806 KAR 6:090. Discounting of casualty insurance loss reserves

Link to law: http://www.lrc.ky.gov/kar/806/006/090.htm
Published: 2015

      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.)
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