Section 2004.5  Authority

 

This Part is promulgated and adopted pursuant to and in accordance with the provisions of Section 401 of the Illinois Insurance Code in order to implement Section 353(a) of the Code.

 

(Source:  Amended at 30 Ill. Reg. 19360, effective November 29, 2006)

 

Section 2004.7  Definitions

 

Code means the Illinois Insurance Code [215 ILCS 5].

 

Department means the Department of Insurance.

 

Director means the Director of the Department of Insurance.

Insurer means an insurance company that has delivered or issued for delivery in this State an insurance policy.

 

(Source:  Added at 32 Ill. Reg. 13191, effective July 25, 2008)

 

Section 2004.10  Application, Effective Dates and Incorporations by Reference

 

a)         This Part applies to all companies transacting in this State the kinds of business enumerated in clause (b) of Class 1 and clause (a) of Class 2 of Section 4 of the Code, and it applies to all accident and health policies for which reserve standards are prescribed under Section 353a of the Code. The original standards created in this Part applied through 2001. From 2002 through 2016, the applicable standards were those prescribed by the National Association of Insurance Commissioners (NAIC) in the Accounting Practices and Procedures Manual (APPM). Pursuant to Section 223 of the Code, starting in 2017, the applicable standards are those prescribed by the NAIC in the Valuation Manual (VM). 

 

b)         Incorporations by Reference

 

1)         National Association of Insurance Commissioners, 1100 Walnut Street, Suite 1500, Kansas City MO 64106-2277

 

A)        Policies issued and claims incurred on or after January 1, 2002 and before November 29, 2006 are subject to the standards prescribed in the March 2001 APPM.

 

B)        Policies issued and claims incurred on or after November 29, 2006 and before July 25, 2008 are subject to the standards prescribed in the March 2006 APPM. 

 

C)        Policies issued and claims incurred on or after July 25, 2008 and before December 31, 2015 are subject to the standards prescribed in the March 2008 APPM. 

 

D)        Policies issued and claims incurred on or after December 31, 2015 and before January 1, 2017 are subject to the standards prescribed in the March 2016 APPM.

 

E)        Policies issued and claims incurred on or after January 1, 2017 are subject to the standards prescribed in the January 1, 2019 edition of the VM as directed in Section 223 of the Code.

 

2)         The incorporations by reference stated in subsection (b)(1) include no later amendments or editions.

 

c)         For claims incurred on or after January 1, 2002 and before January 1, 2017, the insurer may elect to calculate reserves for all open claims using a more recent standard required by subsection (b), but once a more recent standard is elected, all future valuations must be on that basis. 

 

(Source:  Amended at 44 Ill. Reg. 2572, effective January 21, 2020)

 

Section 2004.20  Active Life Reserves – Individual Policies

 

a)         General Provisions

 

Active life reserves are required for all in force policies and are in addition to any reserves required in connection with claims.  For policy types in subsections (b)(1)-(3) of this Section, the minimum reserve shall be determined as specified in this Part.  It should be emphasized, however, that these are minimum standards and higher, adequate reserves shall be established by the company in any case in which experience indicates that these minimum standards do not place a sound value on the liabilities under the policy.  For policy types in subsection (b)(4) of this Section, the minimum reserve shall be the gross pro rata unearned premium.

 

b)         Types of individual accident and health insurance policies

 

1)         Policies that are noncancellable or noncancellable and guaranteed renewable for life or to a specified age, such as 60 or 65.

 

2)         Policies that are guaranteed renewable for life or to a specified age, such as 60 or 65, but under which the company reserves the right to change the scale of premiums.

 

3)         Policies in which the company has reserved the right to cancel or refuse renewal for one or more reasons, but has agreed implicitly or explicitly that, prior to a specified time or age, it will not cancel or decline renewal solely because of deterioration of health after issue; however, policies shall not be considered of this type if the company has reserved the right to refuse renewal provided the right is to be exercised at the same time for all policies in the same category, unless premiums are based on the level premium principle.

 

4)         All other individual policies.

 

5)         Notices:

 

A)        This subsection (b) does not classify "franchise" as a type of policy.  Such policies are frequently written under an agreement limiting the company's right to cancel or refuse renewal.  Usually the right is reserved to refuse renewal of all policies in the group or other categories such as those ceasing to be members of the association, and this would place those policies, in subsection (b)(4) of this Section in accordance with the last clause under subsection (b)(3) of this Section.  However, if premiums are based on the level premium principle or if the renewal privilege granted to the individual insured meets the requirements for policies in subsections (b)(1)-(3) of this Section, the franchise policy shall be so classified for reserve purposes.

 

B)        "Family group accident and health insurance policies", as defined in Section 367(4) of the Code [215 ILCS 5/367(4)], should have active life reserves determined under this Section.

 

C)        A policy may have guarantees qualifying it as a policy listed in subsections (b)(1)-(3) of this Section until a specified age or duration, after which the guarantees, or lack of guarantees, may qualify it as a policy such as listed in subsections (b)(1)-(4) of this Section.  In such case, the policy in each period shall be considered for reserve purposes according to the type to which it then belongs.

 

D)        Where all of the benefits of a policy, as provided by rider or otherwise, are not of the same type as listed in this subsection (b), each benefit shall be considered for reserve purposes according to the type to which it belongs.

 

c)         Reserve standards for policies in subsections (b)(1)-(3) of this Section.

 

1)         Interest.  The maximum interest rate for reserves shall be 3½% compounded annually.

 

2)         Mortality:

 

A)        1941 Commissioners Standard Ordinary Table, or

 

B)        1958 Commissioners Standard Ordinary Table, or

 

C)        1941 Standard Industrial Mortality Table, or

 

D)        Commissioners 1961 Standard Industrial Mortality Table, or

 

E)        Such other table as may be approved by the Director of the Department of Insurance (Director).

 

3)         Morbidity or Other Contingency:

 

A)        Total disability due to accident or sickness.  The minimum standard shall be the 1964 Commissioners Disability Table.

 

B)        Hospital Expense Benefits.  The minimum standard shall be the 1956 Inter-company Hospital Table.

 

C)        Surgical Expense Benefits.  The minimum standard shall be the 1956 Inter-company Surgical Table.

 

D)        Accidental Death Benefits.  The minimum standard shall be the 1959 Accidental Death Benefits Table.

 

E)        All other benefits.  The company shall adopt standards to produce reserves which place a sound value on the liabilities under such benefit.

 

4)         Negative Reserves.  Negative reserves on any benefit may be offset against positive reserves for other benefits in the same policy, but the mean reserve on any policy shall never be taken as less than one-half the valuation net premium.

 

5)         Preliminary Term.  The minimum reserve shall be on the basis of a two-year preliminary term.

 

6)         Reserve Method.  Mean reserves diminished by appropriate credit for valuation net deferred premiums, or, mid-terminal reserves plus gross or net pro rata unearned premium reserves.  In no event, however, may the aggregate reserve for all policies be less than the gross pro rata unearned premium under those policies.

 

7)         Alternative Valuation Procedures and Assumptions.  Provided the reserve on all policies to which the method or basis is applied is not less in the aggregate than the amount determined according to the applicable standards specified above, the company may use any reasonable assumptions as to the interest rate, mortality rates, or the rates of morbidity or other contingency, and may introduce an assumption as to the voluntary termination of policies.  Also, subject to the preceding condition, the company may employ methods other than the methods stated above in determining a sound value of its liabilities under such policies, including but not limited to the following:

 

A)        Optional use of either the level premium, the one-year preliminary term, or the two-year preliminary term method.

 

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

 

C)        The use of approximations such as those involving age groupings, groupings of several years of issue or average amounts of indemnity.

 

D)        The computation of the reserve for one policy benefit as a percentage of, or by other relation to, the aggregate policy reserves, exclusive of the benefit or benefits so valued.

 

E)        The use of a composite annual claim cost for all or any combination of the benefits included in the policies valued.

 

8)         For statement purposes, the net reserve liability may be shown as the excess of the mean reserve over the amount of net unpaid and deferred premiums, or, regardless of the underlying method of calculation, it may be divided between the gross pro rata unearned premium reserve and a balancing item for the "additional reserve".

 

(Source:  Amended at 32 Ill. Reg. 13191, effective July 25, 2008)

 

Section 2004.30  Active Life Reserves – Group Policies

 

a)         This Section applies to accident and health insurance as defined in Section 367 (excluding subsection (4) thereof) and Section 367(a) of the Code [215 ILCS 5/367 and 367(a)].

 

b)         The minimum reserve for active lives on all group accident and health policies shall be the pro rata gross unearned premium.

 

c)         If a group policy contains a conversion option for terminated employees and such employees, under this provision, may receive an individual policy without evidence of insurability, the company shall establish a reserve for the morbidity cost expected in excess of such costs assumed by the premium, if any, which is then payable by or on behalf of such terminated employee.  The group account shall be charged with an amount (conversion charge) to establish this reserve and thereafter such reserve shall be maintained as an individual policy active life reserve.

 

(Source:  Amended at 32 Ill. Reg. 13191, effective July 25, 2008)

 

Section 2004.40  Claim Reserves – Present Value of Amounts Not Yet Due on Claims

 

a)         General (Also called "Disabled Life Reserves" in the case of insurance providing loss-of-time benefits for disability due to accident or sickness) Reserves are required for claims on all health insurance policies, group and individual in Section 2004.20(b) providing benefits for continuing loss, such as loss-of-time or hospitalization.

 

b)         Claim reserve standards for total disability due to accident or sickness

 

1)         Interest.  The maximum interest rate for reserves shall be 3½% compounded annually.

 

2)         Morbidity.  The reserve shall be established in accordance with the 1964 Commissioners Disability Table, except that for unreported claims and resisted claims and, at the option of the company, claims with a duration of disablement of less than two years, reserves may be based on the individual company's experience or other assumptions designed to place a sound value on the liabilities.  Reserves based on such experience or assumptions shall be verified by the development of each year's claims over a period of years.

 

3)         For policies with an elimination period, the duration of disablement shall be considered as dating from the time that benefits would have begun to accrue had there been no elimination period.

 

4)         A new disability connected with a previous disability which had a duration of at least one year and terminated within six months of the new disability shall be considered a continuation of the previous disability.

 

c)         Reserve standards for all other claim reserves

 

1)         Interest.  The maximum interest rate for reserves shall be 3½% compounded annually.

 

2)         Morbidity or other contingency.  The reserve shall be based on the individual company's experience or other assumptions designed to place a sound value on the liabilities.  The results shall be verified by the development of each year's claims over a period of years.

 

d)         Valuation procedures

 

The company may employ suitable approximations and estimates, including but not limited to groupings and averages, in computing claim reserves.

 

Section 2004.50  Policies Issued Prior to Operative Date of Section 353a

 

Any company may elect to establish and maintain reserves for policies issued prior to the operative date of Section 353a of the Code in accordance with the standards prescribed by Section 353a of the Code.  In making such election a company may elect to revalue all previous issues or at its option may revalue only certain blocks of issues as determined by issue date or plan of coverage.  Claim reserves may be revalued independent of active life reserves.  Such election shall be made by filing written notice with the Director, stating the effective date of election and identifying the reserves or issues of policies to be revalued.

 

(Source:  Amended at 32 Ill. Reg. 13191, effective July 25, 2008)