Section R20-6-607. Reasonableness of Benefits in Relation to Pre- mium Charged

A.      Applicability. This rule shall apply to individual disability insurance (as defined in A.R.S. § 20-253) policy forms and rates.

B.       When rate filing is required. Every individual policy form, rider or endorsement form affecting benefits which is submit- ted for approval shall be accompanied by a rate filing unless such rider or endorsement form does not require a change in the rate. Any subsequent addition to or change in rates applica- ble to such policy, rider or endorsement form shall also be filed.

C.      General contents of all rate filings. Each rate submission shall include an actuarial memorandum describing the basis on which rates were determined and shall indicate and describe the calculation of the ratio, hereinafter called “anticipated loss ratio,” of the present value of the expected benefits to the pres- ent value of the expected premiums over the entire period for which rates are computed to provide coverage. Each rate sub- mission must also include a certification by a qualified actuary that to the best of the actuary’s knowledge and judgment, the rate filing is in compliance with applicable laws and regula- tions of this state and that the benefits are reasonable in rela- tion to the premiums.

D.      Previously approved forms. Filings of rate revisions for a pre- viously approved policy, rider or endorsement form shall also include the following:

1.        A statement of the scope and reason for the revision, and an estimate of the expected average effect on premiums including the anticipated loss ratio for the form.

2.        A statement as to whether the filing applies only to new business, only to in-force business, or both, and the rea- sons therefor.

3.        A history of the experience under existing rates, includ- ing at least the data indicated in subsection (D). The his- tory may also include, if available and appropriate, the ratios of actual claims to the claims expected according to the assumptions underlying the existing rates. Additional data might include: substitution of actual claim run-offs for claim reserves and liabilities; determination of loss ratios with the increase in policy reserves (other than unearned premium reserves) added to benefits rather than subtracted from premiums; accumulations of experience funds; substitution of net level policy reserves for prelim- inary term policy reserves; adjustment of premiums to an annual mode basis; or other adjustments or schedules suited to the form and to the records of the company. All additional data must be reconciled, as appropriate, to the required data.

4.        The date and magnitude of each previous rate change, if any.

E.       Experience records. Insurers shall maintain records of earned premiums and incurred benefits for each calendar year for each policy form, including data for rider and endorsement forms which are used with the policy form, on the same basis, including all reserves, as required for the Accident and Health Policy Experience Exhibit to the NAIC annual statement con- vention blank. Separate data may be maintained for each rider

or endorsement form to the extent appropriate. Experience under forms which provide substantially similar coverage may be combined. The data shall be for all years of issue combined, for each calendar year of experience since the year the form was first issued, except the data for calendar years prior to the most recent five years may be combined.

F.       Evaluation experience data. In determining the credibility and appropriateness of experience data, due consideration must be given to all relevant factors, such as:

1.        Statistical credibility of premiums and benefits, e.g., low exposure, low loss frequency.

2.        Experienced and projected trends relative to the kind of coverage, e.g., inflation in medical expenses, economic cycles affecting disability income experience.

3.        The concentration of experience at early policy durations where select morbidity and preliminary term reserves are applicable and where loss ratios are expected to be sub- stantially lower than at later policy durations.

4.        The mix of business by risk classification.

G.      Anticipated loss ratio standard. With respect to a new form or a currently approved form, except currently approved non- cancelable policy forms, under which the average annual pre- mium (as defined below) is expected to be at least $200, bene- fits shall be deemed reasonable in relation to premiums provided the anticipated loss ratio is at least as great as shown in the following table:

Renewal Clause Type of Coverage              OR          CR          GR          NC

1.        The anticipated loss ratio over the entire future period for which the revised rates are computed to provide cover- age;

2.        The anticipated loss ratio derived by dividing (a) by (b) where

a.         Is the sum of the accumulated benefits, from the original effective date of the form or the effective date of this regulation, whichever is later, to the effective date of the revision, and the present value of future benefits, and

b.        Is the sum of the accumulated premiums from the original effective date of the form or the effective date of the regulation, whichever is later, to the effective date of the revision, and the present value of future premiums.

Such present values shall be taken over the entire period for which the revised rates are computed to provide coverage, and such accumulated benefits and premiums to include an explicit estimate of the actual benefits and premiums from the last date as of which an accounting has been made to the effective date of the revision. Interest shall be used in the cal- culation of these accumulated benefits and premi- ums and present values only if it is a significant factor in the calculation of this loss ratio.

I.        Anticipated loss ratios lower than those indicated in subsec- tions (H) and (I) will require justification based on the special circumstances that may be applicable.

1.        Examples of coverages requiring special consideration are as follows:

Medical expense                      60%      55%      55%      50%					a.	Accident only;
Loss of income and other        60%    For a policy form including riders		55%    and end	50%    orsemen	45%    ts, under	b.    c.	Short term nonrenewable, e.g., airline trip, student accident; Specified peril, e.g., common carrier;
which the expected averag	e annual	premium per		policy is	d.	Other special risks.

$100 or more but less than $200, subtract 5 percentage points from the numbers in the table above, or if less than $100, sub- tract 10 percentage points.

The average annual premium per policy shall be computed by the insurer based on an anticipated distribution of business by all applicable criteria having a price difference, such as age, sex, amount, dependent status, rider frequency, etc., except assuming an annual mode for all policies (i.e., the fractional premium loading shall not affect the average annual premium or anticipated loss ratio calculation).

The above anticipated loss ratio standards do not apply to a class of business which is regulated by specific statutes or reg- ulations mandating loss ratios for such business, e.g., Medi- care Supplement and Credit Life and Disability.

Definitions of Renewal Clause

OR – Optionally Renewable: renewal is at the option of the insurance company.

CR – Conditionally Renewable: renewal can be declined by the insurance company only for stated reasons other than deterioration of health.

GR – Guaranteed Renewable: renewal cannot be declined by the insurance company for any reason, but the insurance company can revise rates on a class basis.

NC – Non-Cancelable: renewal cannot be declined nor can rates be revised by the insurance company.

H.      Rate revisions. With respect to filings of rate revisions for a previously approved form, benefits shall be deemed reason- able in relation to premiums provided both the following loss ratios meet the standards in subsection (F) above.

2.        Examples of other factors requiring special consideration are as follows:

a.         Marketing methods, giving due consideration to acquisition and administration costs and to premium mode;

b.        Extraordinary expenses;

c.         High risk of claim fluctuation because of the low loss frequency of the catastrophic, or experimental nature of the coverage;

d.        Product features such as long elimination periods, high deductibles and high maximum limits;

e.         The industrial or debit method of distribution;

f.         Forms issued prior to the effective date of this rule. Companies   are  urged  to  review   their  experience periodically and to file rate revisions, as appropriate, in a timely manner to avoid the necessity of later fil- ing of exceptionally large rate increases.

3.        Notwithstanding the foregoing paragraphs to the contrary, hospital indemnity and cancer and other dread diseases policies shall develop the loss ratios pursuant to subsec- tion (G).

J.        Severability provision. If any provision of this rule or the application thereof to any person or circumstances is held invalid, the remainder of the rule and the application of such provision to other persons or circumstances shall not be affected thereby.

K.      Effective date. This rule shall become effective upon filing with the Secretary of State and shall apply to all individual dis- ability policy form and rate filings submitted on and after said date.

Historical Note

Adopted effective July 14, 1981 (Supp. 81-1). R20-6-607 recodified from R4-14-607 (Supp. 95-1).