KRS 304.6-180: Deficiency reserve -- Recognition of premium deficiency reserve.

(1) If in any contract year the gross premium charged by any life insurer on any policy

or contract, which is subject to subsection (2) of KRS 304.6 -140, is less than the

valuation net premium for the policy or contract calculated by the method used in

calculating the reserve thereon, but using the minimum valuation standards of

mortality and rate of interest, the minimum reserve required for such policy or

contract shall be the greater of either the reserve calculated according to the

mortality table, rate of interest, and method actually used for such policy or

contract, or the reserve calculated by the method actually used for such policy or

contract but using the minimum standards of mortality and rate of interest and

replacing the valuation net premium by t he actual gross premium in each contract

year for which the valuation net premium exceeds the actual gross premium. The

minimum valuation standards of mortality and rate of interest referred to in this

section are those standards stated in KRS 304.6 -140 and 304.6-145. Provided that

for any life insurance policy issued on or after January 1, 1986, for which the gross

premium in the first policy year exceeds that of the second year and for which no

comparable additional benefit is provided in the first year for such excess and which

provides an endowment benefit or a cash surrender value or a combination thereof

in an amount greater than such excess premium, the foregoing provisions of this

section shall be applied as if the method actually used in calculating the reserve for

such policy were the method described in KRS 304.6 -150, ignoring the second

subsection of that section. The minimum reserve at each policy anniversary of such

a policy shall be the greater of the minimum reserve calculated in accordance wi th

KRS 304.6-150, including the second subsection of that section, and the minimum

reserve calculated in accordance with this section.

(2) When the anticipated losses, loss adjustment expenses, commissions and

acquisition costs, and maintenance costs excee d the recorded unearned premium

reserve and any future installment premiums on existing policies, a premium

deficiency reserve shall be recognized by a property and casualty insurer by

recording an additional liability for the deficiency, with a correspond ing charge to

operations. Commission and other acquisition costs need not be considered in the

premium deficiency analysis to the extent they have previously been expensed. For

purposes of determining if a premium deficiency exists, insurance contracts shall be

grouped in a manner consistent with how policies are marketed, serviced, and

measured. A liability shall be recognized for each grouping where a premium

deficiency is indicated. Deficiencies shall not be offset by anticipated profits in

other policy groupings. If a premium deficiency reserve is established, disclosure of

the amount of that reserve shall be made in the financial statements. If a reporting

entity utilizes anticipated investment income as a factor in the premium deficiency

calculation, disclosure of this shall be made in the financial statements.

(3) When the anticipated losses, loss adjustment expenses, commissions and other

acquisition costs, and maintenance costs exceed the recorded unearned premium

reserve, contingency reserve, and the estimated future renewal premium on existing

policies, a mortgage guaranty insurer shall recognize a premium deficiency reserve

by recording an additional liability for the deficiency with a corresponding charge to

operations. Commissions and other acqui sition costs need not be considered in the

premium deficiency analysis to the extent they have been expensed. If a mortgage

guaranty insurer utilizes anticipated investment income as a factor in the premium

deficiency calculation, disclosure of this shall be made in the financial statements.

(4) When the expected claims payments or incurred costs, claim adjustment expenses,

and administration costs exceed the premiums to be collected for the remainder of a

contract period, an individual or group accident an d health insurer or health

maintenance organization shall recognize a premium deficiency reserve by

recording an additional liability for the deficiency, with a corresponding charge to

operations. For purposes of determining if a premium deficiency exists, contracts

shall be grouped in a manner consistent with how policies are marketed, serviced,

and measured. A liability shall be recognized for each grouping where a premium

deficiency is indicated. Deficiencies shall not be offset by anticipated profits in

other policy groupings. Such accruals shall be made for any loss contracts, even if

the contract period has not yet started.