single premium credit disability insurance individual policies and group certificates, which are subject to the requirements of Section 625.121(13), F.S., are excluded from unearned premium reserve requirements of paragraphs (2)(a), (b), and (c).

      3.a. If premiums due and unpaid are carried as an asset, the premiums shall be treated as premiums in force, subject to unearned premium reserve determination.

      b. The value of unpaid commissions, premium taxes, and the cost of collection associated with due and unpaid premiums shall be carried as an offsetting liability.

      4. The gross premiums paid in advance for a period of coverage beginning after the next premium due date following the date of valuation may at the option of the insurer be discounted to the valuation date, and shall be held as a separate liability.

   2. (b) Minimum Standards for Unearned Premium Reserves.

      1. The minimum unearned premium reserve for any contract is the pro-rata unearned modal premium that applies to the premium period beyond the valuation date, with the premium determined on the basis of:

      a. The valuation net modal premium on the contract reserve basis applying to the contract; or

      b. The gross modal premium for the contract if no contract reserve applies.

      2. In no event shall the sum of the unearned premium and contract reserves for all contracts of the insurer subject to contract reserve requirements be less than the gross modal unearned premium reserve on all these contracts, as of the date of valuation. The reserve shall not be less than the expected claims for the period beyond the valuation date represented by the unearned premium reserve, to the extent not provided for elsewhere.

   3. (c) Premium Reserve Methods Generally. The insurer may at their option employ suitable approximations and estimates, including but not limited to groupings, averages, and aggregate estimation, in computing premium reserves. These approximations or estimates shall be tested periodically to determine their continuing adequacy and reliability.

3. (3) Contract Reserves.

   1. (a) General.

      1. Contract reserves shall be required, unless otherwise specified in sub-sub-sub-sub-subparagraph (3)(a)1.b.(C)(III)2. below, for:

      a. All individual and group contracts with which level premiums are used; or

      b.(I) All individual and group contracts for which, due to the gross premium pricing structure at issue, the value of the future benefits at any time exceeds the value of any appropriate future valuation net premiums at that time.

   2. (II) (A) This evaluation may be applied on a rating block basis if the total premiums for the block were developed to support the total risk assumed and expected expenses for the block each year, and a qualified actuary certifies the premium development.
   3. (B) The actuary shall state in the certification that premiums for the rating block were developed such that each year’s premium was intended to cover that year’s costs without any prefunding.
   4. (C) For group policies having retrospective pricing agreements, if the premium is also intended to recover costs for any prior years, the actuary shall also disclose the reasons for and magnitude of such recovery.

   5. (III) The values specified in this sub-subparagraph shall be determined on the basis specified in paragraph (3)(b) below entitled “Minimum Standards for Contract Reserves”.

      2. Contracts not requiring a contract reserve are:

      a. Contracts which cannot be continued after one year from issue.

      b. For valuation dates on or prior to December 31, 1998, contracts already in force on the effective date of these rules for which no contract reserve was required prior to the effective date of these rules.

      c. For valuation dates after December 31, 1998, contracts in force on the effective date of these rules for which no contract reserve is required by the Commissioner of the insurer’s State of Domicile.

      3. The contract reserve is in addition to claim reserves and premium reserves.

      4. The methods and procedures for contract reserves shall be consistent with those for claim reserves for any contract, or else appropriate adjustment shall be made when necessary to assure provision for the aggregate liability. The definition of the date of incurral shall be the same in both determinations.

      5. The total contract reserve established shall incorporate provisions for moderately adverse deviations.

   6. (b) Minimum Standards for Contract Reserves.

      1. (I) Minimum standards for morbidity are specified in rule subsection 69O-154.204(1), F.A.C. Valuation net premiums used under each contract shall have a structure consistent with the gross premium structure at issue of the contract as it relates to advancing age of insured, contract duration, and period for which gross premiums have been calculated.
      2. (II) Except as provided in sub-subparagraph (3)(a)1.b., if for a policy form there is no gross premium variation by age, the valuation net premiums will nonetheless vary based on age at issue for each such contract since at issue the present value of valuation net premiums for a contract must equal the present value of tabular claim costs.
      3. (III) Contracts for which tabular morbidity standards are not specified in subsection 69O-154.204(1), F.A.C., shall be valued using tables established for reserve purposes by a qualified actuary. The morbidity tables shall contain a pattern of incurred claims cost that reflects the underlying morbidity, and shall not be constructed for the primary purpose of minimizing reserves.
      4. (A) In determining the morbidity assumptions, the actuary shall use assumptions that represent the best estimate of anticipated future experience, but shall not incorporate any expectation of future morbidity improvement.
      5. (B) Morbidity improvement is a change, in the combined effect of claim frequency and the present value of future expected claim payments given that a claim has occurred, from the current morbidity tables or experience that will result in a reduction to reserves.

      6. (C) It is not the intent of this provision to restrict the ability of the actuary to reflect the morbidity impact for a specific known event that has occurred and that is able to be evaluated and quantified.

         1. (I) Under contracts issued on or after January 1, 1999, for which premium rates are not guaranteed, and where the effects of insurer underwriting are specifically used by policy duration in the valuation morbidity standard or for return of premium or other deferred cash benefits, total termination rates may at the option of the insurer be used at ages and durations where these exceed specified mortality table rates, but not in excess of the lesser of:
         2. (A) Eighty percent (80%) of the total termination rate used in the calculation of the gross premiums; or
         3. (B) Eight percent (8%):
         4. (II) For long-term care individual policies or group certificates issued on or after January 1, 1999, the contract reserve shall be established on a basis of:
         5. (A) Separate mortality as specified in rule subsection 69O-154.204(3), F.A.C.; and,
         6. (B) Terminations other than mortality, where such terminations are not to exceed:
         7. (i) For policy years one through four, the lesser of eighty percent (80%) of the voluntary lapse rate used in the calculation of gross premiums and eight percent (8%);
         8. (ii) For policy years five (5) and later, the lesser of one hundred percent (100%) of the voluntary lapse rate used in the calculation of gross premiums and four percent (4%);
         9. (iii) Where a morbidity standard specified in rule subsection 69O-154.204(1), F.A.C., is on an aggregate basis, the morbidity standard shall be adjusted to reflect the effect of insurer underwriting by policy duration. The adjustments shall be appropriate to the underwriting and in accordance with commonly accepted actuarial practice.
         10. (III) Under contracts issued prior to January 1, 1999, voluntary lapse rates accepted for valuation by the Commissioner of the state where the company is domiciled.
         11. (A) In determining the morbidity assumptions, the actuary shall use assumptions that represent the best estimate of anticipated future experience, but shall not incorporate any expectation of future morbidity improvement.
         12. (B) Morbidity improvement is a change, in the combined effect of claim frequency and the present value of future expected claim payments given that a claim has occurred, from the current morbidity tables or experience that will result in a reduction to reserves.
         13. (C) It is not the intent of this provision to restrict the ability of the actuary to reflect the morbidity impact for a specific known event that has occurred and that is able to be evaluated and quantified.
         14. (IV) For long-term care individual policies or group certificates issued on or after January 1, 2005, the contract reserve shall be established on the basis of:
         15. (A) Separate mortality as specified in subsection 69O-154.204(3), F.A.C.; and,
         16. (B) Terminations other than mortality, where the terminations are not to exceed:
         17. (i) For policy year one, the lesser of 80 percent of the voluntary lapse rate used in the calculation of gross premiums and 6 percent;
         18. (ii) For policy years 2 through 4, the lesser of 80 percent of the voluntary lapse rate used in the calculation of gross premiums and 4 percent; and,

         19. (iii) For policy years 5 and later, the lesser of 100 percent of the voluntary lapse rate used in the calculation of gross premiums and 2 percent, except for group long-term care insurance sold to one or more employers, as defined in Section 627.9405(1)(a), F.S., where the 2 percent shall be 3 percent.

             1. (I) For insurance except long-term care and return of premium or other deferred cash benefits, the minimum reserve is the reserve calculated on the two-year full preliminary term method; that is, under which the terminal reserve is zero at the first and the second contract anniversary.
             2. (II) For long-term care insurance, the minimum reserve is the reserve calculated as follows:
             3. (A) For individual policies and group certificates issued on or before December 31, 1991, reserves calculated on the two-year full preliminary term method, or any other method approved by the Commissioner of the state where the company is domiciled.
             4. (B) For individual policies and group certificates issued on or after January 1, 1992 reserves calculated on the one-year full preliminary term method, except for policies issued prior to January 1, 1999, any method acceptable to the Commissioner of the state where the company is domiciled.
             5. (III) For return of premium or other deferred cash benefits, the minimum reserve is the reserve calculated as follows:
             6. (A) On the one year preliminary term method if the benefits are provided at any time before the twentieth anniversary;
             7. (B) On the two year preliminary term method if the benefits are only provided on or after the twentieth anniversary.
             8. (C) For policies issued prior to January 1, 1999, any method acceptable to the Commissioner of the state where the company is domiciled.

             9. (IV) The preliminary term method shall be applied only in relation to the date of issue of a contract. Reserve adjustments introduced later as a result of rate increases, revisions in assumptions (e.g., projected inflation rates), or for other reasons, shall be applied as of the effective date of adoption of the adjusted basis.

                e. Negative Reserves. Negative reserves on any benefit may at the option of the insurer be offset against positive reserves for other benefits in the same contract, but for each contract the total contract reserve for all benefits combined shall not be less than zero.

                f. Nonforfeiture benefits. The contract reserve on a policy basis shall not be less than the net single premium for the nonforfeiture benefits at the appropriate policy duration, where the net single premium is computed according to the above specifications.

             d. Reserve Method.

         b. Interest. The maximum interest rate is specified in rule subsection 69O-154.204(2), F.A.C.

         c. Termination Rates. Termination rates used in the computation of reserves shall be on the basis of a mortality table specified in rule subsection 69O-154.204(3), F.A.C., except as follows:

      1. Basis.

      a. Morbidity or other Contingency.

   7. (c) Alternative Valuation Methods and Assumptions Generally.

      1. (I) Age groupings;
      2. (II) Groupings of several years of issue;
      3. (III) Average amounts of indemnity;

      4. (IV) Grouping of similar contract forms.

         e. The computation of the reserve for one contract benefit as a percentage of, or by other relation to, the aggregate contract reserves exclusive of the benefit or benefits so valued; and,

         f. The use of a composite annual claim cost for all or any combination of the benefits included in the contracts valued.

      1. An insurer may use any reasonable assumptions as to interest rates, termination or mortality rates, and rates of morbidity or other contingency, provided the contract reserve on all contracts to which an alternative method or basis is applied is not less in the aggregate than the amount determined according to the applicable standards specified above.

      2. Subject to the condition in subparagraph 1. above, the insurer may employ methods other than the methods stated above in determining a sound value of its liabilities under these contracts, including, but not limited to the following:

      a. The net level premium method;

      b. The one-year full preliminary term method;

      c. Prospective valuation on the basis of actual gross premiums with reasonable allowance for future expenses;

      d. The use of approximations such as those involving:

   8. (d) Tests for Adequacy and Reasonableness of Contract Reserves.

      1. A review shall be made annually by a qualified actuary of the insurer’s prospective contract liabilities on contracts valued by tabular reserves to determine the continuing adequacy and reasonableness of the tabular reserves, giving consideration to future gross premiums. If the review indicates that the prospective reserves are no longer adequate subject to the minimum standards at paragraph (3)(b) above, the insurer shall add increments to the tabular reserves in order to meet or exceed the minimum standard.

      2. If a company has a contract, or a group of related similar contracts, for which future gross premiums shall be restricted by contract, administrative rule, or other reasons, such that the future gross premiums reduced by expenses for administration, commissions, and taxes shall be insufficient to cover future claims, the company shall establish contract reserves for the shortfall in the aggregate.

Rulemaking Authority 624.308(1), 625.121(14), 625.081 FS. Law Implemented 624.307(1), 625.081, 625.121 FS. History–New 4-14-99, Formerly 4-154.203, Amended 3-1-04, 4-7-05, 11-2-06, 1-25-16.