Sec. 95.10. Additional considerations for analysis

(a) Aggregation.

For the asset adequacy analysis for the statement of actuarial opinion provided in accordance with section 95.8 of this Part, reserves and assets may be aggregated as follows:

(1) Aggregation of the results of asset adequacy analysis of one or more products within a line of business as defined in section 95.4(i) of this Part, the reserves for which prove through analysis to be redundant, with the results of one or more products within a line of business, the reserves for which prove through analysis to be deficient. Where two or more products within a line of business are aggregated because they are backed by an investment segment, the rationale for each such segment shall be provided. The liability cash flows shall be projected separately for at least products with cash settlement options and products without cash settlement options.

(2) With the prior written approval of the superintendent, based on the following guidelines, aggregation of the results of asset adequacy analysis for one or more lines of business, the reserves for which prove through analysis to be redundant, with the results of one or more lines of business, the reserves which prove to be deficient.

(i) In order to aggregate one or more lines of business, any cash-flow testing of assets and liabilities must be performed separately and the results reported for each line of business being aggregated.

(ii) If the asset adequacy analysis is done on an aggregate basis for lines of business with different testing periods, the common reference date shall be the valuation date.

(iii) If aggregation is used for one or more lines of business, the appointed actuary must provide, to the satisfaction of the superintendent, the following in the memorandum:

(a) a demonstration that the asset adequacy results for the various products or lines of business are developed using consistent economic scenarios or are subject to mutually independent risks, e.g., the likelihood of events impacting the adequacy of the assets supporting the redundant reserves is generally unrelated to the likelihood of events impacting the adequacy of the assets supporting the redundant reserves is generally unrelated to the likelihood of events impacting the adequacy of the assets supporting the deficient reserves;

(b) detailed descriptions of the assumptions used to develop the asset and liability cash flows; and

(c) where reserve redundancies of participating products or products with nonguaranteed elements are used to offset deficiencies, in addition to a description of dividends, experience rating or declaration of additional amounts, the memorandum shall include for the level scenario, a comparison of the modeled dividends and additional amounts to those actually paid over the recent past.

(b) Selection of assets for analysis.

(1) The determination or selection of assets should consider the investment allocation method used by the company (e.g., segmentation, dedicated or allocated assets and/or a proration of segmented, dedicated, or allocated assets in the general account). In allocating or assigning assets to the reserve liabilities (for asset adequacy analysis purposes) for which an opinion is rendered, the appointed actuary shall ascertain and report whether or not such selection is such that the adequacy of assets for other liabilities is prejudiced or endangered and shall include an appropriate statement as to such ascertainment. For example, if the assets remaining after such selection were long term assets with market value below book value or were bonds in danger of default, and the other liabilities were short term liabilities where cash is needed, the selection of the assets could have an adverse effect on the other liabilities.

(2) The appointed actuary shall analyze those assets held in support of the reserves which are the subject of specific analysis, hereafter called “specified reserves.”

(i) Assets shall be assigned or allocated to each line of business so that any asset adequacy analysis may be performed for each line separately.

(ii) An asset may be allocated over several groups of specified reserves.

(iii) Where a portion of a particular asset supports a group of specified reserves, that portion cannot support any other group of specified reserves.

(iv) The annual statement value of the assets held on support of the specified reserves shall not exceed the annual statement value of the specified reserves, except as provided in subdivision (c) of this section.

(v) If the method of assets allocation is not consistent from year to year, the extent of its inconsistency should be described in the supporting memorandum.

(c) Use of assets supporting the interest maintenance reserve and the asset valuation reserve.

(1) An appropriate allocation of assets in the amount of the Interest Maintenance Reserve (IMR), whether positive or negative, must be used in any asset adequacy analysis.

(2) Analysis of risks regarding asset default or write-down may include an appropriate allocation of assets supporting the Asset Valuation Reserve (AVR); these AVR assets may not be applied for any other risks with respect to reserve adequacy.

(3) Analysis of these and other risks may include assets supporting other mandatory or voluntary reserves available to the extent not used for risk analysis and reserve support.

(4) The amount of the assets used for the AVR and the IMR must be disclosed in the Table of Reserves and Liabilities of the opinion and in the memorandum.

(5) The method used for selecting particular assets or allocated portions of assets must be disclosed in the memorandum.

(d) Required interest scenarios.

(1) For the purpose of performing the asset adequacy analysis required by this Part, the appointed actuary is expected to follow standards which are adopted by the Actuarial Standards Board and are not inconsistent with this Part; nevertheless, the appointed actuary must consider in the analysis the effect of at least the following interest rate scenarios:

(i) level with no deviation;

(ii) uniformly increasing over 10 years at a half percent (0.5%) per year and then level;

(iii) uniformly increasing at one percent per year over five years and then uniformly decreasing at one percent per year to the original level at the end of the 10 years and then level;

(iv) an immediate increase of three percent and then level;

(v) uniformly decreasing over 10 years at a half percent (0.5%) per year and then level;

(vi) uniformly decreasing at one percent per year over five years and then uniformly increasing at one percent per year to the original level at the end of 10 years and then level; and

(vii) an immediate decrease of three percent and then level.

(2) For these and other scenarios which may be used, projected interest rates for a five year treasury note need not be reduced beyond the point where such five year treasury note yield would be at 50 percent of its initial level.

(3) The beginning interest rates may be based on interest rates for new investments as of the valuation date similar to recent investments allocated to support the products being tested or be based on an outside index, such as treasury yields, of assets of the appropriate length on a date close to the valuation date. Whatever method is used to determine the beginning yield curve and associated interest rates should be specifically defined. The beginning yield curve and associated interest rates should be consistent for all interest rate scenarios.

(4) In the event of a projected negative surplus (based on a comparison of market values of assets and liabilities at the end of the projection) for a prescribed scenario for any line of business, the actuary shall modify that scenario by decreasing the total interest rate change in 100 bases point intervals until there is a projected positive surplus. The projected results at each interval tested should be provided. In addition, the actuary shall use additional assets to determine the approximate additional amount so that there is no longer any negative surplus under the prescribed scenario without modification under paragraph (1) of this subdivision.

(5) It is recognized that the adequacy of reserves and other actuarial items which are the subject of the opinion required by section 95.8 of this Part is a matter of judgment which the actuary rendering such opinion is to make in accordance with section 4217 of the Insurance Law and this Part. Consequently, failure under one or more of the scenarios prescribed by paragraph (1) of this subdivision would not necessarily prevent such actuary from expressing the opinion required by section 95.8 of this Part without qualification. However, the actuary shall furnish an analysis of the modified scenarios and of additional amounts under the prescribed scenarios without modification. If the actuary then opines that additional reserves are necessary, the actuary shall then explain and justify how the actuary determined the additional amount. The superintendent retains the right to request additional information with regard to these matters.

(e) Withdrawal or lapse rates.

For interest sensitive products, such as single premium cash value deferred annuities of universal life insurance, the withdrawal rates might be sensitive to changes in new money rates and to market rates of competitors. The description of the withdrawal rates should include the formula along with sample rates or the tables of rates along with appropriate descriptions as to their applicability.

(f) Calls.

(1) In the absence of credible experience, the following are examples of acceptable procedures for coupon bonds without a call premium:

(i) assume no calls until the current interest rate is two percent less than the coupon rate, and then assume 100 percent call;

(ii) assume calls begin when the coupon rate exceeds the current interest rate and calls increase to 100 percent when the spread reaches three percent; and

(iii) assume a 100 percent call when the present value of the remaining bond cash flows, when discounted at a level interest rate at the then rate for the appropriate scenario, exceeds the call price plus an expense margin plus one percent.

(2) The following are examples of acceptable procedures for coupon bonds with a call premium of up to five percent:

(i) assume no calls until the current interest rate is three percent less than the coupon rate and then assume 100 percent call;

(ii) assume calls begin when the coupon rate exceeds the current interest rate by one percent and calls increase to 100 percent when the spread reaches four percent; and

(iii) assume a 100 percent call when the present value of the remaining bond cash flows, when discounted at a level interest rate at the then rate for the appropriate scenario, exceeds the call price plus an expense margin plus one percent.

(3) In case of Government National Mortgage Association obligations, other mortgage backed securities and collateralized mortgage obligations, some prepayment should be assumed such as, for example, five percent when the current interest rate equals or exceeds the coupon rate, with prepayments increasing to 50 percent when the coupon rate exceeds the current interest rate by four percent, or by linking the ratio of the market value to the loan balance to multiples of the Public Securities Association standard prepayment model.

(4) Other procedures may be used for other types of obligations and other call premiums.

(5) Any comparison of coupon rate and current interest rates and any comparison of present values with amount payable on call should be for like type and quality of assets and remaining duration to maturity.

(g) Defaults.

In the absence of credible experience, it will be acceptable to make annual expense charges (or reductions in annual investment income) not less than 10 percent of the AVR maximum reserve for the bond, preferred stock, common stock or mortgage.

(h) Testing period.

In general, the testing period for asset adequacy analysis should extend far enough into the future to cover the major portion of the future run out of insurance cash flows. This period may vary by product. For example:

(1) For group guaranteed interest contracts with a lump sum payout and a maturity date of 10 or less years to run, full surrender should be assumed on the maturity date and the testing period should extend to the last maturity date.

(2) In case of individual single premium cash value deferred annuities, full surrender of any persisting annuities should be assumed at the end of a 10 year testing period, unless specific approval is obtained for a longer period.

(3) For lifetime annuities a testing period of at least 20 years, and perhaps longer, would be appropriate.

(4) For life insurance, a testing period of at least 20 years, and perhaps longer, would be appropriate.

(i) Market value of projected results.

The market value as of the end of the projection or testing period of any remaining assets and/or borrowed funds and of any remaining liabilities, and the net thereof, shall be provided based on assuming that the interest rate after such date would be frozen at the prevailing rate as of that date for the appropriate interest rate scenario. In the case of liabilities with cash values, where the assumption of 100 percent lapse is used, the value of the remaining liabilities would be the cash value. In the case of noncash value liabilities, the present value of future liability payments and expenses shall be discounted at the prevailing scenario interest rate. Where such market values are discounted back to the valuation date, the procedure for discounting shall be explained and justified based on the scenario. The date as of which market values are taken shall be clearly labeled.

(j) Documentation.

The appointed actuary shall retain in file, for at least seven years, sufficient documentation so that it will be possible to determine the procedures followed, the analyses performed, the bases for assumptions and the results obtained.