806 KAR 17:070. Filing procedures for health insurance rates.
RELATES TO: KRS 304.14-120, 304.14-130, 304.17-380
STATUTORY AUTHORITY: KRS 304.2-110
NECESSITY, FUNCTION, AND CONFORMITY: KRS 304.2-110 provides that the Executive Director of Insurance may make reasonable rules and administrative regulations necessary for or as an aid to the effectuation of any provision of the Kentucky Insurance Code. This administrative regulation provides additional filing procedures for health insurance rates.
Section 1. Definitions. (1) "Present value" means the amount of money needed as of the valuation date to produce, when accumulated at interest, a specified amount on a specific future date. The "present value of future benefits" and "present value of future premiums" are sums of such values which should take into account not only the interest assumption but the assumed persistency and mortality of the business.
(2) "Accumulated value" means the amount of which a sum of money would have increased as of the valuation date, if invested at a specific date in the past, subject to the investment earnings attributable to the policies.
(3) "Loss ratio" means the ratio of the sum of incurred losses and the change in policy reserves divided by the earned premiums.
(4) A "qualified actuary" is a member of the American Academy of Actuaries, a fellow or associate of the Society of Actuaries, the Institute of Actuaries, the Faculty of Actuaries, the Casualty Actuarial Society, or a fellow or member of the Conference of Actuaries in Public Practice.
Section 2. Classification of Policies. For the purposes of this administrative regulation, policies are classified by type of benefit, renewal clause and average annual premium.
(1) Types of benefits recognized are:
(a) Medical expense, including hospital indemnity policies, as well as hospital, surgical, major medical or any other policies providing insurance against the expenses resulting from accident or sickness;
(b) Medicare supplement policies;
(c) Loss of income; and
(d) All other policies which may be designated by the executive director.
(2) Categories of renewal clause are as follows:
OR - Optionally renewable: renewal of individual policies 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 - Noncancellable: renewal cannot be declined nor can rates be revised by the insurance company.
(3) Recognized categories by average annual premium per policy are:
(a) Less than $100;
(b) At least $100 but less than $200;
(c) $200 or more.
Section 3. Filing of Rates. Every policy, rider or endorsement form affecting benefits which is submitted for approval shall be accompanied by a rate filing unless such rider or endorsement form does not directly or indirectly produce a change in the benefit level. Any subsequent addition to or change in rates applicable to such policy, rider or endorsement shall also be filed.
(1) The following items shall be included in individual health insurance rate filing submissions for rates on a new product:
(a) Policy form, application, endorsements, "face sheet and verification form" and filing fee.
(b) Rate sheet.
(c) Actuarial memorandum.
1. Brief description of the type of policy, benefits, renewability, general marketing method, and issue age limits.
2. Brief description of how rates were determined, including the general description and source of each assumption used. If assumptions are materially different from the company's experience on similar policies, the reasons for their choice should be explained. Margins, both implicit and explicit, should be estimated. For expenses, show those which are percent of premium, dollars per policy and/or dollars per unit of benefit, separately, by policy year.
3. Estimated average annual premium per policy.
4. Anticipated loss ratio, including a brief description of how it was calculated, and a projection of year-by-year expected loss ratios.
5. Anticipated loss ratio presumed reasonable according to Section 4 of this administrative regulation.
6. If subparagraph 4 of this paragraph is less than subparagraph 5 of this paragraph, supporting documentation for the use of the proposed premium rates.
7. An actuarial report signed by a qualified actuary as to whether or not, to the best of the actuary's knowledge and judgment, the rate submission is in compliance with the applicable laws and administrative regulations of the state and the benefits are reasonable in relation to the premiums.
8. Comparison of the rates with those of any similar policies currently or recently issued by the company.
(d) A statement as to the status of the filing in the company's home state, and a statement as to any variations in rates and/or loss ratio assumptions required by or used in other states.
(2) The following items shall be included in individual health insurance rate filing submissions for rate increases on an existing product:
(a) New rate sheet, "face sheet and verification form" and filing fee.
(b) Actuarial memorandum.
1. Brief description of the type of policy, benefits, renewability, general marketing method, issue age limits, the first and last year the policy form was issued, and the anticipated loss ratio of its original rates.
2. Scope and reason for rate revision including a statement of whether the revision applies only to new business, only to in-force business, or to both, and outline of all past rate increases on this form.
3. Estimated average annual premium per policy, before and after rate increase. Comparison of proposed rate scale with current rate scale.
4. Past experience, in the format of the "experience reporting form," and any other available data the insurer may wish to provide. If policy reserves are other than net level reserves based on the rate assumptions underlying the existing rates, an estimate of the effect of using such reserves should be provided.
5. Brief description of how revised rates were determined, including the general description and source of each assumption used. For expenses, include percent of premium, dollars per policy, and/or dollars per unit of benefit as separate items, Also, the unamortized initial expenses to be recovered from future premiums should be shown.
6. The anticipated future loss ratio described in Section 4(2)(a) of this administrative regulation and description of how it was calculated.
7. The anticipated loss ratio which combines cumulative and future experience described in Section 4(2)(b) of this administrative regulation, and description of how it was calculated.
8. Anticipated loss ratio presumed reasonable according to Section 4 of this administrative regulation.
9. If subparagraphs 6 or 7 of this paragraph is less than subparagraph 8 of this paragraph, supporting documentation for the use of such premium rates.
10. An actuarial report signed by a qualified actuary as to whether or not, to the best of the actuary's knowledge and judgment, the rate submission is in compliance with the applicable laws and administrative regulations of the state and the benefits are reasonable in relation to the premiums.
11. The number of policies in force in Kentucky and approximate annual premiums.
(c) A statement as to the status of the filing in the company's home state, and a statement as to any variations in rates and/or loss ratio assumptions required by or used in other states.
Section 4. Reasonableness of Benefits in Relation to Premiums. (1) New forms.
(a) With respect to a new form other than a Medicare supplement form under which the average annual premium (as defined below) is expected to be at least $200, benefits shall be deemed reasonable in relation to premiums provided the anticipated loss ratio is at least as great as shown in the following table:
Type of Coverage
Loss of Income and Other
(b) For a policy form, including riders and endorsements, under which the expected average annual premium per policy is $100 or more but less than $200, subtract five (5) percentage points from the numbers in the table above, or less than $100, subtract ten (10) percentage points.
(c) 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).
(d) The loss ratio for a Medicare supplement policy shall be as provided in 806 KAR 17:060, regardless of renewal clause or average premium.
(2) Rate revisions. Excepting as provided below, with respect to filings of rate revisions for a previously approved form, benefits shall be deemed reasonable in relation to premiums provided both the following loss ratios meet the above standards for new forms.
(a) The anticipated loss ratio over the entire future period for which the revised rates are computed to provide coverage;
(b) The anticipated loss ratio derived by dividing "A" by "B" where:
1. "A" is the sum of the accumulated benefits, from the original effective date of the form or the effective date of this administrative regulation, whichever is later, to the effective date of the revision, and the present value of future benefits, and
2. "B" is the sum of the accumulated premiums from the original effective date of the form or the effective date of the administrative regulation, whichever is later, to the effective date of the revision, and the present value of future premiums, such present values to be taken over the entire period for which the revised rates are computed to provide coverage, and such accumulated benefits and premiums and premiums from the last date as of which an accounting has been made to the effective date of the revision.
(3) Anticipated loss ratios other than those indicated in subsection (1) or (2) of this section will require justification based on the special circumstances that may be applicable.
(a) Examples of coverages for which a lower loss ratio may receive special consideration are as follows:
1. Accident only;
2. Short term nonrenewable, e.g., airline trip, student accident;
3. Specified peril, e.g., common carrier;
4. Other special risks.
(b) Examples of other factors for which lower loss ratios may receive special consideration are as follows:
1. Marketing methods, giving due consideration to acquisition and administration costs and to premium mode;
2. Extraordinary expenses;
3. High risk of claim fluctuation because of the low loss frequency or the catastrophic, or experimental nature of the coverage;
4. Product features such as long elimination periods, high deductibles and high maximum limits;
5. The industrial or debit method of distribution;
6. Forms issued prior to the effective date of these guidelines.
(c) 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 filing of unacceptable large rate increases. Companies will be requested to implement rate increases of more than thirty (30) percent over two (2) or more years.
(d) Examples of factors for which higher loss ratios may be required:
1. Forms on which all initial expenses have been amortized.
2. Forms on which rates have been increased to at least double their original level.
Section 5. Miscellaneous Considerations. (1) Additional data which may be included in support of rate filings includes, but is not limited to, substitution of actual claim run-offs for claim reserves and liabilities, in order to avoid the problems of short-term developments, accident-year loss ratios supporting trends, the operation of any experience funds or stabilization reserves, adjustment of premiums to an annual mode basis.
(2) All additional data must be reconciled, as appropriate, to the required data, and any missing data explained.
Section 6. Severability. If any provision of this administrative regulation or the application thereof to any person or circumstance is for any reason held to be invalid, the remainder of this administrative regulation and the application of such provision to other persons or circumstances shall not be affected thereby. (8 Ky.R. 955; eff. 4-7-82; Am. 1961; eff. 4-6-95; TAm eff. 8-9-2007.)