Insurance Code section 997

(a)

For statement purposes as defined in Article 10 (commencing with Section 900), for insolvency calculations as defined in Article 13 (commencing with Section 980), and for the valuation of the liabilities of insurers for all other purposes, every admitted insurer shall maintain an active life reserve which shall place a sound value on its liabilities under all disability policies and which shall not be less than the reserve according to the standards set forth in regulations issued by the commissioner and, in no event, less in the aggregate than the pro rata gross unearned premium reserve for the policies. The promulgation of the regulations by the commissioner or any changes or amendments thereof shall be in accordance with the procedure provided in Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code.
Subdivisions (b), (c), and (d) shall control the amounts of reserves and liabilities, other than for specific claim losses, upon all individual disability policies until the effective date of regulations issued by the commissioner as provided in the next preceding paragraph. The regulations, in lieu of subdivisions (b), (c), and (d), shall control the amounts of the reserves and liabilities during the time the regulations continue in force. In the event the regulations shall cease to be in effect, the reserves and liabilities again shall be controlled by subdivisions (b), (c), and (d) during the time no such regulations shall be in force.

(b)

Every admitted insurer which issues one or more of the following three types of individual disability policies shall maintain a reserve not less than the minimum reserve required under this subdivision:

(1)

Policies which are guaranteed renewable for life or to a specified age at guaranteed premium rates.

(2)

Policies which are guaranteed renewable for life or to a specified age but under which the insurer has reserved the right to change the scale of premiums.

(3)

Policies, other than those described in paragraph (1) of subdivision (c), in which the insurer has reserved the right to cancel or to refuse renewal for one or more reasons, but has agreed implicitly or explicitly that, prior to a specified time or age, it will not cancel or decline renewal solely because of deterioration of health after issue.
During the period within which the renewability of the policy is guaranteed or the insurer’s right to cancel the policy or to refuse renewal thereof is limited, the minimum reserve shall be an amount computed on the basis of two-year preliminary term tabular mean reserves employing the following assumptions:
Mortality and Interest: those assumptions specified in Article 3 (commencing with Section 10478) and Article 3a (commencing with Section 10489.1) of Chapter 5 of Part 2 of Division 2, for the determination of minimum policy reserve liabilities for ordinary life insurance.
Morbidity or other contingency: any tables adopted by the National Association of Insurance Commissioners, or its successor, that is approved by regulation promulgated by the commissioner for use in determining the minimum standard of valuation for use in valuing individual disability insurance policies, or any modification of these tables approved by the commissioner, or any tables based upon individual insurer’s own experience and approved by the commissioner.
For each benefit, each company shall establish reserves that place a sound value on the liabilities for the benefit.
These mean reserves shall be diminished or offset by appropriate credit for the valuation net deferred premiums. In no event, however, shall the aggregate reserves for all policies valued on the mean reserve basis, diminished by any credit for deferred premiums, be less than the gross pro rata unearned premiums under the policies.
Negative reserves for any benefit may be offset against positive reserves for other benefits in the same individual or family policy, but if all benefits of the policy collectively develop a negative reserve, credit shall not be taken for the amount.

(c)

Every admitted insurer which issues one or more of the following types of individual disability policies shall maintain the minimum unearned premium reserve required under this subdivision:

(1)

Selected group disability policies issued under or subject to an agreement that, except for stated reasons, the insurer will not cancel or refuse to renew the coverage of individual insureds prior to a specified age unless all coverage under the same group is terminated.

(2)

Any type of individual disability policy not included in one of the three types described in subdivision (b) and not included in paragraph (1) of this subdivision.
The minimum unearned premium reserve shall be the pro rata unearned portion of gross premiums in force and, subject to the limitations contained in Section 922.2 to 922.8, inclusive, shall be reduced by premiums paid or credited for risks reinsured in solvent insurers.

(d)

Provided the reserve on all policies to which the method or basis is applied is not less in the aggregate than the required amount determined according to the applicable standards specified in subdivisions (b) and (c), an insurer may use any reasonable assumptions as to the interest rate, mortality rates or the rates of morbidity or other contingency, and may introduce an assumption as to the voluntary termination of policies. Also, subject to the preceding conditions, the insurer may employ methods other than the methods stated in subdivisions (b) and (c) in determining a sound value of its liabilities under such policies, including, but not limited to, any of the following:

(1)

The use of midterminal reserves in addition to either the gross pro rata unearned premium reserves described in subdivision (c) or the net pro rata unearned premium reserve.

(2)

Optional use of either the level premium, the one-year preliminary term or the two-year preliminary term method.

(3)

Prospective valuation on the basis of actual gross premiums with reasonable allowance for future expense.

(4)

The use of approximations such as those involving age groupings, groupings of several years of issue, average amounts of indemnity.

(5)

The computation of the reserve for one policy benefit as a percentage of, or by other relation to, the aggregate policy reserves, exclusive of the benefit or benefits so valued.

(6)

The use of a composite annual claim cost for all or any combination of the benefits included in the policies valued.
For statement purposes the net reserve liability for active lives may be shown as the mean reserve with offsetting asset items for net unpaid and deferred premiums or it may be shown as the excess of the mean reserve over the amount of net unpaid and deferred premiums, or, regardless of the underlying method of calculation, it may be divided between the gross pro rata unearned premium reserve and a balancing item for the “additional reserve.”

Source: Section 997, https://leginfo.­legislature.­ca.­gov/faces/codes_displaySection.­xhtml?lawCode=INS§ionNum=997.­ (accessed May 19, 2025).

997
Last Updated

May 12, 2025

§ 997’s source at ca​.gov