Md. Code Regs. 32.02.02.14

Current through Register Vol. 51, No. 22, November 1, 2024

Section 32.02.02.14 - Reserve Requirements

A. Definitions.

(1) In this regulation, the following terms have the meanings indicated.

(2) Terms Defined.

(a) "Binding agreement" means an unconditional, irrevocable letter of credit or line of credit agreement entered into by a provider and a financial institution.

(b) "Debt service fund" means one or more special loan funds, established under requirements imposed by a financial institution or under applicable financing documents, into which the provider is required to deposit moneys during the provider's fiscal year to pay the current portion of the principal due and the interest accruing in that year on the provider's debt.

(c) "Debt service reserve fund" means moneys required by a financial institution or under applicable financing documents to be deposited in a special loan fund, which are to be used to pay principal and interest payments due on the provider's debt if the provider is unable to pay when due the principal and interest from operating income or other sources.

(d) "Market value" means readily determinable fair value.

(e) Net Operating Expenses.

(i) "Net operating expenses" means a provider's total operating expenses related to furnishing continuing care at home, less depreciation, amortization, unusual and infrequent expenses, and changes in the obligation to provide future services.

(ii) "Net operating expenses" does not include interest expense if the provider has funded a debt service fund or other interest reserve under requirements imposed by a financial institution or under applicable financing documents, to the extent and in the amount the fund or reserve includes amounts to cover interest for the year in question.

(f) "Other interest reserve" means one or more special loan funds other than debt service funds or debt service reserve funds:

(i) Established under requirements imposed by a financial institution or under applicable financing documents; and

(ii) Into which the provider is required to deposit moneys during the provider's fiscal year to pay interest accruing in that year on the provider's debt.

B. Operating Reserve Requirement.

(1) Except as otherwise provided in this regulation, a provider shall set aside operating reserves equal to 15 percent of the provider's net continuing care at home operating expenses for the most recent fiscal year for which a certified financial statement is available.

(2) A provider shall compute the operating reserves as of the end of its most recent fiscal year and shall indicate compliance by setting forth the amount actually set aside in a letter to the Department from the provider's certified public accountant or by disclosing the amount in the provider's most recent certified financial statement. The letter or certified financial statements shall be submitted with the provider's application for a renewal certificate.

(3) A provider may apply toward the reserve required by this regulation any reserves, other than debt service reserve funds, maintained under applicable financing document requirements if the reserves are available to the provider to meet operating expenses.

(4) For the purpose of calculating the provider's operating reserves, investments held to the credit of the reserves shall be calculated at their market value as of the end of the provider's most recent fiscal year for which a certified financial statement is available.

C. Capital Reserves. In addition to the operating reserve required under this chapter, a provider shall have a capital reserve of unencumbered, surplus assets of at least $500,000 before beginning operations and shall maintain an equal amount in reserve in order to maintain itself in good standing.

D. Contract Reserves.

(1) Calculation. Annually a provider shall calculate a contract reserve amount to cover all its continuing care at home agreements. This calculation:

(a) Shall place a sound value on the provider's liabilities under its continuing care at home agreements;

(b) In the aggregate, may not be less than the pro rata gross unearned periodic and entrance fees paid pursuant to the subscribers' agreements;

(c) May not use an interest rate greater than the maximum allowable interest rate established annually by the National Association of Insurance Commissioners for calculating reserves for whole life insurance policies, with maturities 20 or more years after issue;

(d) May not assume an inflation rate of benefits:

(i) Greater than the interest rate used, or

(ii) Less than the interest rate used minus two percentage points;

(e) Shall use the 1994 Annuitant Table published by the American Society of Actuaries and adjust it accordingly for expected mortality improvements; and

(f) Shall:

(i) Subtract the future administrative and claim expenses from the future periodic fees for each year for each subscriber,

(ii) Discount the result back to the current year, and

(iii) Sum the results for each subscriber.

(2) Funding. A provider shall fund and maintain a reserve account that equals or exceeds:

(a) 50 percent of the calculated contract reserve amount by the end of its first year of operation;

(b) 60 percent of the calculated contract reserve amount by the end of its second year of operation;

(c) 70 percent of the calculated contract reserve amount by the end of its third year of operation;

(d) 80 percent of the calculated contract reserve amount by the end of its fourth year of operation;

(e) 90 percent of the calculated contract reserve amount by the end of its fifth year of operation;

(f) 100 percent of the calculated contract reserve amount by the end of its sixth year of operation; and

(g) 100 percent of the calculated contract reserve amount for every year after the provider's sixth year of operation.

(3) Funds in the capital reserve may be counted towards satisfying the contract reserve requirements. Funds in the operating reserve may not be counted towards the contract reserve requirements.

E. Aggregate Reserves. The aggregate reserves for all continuing care at home may not be less than the aggregate reserves that a qualified actuary determines to be necessary under §G of this regulation.

F. Actuarial Opinions. Each provider shall submit annually the opinion of a qualified actuary as to whether the reserves and related actuarial items held in support of the providers' agreements are:

(1) Computed appropriately;

(2) Based on reasonable assumptions that satisfy contractual provisions;

(3) Consistent with prior reported amounts; and

(4) In compliance with applicable laws of the State.

G. Adequacy of Aggregate Reserves.

(1) Each provider shall include with the opinion required by §F of this regulation an additional opinion of the same qualified actuary, stating whether the reserves and related actuarial items that are held in support of the agreements by the provider appear on their face to be adequate to meet its obligations under its agreements. The obligations of a provider under its agreements include benefits to be provided and associated expenses that may reasonably be expected.

(2) A memorandum acceptable to the Secretary shall be prepared to support each opinion required under this section, and submitted to the Secretary annually.

(3) The memorandum shall also include a statement from the actuary:

(a) That all assumptions contained in the reserve calculations are reasonable and are calculated net of all, if any, reinsurance agreements that limit the provider's exposure to risk;

(b) That the assumptions contained in the reserve calculation are supported by an actuarial balance sheet and a pricing analysis prepared within the past 3 years; and

(c) Setting forth the underlying morbidity assumptions.

(4) The Secretary may engage a qualified actuary at the expense of the provider to review each opinion and prepare a supporting memorandum if:

(a) The provider fails to provide a supporting memorandum within the period specified by regulation; or

(b) The Secretary determines that the supporting memorandum that the provider provides fails to meet necessary standards or is unacceptable.

(5) Each opinion and memorandum required by this section shall be submitted with the annual renewal application required by this chapter and reflect the valuation of the reserve liabilities of the provider and be based on standards adopted by the Actuarial Standards Board.

H. Use of Reserves.

(1) A provider shall notify the Department in writing simultaneously with withdrawing any amount from the funds available to satisfy the reserves required by this regulation.

(2) Within 30 days of any draw, the provider shall submit to the Department a written plan for restoring promptly and prudently the funds in the reserve to the level required by this regulation.

I. Phase-In Period of Operating Reserve Requirement.

(1) Except as provided under §I(2) of this regulation, a provider shall meet the requirements of §B of this regulation by the end of the second full fiscal year after the fiscal year in which the provider obtains its initial certificate of registration.

(2) For the time specified in §I(3) of this regulation, a provider may meet the operating reserve requirements in §B of this regulation if the provider has a binding agreement with a financial institution that unconditionally obligates the financial institution to furnish the provider credit in the amount of the reserve required by §B of this regulation.

(3) A provider may use the exception allowed by §I(2) of this regulation only until the earlier of the:

(a) End of the tenth full fiscal year after the fiscal year in which the provider obtains its initial certificate of registration; or

(b) Date on which the binding agreement with a financial institution expires.

J. Quarterly Reporting. For the first 5 years following the issuance of an initial certificate, a provider shall submit to the Department on a quarterly basis a financial statement that specifies and describes the status of each reserve required by this regulation.

K. Investment Reserves. Reserves shall be maintained in reasonably liquid form in the judgment of the provider and in accordance with the provider's investment policies. For assets held to satisfy the reserves required by this regulation, the provider shall list the assets by type, number, and value. The list shall be disclosed in the provider's most recent certified financial statement or in a letter to the Department from the provider's certified public accountant. The certified financial statement or letter shall be submitted with the provider's application for a renewal certificate of registration.

Md. Code Regs. 32.02.02.14