Are they saving enough money for a very rainy day? (AP Photo/Jeff Chiu)

A document that the National Association of Insurance Commissioners (NAIC) approved earlier this week could provide a little stability for writers of health insurance, disability insurance and long-term care insurance (LTCI).

The new Valuation Manual that the NAIC adopted in Washington at its fall meeting will revamp reserving rules for life insurers and annuity issuers.

The manual is supposed to help state insurance regulators, life insurers and actuaries implement the 2009 version of the Standard Valuation Law model, a model that’s supposed to help the life and health insurance industry move away from its traditional reliance on static formulas and reserving levels, and toward use of modern statistical forecasting methods and reliance on actuarial judgment.

Advocates of life “principles-based reserving” (PBR) — who note that European financial services regulators have been using PBR principles for years — have been fighting tooth and nail with state insurance regulators and others who have asked whether some life insurers might not use a PBR approach as an excuse to pump up earnings by under-reserving.

The health and credit life and disability sections of the manual — VM-25 Health Insurance Reserve Minimum Reserve Requirements and VM-26 Credit Life and Disability Reserve Requirements — have produced no such drama and have attracted little public attention.

The health and credit life and disability manual sections mostly continue health and credit disability reserving practices that are already in place, and VM-25 is based mainly on the existing Health Reserves Model Regulation.

One section of VM-25,  the definitions to be used in efforts to set minimum reserve requirements for LTCI policies, defines “long-term care insurance” as “any insurance policy or rider advertised, marketed, offered or designed to provide coverage for not less than …. 12 consecutive months for each covered person on an expense incurred, indemnity, prepaid or other basis; for one or more necessary or medically necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance or personal care services, provided in a setting other than an acute care unit of a hospital.”

The LTCI definition “also includes a policy or rider which provides for payment of benefits based upon cognitive impairment or the loss of functional capacity,” according to the section text.

The manual definition excludes basic Medicare supplement coverage, “basic hospital expense coverage, basic medical-surgical expense coverage, hospital confinement indemnity coverage, major medical expense coverage, disability income or related asset-protection coverage, accident only coverage, specified disease or specified accident coverage, or limited benefit health coverage.”

The manual requires a company to hold “appropriate claim expense reserves” for settling all incurred but unpaid claims on health policies.

For individual and group disability insurance policies, the manual continues the current practice of letting insurers with “credible” amounts of claims experience use homegrown claim termination data in place of the standard claim termination data for the first two years after a claimant has become disabled.

If a group disability insurer manages a block of group business itself and has credible claim termination data, it can also use homegrown termination data for the period from two years to five years after a claimant has become disabled.

For a disability insurer to treat its data as “credible,” it should be able to “provide claim termination patterns over no more than … six years reflecting at least 5,000 claims terminations during the third the third through fifth claims durations on reasonably similar applicable policy forms,” according to the manual text.

For health insurance reserves in general, the “ultimate text” of reserve adequacy as of a given valuation date is a forward-looking “gross premium valuation” that looks at “the present value of all expected benefits unpaid, all expected expenses unpaid, and all unearned or expected premiums, adjusted for future premium increases reasonably expected to be put into effect.”

A company should do a gross premium valuation whenever a “significant doubt” exists about the reserve adequacy of a major block of contracts or a company’s entire health business, according to the manual text. 

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