Rules governing valuation of life insurance reserves.
Purpose:
To include provisions from Actuarial Guideline 38.
Text of proposed rule:
Subdivisions (i) through (r) of Section 98.3 are hereby relettered (j) through (s) and a new subdivision (i) is added to read as follows:
(i) “Insurer” means a life insurance company, fraternal benefit society or an accredited reinsurer that reinsures life insurance, whether within or outside the state, or writes life insurance outside the state.
A new subdivision (w) is added to Section 98.4 to read as follows:
(w)(1) For the purposes of this section, statistical agent means an entity with proven systems for protecting the confidentiality of individual insured and insurer information; demonstrated resources for, and history of, ongoing electronic communications and data transfer ensuring data integrity with insurers that are the statistical agent's members or subscribers; and a history of and means for aggregation of data and accurate promulgation of the experience modifications in a timely manner.
(2)(i) This subdivision applies to insurers where the sum of the premiums received as specified in (a), (b), (c), and (d) of this paragraph exceed ten million dollars for the previous calendar year:
(a) Direct individual life insurance premiums,
(b) Reinsurance assumed life insurance premiums,
(c) Direct individually solicited group life insurance premiums, and
(d) Reinsurance assumed individually solicited group life insurance premiums.
(ii) Every insurer subject to this subdivision shall annually file on or before July 1 with the superintendent, or at the direction of the superintendent, with either the National Association of Insurance Commissioners or with a statistical agent designated by the superintendent, a statistical report, in a form specified by the superintendent, showing mortality, expenses, lapses, and such other company experience information as the superintendent may deem necessary or expedient for the administration of the provisions of the Insurance Law or this Part, with respect to individual life insurance policies and individually solicited group life insurance certificates issued on or after January 1, 1990.
Section 98.9(c)(2)(ii)(b) is amended to read as follows:
(b) Regarding the reserve calculation, this example differs from the one in [section 98.9(c)(1)(i)] subparagraph (i) of this paragraph in that there is no specified event that has to occur in order for the insurer to impose a premium increase; however, the insurer must provide an additional benefit to the policyholder if it exercises this right. Thus the insurer does not have an unrestricted right to impose an increase after ten years. If the contract contains provisions that require additional benefits be provided to the policyholder in the event of a premium increase, even if these benefits are lost if not claimed within a stated time frame, then the initial premiums shall be treated as guaranteed for the entire 30 year period. It would be contrary to the conservative nature of statutory accounting to treat this policy the same as one in which the ability to raise premiums does not require that additional benefits be provided. Therefore, the initial segment for this policy is 30 years.
The opening paragraph of section 98.9(c)(2)(viii) is amended to read as follows:
(viii) When a universal life policy guarantees coverage to remain in force as long as the accumulation of premiums paid satisfies the secondary guarantee requirement, for policies issued on or after January 1, 2003, the steps [outlined] specified in clauses (a) [- (ix)] through (i) of this subparagraph shall be used to calculate the reserves.
Section 98.9(c)(2)(viii)(b) is renumbered to be Section 98.9(c)(2)(viii)(b)(1), to read as follows:
(b)(1) For purposes of applying section 98.7(b)(1) of this Part, the specified premiums are the minimum gross premiums derived in clause (a) of this subparagraph. Consistent with section 98.5 of this Part, items in clauses (c) through (i) of this subparagraph shall be calculated on a segmented basis, using the segments that section 98.5 of this Part defines for the product. Therefore, in clauses (c) through (i) of this subparagraph, the term fully fund the guarantee shall mean fully funding the guarantee to the end of each possible segment. The term remainder of the secondary guarantee period shall mean the remainder of each possible segment. The reserve shall be no less than the greatest reserve determined by applying the methodology of this subparagraph to the end of each possible segment.
A new section 98.9(c)(2)(viii)(b)(2) is added to read as follows:
(2) For policies issued on or after January 1, 2007 and prior to January 1, 2011, for purposes of applying section 98.7(b)(1) of this Part, an insurer may use a lapse rate of no more than two percent per year for the first five years, followed by no more than one percent per year to the policy anniversary specified in the following table based on issue age, and zero percent per year thereafter. If the period of time from the date of policy issuance to the date of the applicable policy anniversary age in the table is less than five years, then an insurer may use a lapse rate of no more than two percent per year for that period of time, and zero percent per year thereafter.
Issue Age
Policy Anniversary after which the lapse rate is zero
0–50
30th policy anniversary
51 – 60
Policy Anniversary age 80
61 – 70
20th policy anniversary
71 – 89
Policy anniversary age 90
90 and over
no lapse
Section 98.9(c)(2)(viii)(e) is amended to read as follows:
(e) Compute the net single premium on the valuation date for the coverage provided by the secondary guarantee for the remainder of the secondary guarantee period, using the applicable valuation table and select factors as prescribed in section 98.4(a) of this Part, or Part 100 of this Title (Regulation 179), if applicable. For purposes of calculating the net single premium for policies issued on or after January 1, 2007 and prior to January 1, 2011, a lapse rate subject to the same criteria as the lapse rate used in applying clause (b) of this subparagraph may be used.
Section 98.9(c)(2)(viii)(h)(2) is amended to read as follows:
(2) Calculate both net premiums using the maximum allowable valuation interest rate and the minimum mortality standards allowable for calculating basic reserves. However, except for policies issued on or after January 1, 2007 through January 1, 2011, if no future premiums are required to support the guarantee period being valued, there is no reduction for surrender charges. If the resulting amount is less than the sum of the basic and deficiency reserve from clause (b) of this subparagraph, then the basic and deficiency reserves to be used for the purposes of section 98.7(b)(1)(vi)(a) of this Part are those calculated in clause (b) of this subparagraph, and no further calculation is required.
A new section 98.9(c)(2)(viii)(j) is added as follows:
(j) With respect to any policy issued pursuant to this subparagraph, on or after January 1, 2007 and prior to January 1, 2011, the insurer shall annually submit an actuarial opinion and memorandum on or before March 1, in form and substance satisfactory to the superintendent, which satisfies the requirements of Part 95 of this Title (Regulation 126). Reserves established in accordance with this subparagraph shall be increased by any additional reserves required by the stand-alone asset adequacy analysis.
Text of proposed rule and any required statements and analyses may be obtained from:
Andrew Mais, Insurance Department, 25 Beaver St., New York, NY 10004, (212) 480-2285, e-mail: amais@ins.state.ny.us
Data, views or arguments may be submitted to:
Frederick Andersen, Insurance Department, One Commerce Plaza, Albany, NY 12257, (518) 474-7929, e-mail: fanderse@ins.state.ny.us
Public comment will be received until:
45 days after publication of this notice.
Regulatory Impact Statement
1. Statutory authority:
The Superintendent's authority for the Second Amendment to Regulation No. 147 (11 NYCRR 98) derives from sections 201, 301, 1304, 1308, 4217, 4218, 4240 and 4517 of the Insurance Law.
These sections establish the Superintendent's authority to promulgate regulations governing reserve requirements for life insurers and fraternal benefit societies. Sections 201 and 301 of the Insurance Law authorize the Superintendent to effectuate any power accorded to him by the Insurance Law, and prescribe regulations interpreting the Insurance Law.
Section 1304 of the Insurance Law enables the Superintendent to require any additional reserves as necessary on account of life insurers' policies, certificates and contracts.
Section 1308 of the Insurance Law describes when reinsurance is permitted, and the effect that reinsurance will have on reserves.
Section 4217 requires the Superintendent to annually value, or cause to be valued, the reserve liabilities (“reserves”) for all outstanding policies and contracts of every life insurance company doing business in New York. Section 4217(a)(1) specifies that the Superintendent may certify the amount of any such reserves, specifying the mortality table or tables, rate or rates of interest and methods used in the calculation of the reserves. Reserving has not historically included lapse as a factor in calculations because it was not relevant to traditional forms of life insurance contracts, and therefore Section 4217 does not expressly include references to lapses. However, new products have been developed that were not contemplated at the time Section 4217 was written, such that lapses may be relevant in reserve calculations in some cases.
Section 4217(c)(6)(C) provides that reserves according to the commissioners reserve valuation method for life insurance policies providing for a varying amount of insurance or requiring the payment of varying premiums shall be calculated by a method consistent with the principles of section 4217(c)(6).
Section 4217(c)(6)(D) permits the Superintendent to issue, by regulation, guidelines for the application of the reserve valuation provisions for section 4217 to such policies and contracts as the Superintendent deems appropriate.
Section 4217(c)(9) requires that, in the case of any plan of life insurance that provides for future premium determination, the amounts of which are to be determined by the insurance company based on then estimates of future experience, or in the case of any plan of life insurance or annuity that is of such a nature that the minimum reserves cannot be determined by the methods described in section 4217(c)(6) and section 4218, the reserves that are held under the plan must be appropriate in relation to the benefits and the pattern of premiums for that plan, and be computed by a method that is consistent with the principles of sections 4217 and 4218, as determined by the Superintendent.
Section 4218 requires that when the actual premium charged for life insurance under any life insurance policy is less than the modified net premium calculated on the basis of the commissioners reserve valuation method, the minimum reserve required for the policy shall be the greater of either the reserve calculated according to the mortality table, rate of interest, and method actually used for the policy, or the reserve calculated by the commissioners reserve valuation method replacing the modified net premium by the actual premium charged for the policy in each contract year for which the modified net premium exceeds the actual premium.
Section 4240(d)(6) states that the reserve liability for variable contracts shall be established in accordance with actuarial procedures that recognize the variable nature of the benefits provided and any mortality guarantees provided in the contract. Section 4240(d)(7) states that the Superintendent shall have the power to promulgate regulations, as may be appropriate, to carry out the provisions of this section.
Section 4517(b)(2) provides, for fraternal benefit societies, that reserves according to the commissioners reserve valuation method for life insurance certificates providing for a varying amount of benefits, or requiring the payment of varying premiums, shall be calculated by a method consistent with the principles of subsection (b).
2. Legislative objectives:
Maintaining solvency of insurers doing business in New York is a principle focus of the Insurance Law. One way the Insurance Law seeks to ensure solvency is by requiring all insurers and fraternal benefit societies authorized to do business in New York State to hold reserve funds necessary in relation to the obligations made to policyholders. At the same time, insurers and policyholders benefit when the insurer has adequate capital for company uses such as expansion, product and other forms of business development.
3. Needs and benefits:
The regulation is necessary to help ensure the solvency of life insurers doing business in New York. The original version of Regulation No. 147, which incorporated the National Association of Insurance Commissioners (NAIC) Valuation of Life Insurance Policies model regulation (adopted in 1999), was permanently adopted in 2003. In 2004, the Department and other states became aware that some insurers were creating new products in order to avoid the reserve methodologies described in Regulation No. 147. As a result, the NAIC began developing an Actuarial Guideline in 2004 that addressed the concerns of the Department and other regulators by eliminating any perceived ambiguity in the standards for policies issued July 1, 2005 and later. This revision was adopted by the NAIC in October 2005 and Regulation No. 147 was amended on an emergency basis to reflect the principles of section 4217 of the Insurance Law and the NAIC standards for policies issued July 1, 2005 and later. The amendment was permanently adopted effective January 10, 2007.
In September 2006, the NAIC adopted a new version of Actuarial Guideline 38, which included provisions on lapse decrements and a separate asset adequacy analysis requirement for certain universal life with secondary guarantee policies. This amendment, which includes these provisions, is consistent with the NAIC. Consistent with the NAIC, these provisions will only be in effect for policies issued on or after January 1, 2007 and prior to January 1, 2011.
The lapse provision was intended to lessen what some insurers saw as redundancy in the reserves for these products. The January 1, 2011 sunset was added because the lapse provision is seen by the NAIC as being an interim resolution, with the expectation that other ways to address the reserve issue will be developed by 2011.
The separate asset adequacy analysis is intended to place a floor value on the reserve after inclusion of the lapse provision.
The regulation requires insurers to submit certain data because experience information is necessary in order to help the Department monitor the ongoing adequacy of the reserve established pursuant to this regulation, particularly as the Department considers the implementation of a more principles-based reserve system that puts more emphasis on an insurer's own experience data.
4. Costs:
Administrative costs to most insurers and fraternal benefit societies authorized to do business in New York State will be minimal. Since the majority of the reserve requirements and methodologies included in this regulation have been in effect since the adoption of the first amendment to this regulation in January 2007, most insurers would only need to update their current computer programs to implement the new reserve methodologies for policies with secondary guarantees. An insurer that needs to modify its current system could produce the modifications internally, or if the system was purchased from a consultant, have its consultant produce the modifications. The cost associated with these modifications is estimated to be less than $5,000. The cost would include the actual modifications, as well as the testing and implementation of the new software. Once the modifications to the system have been developed, no additional costs should be incurred. Note that these are minimum standards, and an insurer need not modify its current computer systems if it continues to maintain higher reserves.
The impact of the additional provisions is estimated to be a ten percent decrease in reserves, but only for certain universal life with secondary guarantee policies issued on or after January 1, 2007 and prior to January 1, 2011. Reserves on policies issued before January 1, 2007 or on or after January 1, 2011 will not be impacted by these provisions.
Costs to the Insurance Department will be minimal, as existing personnel are available to verify that the appropriate reserves are held by insurers for policies affected by the amendment to Regulation No. 147. There are no costs to other government agencies or local governments.
The requirement of a stand-alone asset adequacy analysis should involve minimal costs for insurers and the Department because such analyses are already required under Sections 95.3(c) and 95.6 of 11 NYCRR 95 (Regulation 126) in view of the interest-sensitive nature of the applicable business.
The cost of submitting data for a company that already voluntarily supplies data as part of the Society of Actuaries data call is expected to be less than $10,000. For a company that does not currently contribute to industry studies, the cost is expected to be up to $50,000. The regulation, however, provides an exemption from submitting data for those insurers that do not meet the premium criteria specified in the regulation.
5. Local government mandates:
The regulation imposes no new programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district.
6. Paperwork:
The regulation imposes reporting requirements related to the actuarial opinion and memorandum required for insurers using the new reserve standards for universal life with secondary guarantee insurance policies. Additionally, the regulation requires that certain insurers provide data for mortality, expenses, lapses, and other company specific experience in a statistical report for life insurance policies and individually solicited group life insurance certificates issued on or after January 1, 1990.
7. Duplication:
The regulation does not duplicate any existing law or regulation.
8. Alternatives:
One alternative was to not include provisions of Actuarial Guideline 38 added in the version adopted by the NAIC in September 2006. These provisions consisted of lapse decrements and a separate asset adequacy analysis requirement when valuing certain universal life with secondary guarantee policies. In order to be consistent with the NAIC, the Department included these provisions in this amendment to Regulation No. 147.
The Department also considered requiring all insurers that issue life insurance or individually solicited group life insurance to provide data in the form of a statistical report. However, the amendment includes an exemption for insurers where the premiums are lower than the criteria specified in the regulation.
9. Federal standards:
There are no federal standards in this subject area.
10. Compliance schedule:
This amendment to the regulation applies to financial statements filed on or after December 31, 2007. Since asset adequacy analysis was already required for applicable blocks of business under Part 95 (Regulation 126), the requirement of a stand-alone asset adequacy analysis should not prevent insurers from having ample time to achieve full compliance. Additionally, the statistical report required for insurers meeting the criteria specified in the regulation is due annually on July 1, which gives insurers ample time to prepare the required report.
Regulatory Flexibility Analysis
1. Small businesses:
The Insurance Department finds that this rule will not impose any adverse economic impact on small businesses and will not impose any reporting, recordkeeping or other compliance requirements on small businesses. The basis for this finding is that this rule is directed at all insurers and fraternal benefit societies authorized to do business in New York State, none of which fall within the definition of “small business” as found in section 102(8) of the State Administrative Procedure Act. The Insurance Department has reviewed filed Reports on Examination and Annual Statements of authorized insurers and fraternal benefit societies, and believes that none of them fall within the definition of “small business”, because there are none that are both independently owned and have under one hundred employees.
2. Local governments:
The regulation does not impose any impacts, including any adverse impacts, or reporting, recordkeeping, or other compliance requirements on any local governments.
Rural Area Flexibility Analysis
1. Types and estimated number of rural areas:
Insurers and fraternal benefit societies covered by the regulation do business in every county in this state, including rural areas as defined under SAPA 102(10).
2. Reporting, recordkeeping and other compliance requirements; and professional services:
The amendment to this regulation discusses the submission of data by insurers that exceed the premium criteria specified in the regulation for individual life insurance policies and individually solicited group life insurance certificates issued on or after January 1, 1990. It establishes reserve requirements for certain types of life insurance, including universal life insurance with secondary guarantees. The amendment also requires that a stand-alone asset adequacy analysis be performed for certain universal life insurance with secondary guarantee policies.
3. Costs:
Administrative costs to most insurers and fraternal benefit societies authorized to do business in New York State will be minimal. Since the majority of the reserve requirements and methodologies included in this regulation have been in effect since the adoption of the first amendment to this regulation in January of 2007, most insurers would only need to update their current computer programs to implement the new reserve methodologies for policies with secondary guarantees. An insurer that needs to modify its current system could produce the modifications internally, or if the system was purchased from a consultant, have its consultant produce the modifications. The cost associated with these modifications is estimated to be less than $5,000. The cost would include the actual modifications, as well as the testing and implementation of the new software. Once the modifications to the system have been developed, no additional costs should be incurred due to those requirements. Note that these are minimum standards, and an insurer need not modify its current computer systems if it continues to maintain higher reserves.
The impact of the additional provisions is estimated to be a ten percent decrease in reserves, only for certain universal life with secondary guarantee policies issued on or after January 1, 2007 and prior to January 1, 2011. Reserves on policies issued before January 1, 2007 or on or after January 1, 2011 will not be impacted by these provisions.
The requirement of a stand-alone asset adequacy analysis should involve minimal costs, because such analyses are already required under sections 95.3(c) and 95.6 of 11 NYCRR 95 (Regulation 126) in view of the interest-sensitive nature of the applicable business.
The cost of submitting data for a company that already voluntarily supplies data as part of the Society of Actuaries data call is expected to be less than $10,000. For a company that does not currently contribute to industry studies, the cost is expected to be up to $50,000. The regulation however provides an exemption from submitting data for those insurers that do not meet the premium criteria specified in the regulation.
4. Minimizing adverse impact:
The regulation does not impose any adverse impact on rural areas.
5. Rural area participation:
Numerous discussions with affected insurers have taken place during the course of developing a national standard through the National Association of Insurance Commissioners. Insurers that may be impacted by this standard are aware of the issues, and should have already formed estimates of the impact of the increase in costs and decrease in reserves. Additionally, the Department had extensive discussions with the Life Insurance Council of New York (LICONY) regarding this regulation and this amendment met with LICONY's approval. Moreover, discussion of the proposed rule making was included in the Insurance Department's regulatory agenda, which was published in the June 27, 2007 issue of the State Register.
Job Impact Statement
Nature of impact:
The Insurance Department finds that this rule will have little or no impact on jobs and employment opportunities. This regulation sets standards for setting life insurance reserves for insurers and fraternal benefit societies. The regulation is unlikely to impact jobs and employment opportunities.
Categories and number affected:
No categories of jobs or number of jobs will be affected.
Regions of adverse impact:
This rule applies to all insurers and fraternal benefit societies authorized to do business in New York State. There would be no region in New York which would experience an adverse impact on jobs and employment opportunities.
Minimizing adverse impact:
No measures would need to be taken by the Department to minimize adverse impacts.
Self-employment opportunities:
This rule would not have a measurable impact on self-employment opportunities.
