SECTIONS 997 - California Statutes

INSURANCE CODE

SECTION 997

997. (a) For statement purposes as defined in Article 10
(commencing with Section 900), for insolvency calculations as defined
in Article 13 (commencing with Section 980), and for the valuation
of the liabilities of insurers for all other purposes, every admitted
insurer shall maintain an active life reserve which shall place a
sound value on its liabilities under all disability policies and
which shall not be less than the reserve according to the standards
set forth in regulations issued by the commissioner and, in no event,
less in the aggregate than the pro rata gross unearned premium
reserve for the policies. The promulgation of the regulations by the
commissioner or any changes or amendments thereof shall be in
accordance with the procedure provided in Chapter 3.5 (commencing
with Section 11340) of Part 1 of Division 3 of Title 2 of the
Government Code.
Subdivisions (b), (c), and (d) shall control the amounts of
reserves and liabilities, other than for specific claim losses, upon
all individual disability policies until the effective date of
regulations issued by the commissioner as provided in the next
preceding paragraph. The regulations, in lieu of subdivisions (b),
(c), and (d), shall control the amounts of the reserves and
liabilities during the time the regulations continue in force. In the
event the regulations shall cease to be in effect, the reserves and
liabilities again shall be controlled by subdivisions (b), (c), and
(d) during the time no such regulations shall be in force.
(b) Every admitted insurer which issues one or more of the
following three types of individual disability policies shall
maintain a reserve not less than the minimum reserve required under
this subdivision:
(1) Policies which are guaranteed renewable for life or to a
specified age at guaranteed premium rates.
(2) Policies which are guaranteed renewable for life or to a
specified age but under which the insurer has reserved the right to
change the scale of premiums.
(3) Policies, other than those described in paragraph (1) of
subdivision (c), in which the insurer has reserved the right to
cancel or to 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.
During the period within which the renewability of the policy is
guaranteed or the insurer's right to cancel the policy or to refuse
renewal thereof is limited, the minimum reserve shall be an amount
computed on the basis of two-year preliminary term tabular mean
reserves employing the following assumptions:
Mortality and Interest: those assumptions specified in Article 3
(commencing with Section 10478) and Article 3a (commencing with
Section 10489.1) of Chapter 5 of Part 2 of Division 2, for the
determination of minimum policy reserve liabilities for ordinary life
insurance.
Morbidity or other contingency: any tables adopted by the National
Association of Insurance Commissioners, or its successor, that is
approved by regulation promulgated by the commissioner for use in
determining the minimum standard of valuation for use in valuing
individual disability insurance policies, or any modification of
these tables approved by the commissioner, or any tables based upon
individual insurer's own experience and approved by the commissioner.
For each benefit, each company shall establish reserves that place
a sound value on the liabilities for the benefit.
These mean reserves shall be diminished or offset by appropriate
credit for the valuation net deferred premiums. In no event, however,
shall the aggregate reserves for all policies valued on the mean
reserve basis, diminished by any credit for deferred premiums, be
less than the gross pro rata unearned premiums under the policies.
Negative reserves for any benefit may be offset against positive
reserves for other benefits in the same individual or family policy,
but if all benefits of the policy collectively develop a negative
reserve, credit shall not be taken for the amount.
(c) Every admitted insurer which issues one or more of the
following types of individual disability policies shall maintain the
minimum unearned premium reserve required under this subdivision:
(1) Selected group disability policies issued under or subject to
an agreement that, except for stated reasons, the insurer will not
cancel or refuse to renew the coverage of individual insureds prior
to a specified age unless all coverage under the same group is
terminated.
(2) Any type of individual disability policy not included in one
of the three types described in subdivision (b) and not included in
paragraph (1) of this subdivision.
The minimum unearned premium reserve shall be the pro rata
unearned portion of gross premiums in force and, subject to the
limitations contained in Sections 922.2 to 922.8, inclusive, shall be
reduced by premiums paid or credited for risks reinsured in solvent
insurers.
(d) Provided the reserve on all policies to which the method or
basis is applied is not less in the aggregate than the required
amount determined according to the applicable standards specified in
subdivisions (b) and (c), an insurer 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 conditions, the insurer may employ methods other than the
methods stated in subdivisions (b) and (c) in determining a sound
value of its liabilities under such policies, including, but not
limited to, any of the following:
(1) The use of midterminal reserves in addition to either the
gross pro rata unearned premium reserves described in subdivision (c)
or the net pro rata unearned premium reserve.
(2) Optional use of either the level premium, the one-year
preliminary term or the two-year preliminary term method.
(3) Prospective valuation on the basis of actual gross premiums
with reasonable allowance for future expense.
(4) The use of approximations such as those involving age
groupings, groupings of several years of issue, average amounts of
indemnity.
(5) 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.
(6) The use of a composite annual claim cost for all or any
combination of the benefits included in the policies valued.
For statement purposes the net reserve liability for active lives
may be shown as the mean reserve with offsetting asset items for net
unpaid and deferred premiums or it 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."