New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on January 7, 2004, representing the position of the New York State Insurance Department.

RE: Accident & Health Insurance, Premium Rates.

Question Presented:

If the projections of anticipated claim experience submitted by an insurer as part of a rate filing for a group health insurance policy or contract are not borne out by actual experience, must there be subsequent adjustments?

Conclusion:

If the projections submitted by an insurer are not borne out by experience, there must be subsequent adjustments.

Facts:

The inquirer requested information concerning an insurer’s obligations with respect to group policies of accident & health insurance issued to employer-employee groups, both those that are experience rated and those that, in accordance with New York Insurance Law § 3231 (McKinney 2000 and 2003 Supplement), are community rated.

Analysis:

Since the requirements differ, the ramifications for policies issued by commercial insurers licensed in accordance with New York Insurance Law Articles 41 (McKinney 2000 and 2003 Supplement) or 42 (McKinney 2000 and 2003 Supplement) will be separately explained from those issued by not-for-profit insurers holding a license in accordance with New York Insurance Law § 4302(b) (McKinney 2000).

Commercial Insurers

New York Insurance Law § 3231(a) provides:

No individual health insurance policy and no group health insurance policy covering between two and fifty employees or members of the group exclusive of spouses and dependents, hereinafter referred to as a small group, providing hospital and/or medical benefits . . . shall be issued in this state unless such policy

is community rated and, notwithstanding any other provisions of law, the underwriting of such policy involves no more than the imposition of a pre-existing condition limitation as permitted by this article. . . . For the purposes of this section, ‘community rated’ means a rating methodology in which the premium for all persons covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status or occupation.

The standard for premium rates for commercial accident & health insurance policies, which is set forth in New York Insurance Law § 3201(c)(3) (McKinney 2000 and 2003 Supplement), is that such premiums must be reasonable in relation to the benefits provided. New York Insurance Law § 4235(h) (McKinney 2000 and 2003 Supplement) further provides:

(1) Each domestic insurer and each foreign or alien insurer doing business in this state shall file with the superintendent its schedules of premium rates, rules and classification of risks for use in connection with the issuance of its policies of group accident, group health or group accident and health insurance . . . .

(2) An insurer may revise such schedules from time to time, and shall file such revised schedules with the superintendent.

The Department has specified, as part of a Regulation (Regulation 62), N.Y. Comp. Codes R. & Regs. tit. 11, § 52.40(d)(2) (2002), dealing with accident and health insurance, that information which an insurer submits must be in compliance with New York Insurance Law § 4235(h)(2). Among the data items that must be submitted are the experience under the contract form and the anticipated loss ratio. Loss ratio, which is defined in N.Y. Comp. Codes R. & Regs. tit. 11, § 52.2(g) (2002), may simply be expressed as the ratio of benefits to premiums.

The required loss ratio for group insurance issued by commercial insurers is set forth in N.Y. Comp. Codes R. & Regs. tit. 11, § 52.45(f) (1998):

The minimum loss ratio for group . . . insurance shall be 65 percent, except that: (1) for insurance covering less than 50 persons at inception, excluding dependents, the minimum loss ratio shall be 60 percent . . . .

Upon receipt of rate information from an insurer concerning a contract form, not a particular policy, the Department ascertains if the anticipated loss ratio as reported by the insurer meets the standard established in N.Y. Comp. Codes R. & Regs. tit 11, § 52.45(f). Other than for policies issued to comply with New York Workers, Compensation Law Article 9 (McKinney 1994 and 2003 Supplement) (Disability Law), N.Y. Comp. Codes R. & Regs tit. 11, § 52.43(b) (1995), and Medicare supplement policies, N.Y. Comp. Codes R. & Regs. tit. 11, § 52.44(c) (2002), there is no requirement, outside of a rate modification application, that an insurer submit experience data.

In accordance with New York Insurance Law § 309 (McKinney 2000), the Department periodically examines each domestic insurance company. Such examinations usually include a review of the insurer’s rates. In the case of licensed foreign insurers, domiciled in a jurisdiction other than New York, the domiciliary jurisdiction conducts such examinations and furnishes a copy of the Report on examination to the Department. In addition, the Department may periodically conduct a market conduct examination of licensed insurers.

If as a result of such examination, the Department ascertains that the insurer has not met the minimum loss ratio, it will require a future rate reduction. If as a result of such examination, or otherwise, the Department ascertains that the insurer has not made good faith projections, it may, in addition to any refund to policyholders, impose a civil penalty in accordance with New York Insurance Law § 4241 (McKinney 2000).

Not-For-Profit Insurers and Health Maintenance Organizations

New York Insurance Law § 4317(a) (McKinney 2000 and 2003 Supplement) has requirements that are identical to those of New York Insurance Law § 3231.

The standard for premium rates for insurance contracts issued by not-for-profit insurers and, in accordance with New York Public Health Law § 4406(1) (McKinney 2002) Health Maintenance Organizations, which is set forth in New York Insurance Law § 4308(b) (McKinney 2000), is that such premiums may not be excessive, inadequate, or unfairly discriminatory. Originally, in accordance with New York Insurance Law § 4308(c), such insurers had to apply to the Department, which held a public hearing, for permission to modify their premium rates. However, in accordance with 1995 N.Y. Laws 504, the procedure has been modified.

New York Insurance Law § 4308 now provides:

(g) (1) Beginning January first, nineteen hundred ninety-six, as an alternate procedure to the requirements of subsection (c) of this section, a corporation subject to the provisions of this article desiring to increase or decrease premiums for any contract subject to this section may instead submit a rate filing or application to the superintendent and such application or filing shall be deemed approved, provided that (A) the anticipated incurred loss ratio for a contract form shall not be less than . . . seventy-five percent for small group and small group remittance contracts, nor . . . shall the loss ratio for any . . . group or group remittance contract be more than one hundred five percent of the anticipated earned premium, and (B) the corporation submits, as part of such filing, a certification by a member of the American Academy of Actuaries or other individual acceptable to the superintendent that that corporation is in compliance with the provisions of this subsection, based upon that person's examination, including a review of the appropriate records and of the actuarial assumptions and methods used by the corporation in establishing premium rates for contracts subject to this section. For purposes of this section, a small group is any group whose contract is subject to the requirements of section forty-three hundred seventeen of this article.

. . .

(h) (1) Each calendar year, a corporation subject to the provisions of this article shall return, in the form of aggregate benefits incurred for each contract form filed pursuant to the alternate procedure set forth in subsection (g) of this section, at least . . . seventy-five percent for small group and small group remittance contracts, but . . . not in excess of one hundred five percent of the aggregate premiums earned for the contract form during that calendar year. Corporations subject to the provisions of this article shall annually report, no later than May first of each year, the loss ratio calculated pursuant to this subsection for each such contract form for the previous calendar year.

(2) In each case where the loss ratio for a contract form fails to comply with the . . . seventy-five percent minimum loss ratio requirement for small group and small group remittance contracts, as set forth in paragraph one of this subsection, the corporation shall issue a dividend or credit against future premiums for all contract holders with that contract form in an amount sufficient to assure that the aggregate benefits incurred in the previous calendar year plus the amount of the dividends and credits shall equal no less than . . . seventy-five percent for small group and small group remittance contracts, of the aggregate premiums earned for the contract form in the previous calendar year. The dividend or credit shall be issued to each contract that was in effect as of December thirty-first of the applicable year and remains in effect as of the date the dividend or credit is issued. All dividends and credits must be distributed by September thirtieth of the year following the calendar year in which the loss ratio requirements were not satisfied. The annual report required by paragraph one of this subsection shall include a corporation's calculation of the dividends and credits, as well as an explanation of the corporation's plan to issue dividends or credits. The instructions and format for calculating and reporting loss ratios and issuing dividends or credits shall be specified by the superintendent by regulation. Such regulations shall include provisions for the distribution of a dividend or credit in the event of cancellation or termination by a contract holder or subscriber.

(3) In each case where the loss ratio for a contract form fails to comply with the one hundred five percent maximum loss ratio requirement of paragraph one of this subsection, the corporation shall institute a premium rate increase in an amount sufficient to assure that the aggregate benefits incurred in the previous calendar year shall equal no more than one hundred five percent of the sum of the aggregate premiums earned for the contract form in the previous calendar year and the aggregate premium rate increase. The rate increase shall be applied to each contract that was in effect as of December thirty-first of the applicable year and remains in effect as of the date the rate increase is imposed. All rate increases must be imposed by September thirtieth of the year following the calendar year in which the loss ratio requirements were not satisfied. The annual report required by paragraph one of this subsection shall include a corporation's calculation of the premium rate increase, as well as an explanation of the corporation's plan to implement the rate increase. The instructions and format for calculating and reporting loss ratios and implementing rate increases shall be specified by the superintendent by regulation.

An amendment to Regulation 62 to effectuate the requirements of New York Insurance Law § 4308(g) & (h) is being drafted by the Department. In the interim, the Department has furnished guidelines to insurers, which are available on its website, located at http:\\ www.ins.state.ny.us, setting forth criteria that are intended to assure that the statutory requirements are met.

In accordance with New York Insurance Law § 309, the Department periodically examines each not-for-profit insurance company. Such examinations usually include a review of the insurer’s rates. In addition, the Department may periodically conduct a market conduct examination of licensed insurers. If as a result of such examination, or otherwise, the Department ascertains that the insurer has not made good faith projections, it may, in addition to any refund to policyholders, impose a civil penalty in accordance with New York Insurance Law § 4241 (McKinney 2000).

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.