806 KAR 6:090.
Discounting of casualty insurance loss reserves.
RELATES TO: KRS
304.4-010, 304.6-100
STATUTORY AUTHORITY:
KRS Chapter 13A, 304.2-110, 304.6-100
NECESSITY, FUNCTION,
AND CONFORMITY: KRS 304.2-110 provides that the Executive Director of Insurance
may make reasonable administrative regulations necessary for or as an aid to
the effectuation of any provision of the Kentucky Insurance Code. KRS 304.6-100
authorizes the Executive Director of Insurance to make administrative regulations
for the computing of casualty insurance reserves. This administrative
regulation permits and regulates the discounting of loss reserves for certain
types of casualty insurance.
Section 1.
Definitions. As used in this administrative regulation:
(1) "Annual or
other financial statements" means the annual statement required by KRS
304.3-240 and all supplements thereto and any other financial statements
required by the executive director;
(2) "Casualty
insurance" has the meaning set forth in KRS 304.5-070;
(3) “Executive director"
means the Executive Director of the Kentucky Office of Insurance;
(4)
"Domestic insurer" has the meaning set forth in KRS 304.1-070(1);
(5) "Loss
reserves" and "loss adjustment expense reserves," hereinafter
called "loss reserves," means the same as in the Annual Statement
Convention Blank filed with the National Association of Insurance Commissioners;
(6) "Medical
malpractice insurance" means insurance as defined in KRS 304.5-070(1)(j)
issued to health care providers, excess insurance issued to a medical
malpractice self-insured plan, and reinsurance of medical malpractice
insurance;
(7) "Qualified
actuary" means:
(a) A member of the American
Academy of Actuaries; or
(b) A person who has
demonstrated to the satisfaction of the executive director educational
background necessary for reserving and other actuarial sciences and has not
less than seven (7) years of relevant actuarial experience;
(8) "Workers'
compensation insurance" has the meaning set forth in KRS 304.5-070(1)(c).
Section 2.
Discounting of Casualty Insurance Loss Reserves. (1) Domestic insurers may
discount loss reserves for medical malpractice insurance, workers' compensation
insurance, and such other kinds of casualty insurance as may be approved by
order of the executive director.
(2) The reserves
that may be discounted are loss reserves, including reserves for incurred but
not reported claims and case reserves.
(3) All filings
involving discounting of loss reserves shall contain the information required
by this administrative regulation.
Section 3. Actuarial
Statement of Opinion. (1) All filings involving discounting of loss reserves
shall be accompanied by an actuarial statement of opinion reflecting accurately
the effect of discounting of loss reserves on the domestic insurer's financial
condition. The actuarial statement of opinion shall be by a qualified actuary.
(2) The actuarial
statement of opinion shall include the following:
(a) An assessment of
the adequacy of the undiscounted reserve (i.e., full value reserve prior to
discounting);
(b) An assessment of
the appropriateness of the assumed interest rate, considering at least the
following:
1. Valuation basis
of bonds (market value as opposed to amortized value);
2. Yield on assets;
3. Asset maturities
(i.e., do they reasonably match the maturities of the corresponding
liabilities?); and
4. Consistency with
interest rate assumptions used in pricing.
(c) An assessment of
the appropriateness of the anticipated payment schedule, considering at least
the following:
1. The domestic
insurer's own paid loss development history to the extent available and
credible;
2. To the extent
that such history is not available or credible, the applicability of broader
based industry experience, in particular with respect to the form of coverage
(e.g., occurrence as opposed to claims made coverage forms) and retention
level; and
3. The domestic
insurer's reinsurance recoverables.
(d) A description of
the formula(s) used for discounting, including any provision for adverse
deviation;
(e) Any other
factors needed to reflect accurately the effect of discounting on the financial
condition of the domestic insurer or required by the executive director.
Section 4.
Disclosure of Discounting of Loss Reserves in Annual and Other Financial
Statements. (1) Domestic insurers discounting loss reserves shall disclose the
discounting of loss reserves in their annual and other financial statements in
a manner which will reflect accurately the effect of discounting of loss
reserves on the domestic insurer's financial condition. The executive director
may by order specify particular portions or schedules of the annual or other
financial statements in which a specific type of disclosure is needed to
reflect accurately the effect of discounting of loss reserves on a domestic
insurer's financial condition.
(2) Insurers
discounting loss reserves shall prepare schedule P, parts 1, 2, and 3, of the
annual statement on an undiscounted basis, with schedule P, part 4, of the
annual statement providing reconciliation between undiscounted loss reserves
and discounted loss reserves. If schedule P of the annual statement is altered
or replaced, insurers discounting loss reserves shall complete such schedules
or other portions of the annual statement to disclose the discounting of loss
reserves in accordance with the instructions of the executive director.
Section 5.
Limitations on Discounting of Loss Reserves. In no event shall discounting of
loss reserves by an insurer result in reserves which do not meet the
requirements of KRS 304.6-100(3).
Section 6. This
administrative regulation shall apply to financial statements covering the
financial condition of an insurer on or after January 1, 1988. (14 Ky.R. 1035;
Am. 1285; eff. 1-4-88; TAm eff. 8-9-2007.)
