
    Casualty Insurance Reserves.
    
      Casualty insurance companies — Reserves—Amount of — Act of May 17, 19U.
    
    The reserve of casualty Insurance companies required in their annual statement for compensation claims under policies written in the preceding three years, under section 313 (d) of the Insurance Department Act of May 17, 1921, P. L. 789, must be for the first year of the three-year period either 65 per cent, of the earned premiums, less proper deductions, or the present value at 4 per cent, interest of determined and estimated unpaid claims, whichever may be greater, and for the second and third years, 65 per cent, of the earned premiums, less deductions.
    Department of Justice. Opinion to Hon. Matthew H. Taggart, Insurance Commissioner.
    July 13, 1927.
   Wagner, Dep. Att’y-Gen.,

I beg to acknowledge receipt of your letter of July 7th, requesting that you be advised relative to the proper method of computing the reserve required to be set up in the annual statement of a stock or mutual casualty insurance company or exchange for compensation claims under policies written in the three years immediately preceding the date as of which the particular statement is made under the provisions of section 313 (d) of the Insurance Department Act of 1921 (Act of May 17, 1921, P. L. 789).

Section 313 of the above act prescribes the method for the computation of the reserve required of stock and mutual casualty companies for outstanding losses under insurance against loss or damage from accident to, or injuries suffered by, employees or other persons. Sub-sections (ó) and (d) of this section deal with the computation of such reserve for compensation claims. The relevant parts of the section are:

“Section 313. Computation of Reserve. The reserve required of stock and mutual casualty insurance companies and exchanges for outstanding losses under insurance against loss or damage from accident to, or injuries suffered by, an employee or other person, and for which the insured is liable, shall be computed as follows: . . .
“(d) For all compensation claims under policies written more than three years prior to the date as of which the statement is made, the present value at 4 per centum interest of the determined and estimated future payments.
“(d) For all compensation claims under policies written in the three years immediately preceding the date as of which the statement is made, such reserve shall be 65 per centum of the earned compensation premiums of each of such three years, less all loss and loss expense payments made in connection with such claims under policies written in the corresponding years, but, in any event, in the case of the first year of any such three-year period, such reserve shall be not less than the present value at 4 per centum interest of the determined and the estimated unpaid compensation claims under policies written during such year.”

To illustrate, let us assume the case of a company which has filed a statement as of Dec. 31, 1926. The three-year period referred to in section 313 (d) comprises, therefore, the years 1924, 1925 and 1926. It is required that the reserve for all compensation claims arising under policies written in these three years shall be 65 per centum of the earned compensation premiums of each of such three years, less all loss and loss-expense payments made in connection with such claims under policies written in such three years respectively.

A reserve so computed is a sufficient reserve for claims arising for the three years indicated, except, however, as to “the first year” of such three-year period. There is a proviso that the reserve for such first year shall be not less than the present value at 4 per centum interest of the determined and the estimated unpaid claims under policies written during each year. “The first year” of the three-year period used in the illustration is the year 1924. The only other construction which could be given to the phrase “the first year of any such three-year period” is that it refers to the year 1926. 1926, however, is not the first year of such period, but the last year of such period.

A consideration of sub-sections (c) and (d) oí section 313 confirms the construction herein given to the phrase “the first year of any such three-year period.” Section 313 (6) provides that the reserve for all compensation claims under policies written more than three years prior to the date as of which the particular statement is made shall be the present value at 4 per centum interest of the determined and estimated future payments. In the illustration suggested, this would apply to the reserve for all claims under policies written in 1923 or prior thereto. It is, therefore, reasonable that the reserve for 1924 should be required to be either 65 per centum of the earned premiums for that year, less losses and loss-expense payments made in connection with claims under policies written in that year, or the present value at 4 per centum interest of the determined and estimated unpaid claims under policies written during that year, whichever may be greater, and that the reserve for the years 1925 and 1926 should be required to be 65 per centum of the earned premiums for each of such years, less the authorized deductions. It is unreasonable to assume that it was intended that the reserve for the years 1923 and prior thereto should be required to be the present value of future payments, that the reserve for 1924 and 1925 be 65 per centum of the earned premiums, less authorized deductions, and that the reserve for 1926 be 65 per centum of the earned premiums, less authorized deductions, or the present value of the determined and estimated claims for that year, whichever may be greater.

I am, therefore, of the opinion that, in computing the reserve for compensation claims under section 313 (d) of the Insurance Department Act of 1921, the reserve for the first year of any three-year period immediately preceding the date as of which any annual statement is made shall be either 65 per centum of the earned premiums of such year, less authorized deductions, or the present value at A per centum interest of determined and estimated unpaid claims arising under policies written during such year, whichever is greater, and the reserve for the second and last years of any such three-year period, being the last and next to last years included in the statement, shall be 65 per centum of the earned premiums of such years, less authorized deductions.

From C. P. Addams, Harrisburg, Pa.  