DFS-05-12-00010-P Valuation of Annuity, Single Premium Life Insurance, Guaranteed Interest Contract and Other Deposit Reserves

2/1/12 N.Y. St. Reg. DFS-05-12-00010-P

NEW YORK STATE REGISTER

VOLUME XXXIV, ISSUE 5

February 01, 2012

RULE MAKING ACTIVITIES

DEPARTMENT OF FINANCIAL SERVICES

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. DFS-05-12-00010-P

Valuation of Annuity, Single Premium Life Insurance, Guaranteed Interest Contract and Other Deposit Reserves

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Amendment of Part 99 (Regulation 151) of Title 11 NYCRR.

Statutory authority:

Financial Services Law, sections 202, 301, and 302; and Insurance Law, sections 301, 1304, 4217 and 4517

Subject:

Valuation of Annuity, Single Premium Life Insurance, Guaranteed Interest Contract and Other Deposit Reserves.

Purpose:

Use of substandard annuity mortality tables in valuing impaired lives under individual single premium immediate annuities.

Text of proposed rule:

A new subdivision (j) is added to section 99.6 to read as follows:

(j) Use of substandard annuity mortality tables in valuing impaired lives under individual single premium immediate annuities.

(1) This subdivision applies to any individual single premium immediate annuity contract issued on or after January 1, 2012 not covered by subdivision (i) of this section, but for which medical records indicate the expectation of life has been reduced and for which the premium charged reflects that reduction.

(2) An insurer may use a substandard annuity mortality table where there is a medical assessment of the annuitant, or measuring life, based on relevant hospital records, treating physicians' reports, or independent medical evaluations that support at least a 25% reduction in the expectation of life, based on either the current valuation table or the insurer's pricing table, consistently applied, compared to a normally healthy individual of the same age and gender. The insurer shall retain the information used in the medical assessment in its underwriting file as proof of the individual's impaired health and shortened longevity for as long as the contract remains in force.

(3) Minimum Reserves

(i) The minimum reserves for a contract subject to this paragraph shall be the reserves obtained by making a constant addition to the mortality rate of the otherwise applicable valuation mortality table, as specified in section 99.10 of this Part. The constant addition shall be determined as follows:

(a) Calculate the present value of future benefits at issue for each contract using a rated up age, the applicable valuation mortality table, and the single premium immediate annuity valuation interest rate. The rated up age must produce an expectation of life under this valuation mortality table whose percent reduction from the actual age expectation of life under this table is not greater than the percent reduction in the expectation of life supported by the medical assessment described in paragraph (2) of this subdivision; and

(b) Solve for the constant addition to the true age mortality rates such that the present value of future benefits at issue is equal to or greater than the present value obtained in clause (a) of this subparagraph. The base mortality table and the valuation interest rate shall be the same as those specified in clause (a) of this subparagraph.

(ii) The constant addition to the mortality table shall be made as of the issue date and, once determined, held constant for the period of time that the contract remains in force.

(iii) For every contract subject to this subdivision, the insurer shall maintain records of actual to expected mortality to monitor the appropriateness of the substandard mortality. The appointed actuary must comment on the appropriateness of the substandard mortality and report any material deviations in the actuarial memorandum that supports the actuarial opinion required by Part 95 of this Title (Insurance Regulation 126). The fact that an insurer has held minimum reserves as described in this paragraph shall not relieve the appointed actuary from considering whether the reserves are adequate.

Text of proposed rule and any required statements and analyses may be obtained from:

David Neustadt, New York State Department of Financial Services, One State Street, New York, NY 10004, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Frederick Andersen, Department of Financial Services, One Commerce Plaza, Albany, NY 12257, [phone], email: [e-mail]

Public comment will be received until:

45 days after publication of this notice.

This action was not under consideration at the time this agency's regulatory agenda was submitted.

Regulatory Impact Statement

1. Statutory authority: The Superintendent's authority for the adoption of 11 NYCRR 99 (Insurance Regulation 151) derives from sections 202, 301, and 302 of the Financial Services Law ("FSL") and sections 301, 1304, 4217, 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.

Section 202 of the Financial Services Law establishes the office of the Superintendent and designates the Superintendent to be the head of the Department of Financial Services.

FSL section 301 establishes the powers of the Superintendent generally. FSL section 302 and Insurance Law section 301, in material part, authorize the Superintendent to effectuate any power accorded to him by the Insurance Law, the Banking Law, the Financial Services Law, or any other law of this State and to prescribe regulations interpreting the Insurance Law.

Section 1304 of the Insurance Law requires insurers to maintain reserves for life insurance policies and certificates and annuity contracts in force according to prescribed tables of mortality and rates of interest.

Section 4217(c)(6)(D) of the Insurance Law authorizes the Superintendent to issue guidelines for the application of the reserve valuation provisions of section 4217 to the policies and contracts that the Superintendent deems appropriate.

Section 4517(c)(2) of the Insurance Law requires fraternal benefit societies to comply with the minimum valuation standards of section 4217 of the Insurance Law for life insurance and annuities issued on or after January 1, 1980.

Sections 4217(a)(3) and 4517(c)(3) of the Insurance Law give the Superintendent the discretion, in appropriate circumstances, to vary the standards of mortality applicable to policies of insurance on substandard lives.

2. Legislative objectives: Maintaining solvency of insurers doing business in New York is a principal focus of the Insurance Law. One fundamental 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 policy or contract holders. The Insurance Law prescribes the mortality tables and interest rates to be used for calculating such reserves.

3. Needs and benefits: This amendment allows the use of substandard annuity mortality tables in valuing impaired lives under individual single premium immediate annuities. Use of a substandard annuity mortality table or the use of a constant addition to the standard mortality rate allows the insurer to recognize the impaired health of the annuitant. A substandard rating may only be applied if there is documented medical proof that there is at least a 25% reduction in the life expectancy of the annuitant when compared to a normal healthy individual of the same age and gender.

The use of a substandard mortality table is not mandatory for valuing the reserves associated with individual single premium immediate annuities on impaired lives. The amendment will appropriately decrease reserves on in-force business for New York authorized life insurers that meet the conditions of the regulation and choose to value these contracts using substandard mortality. The amendment may benefit consumers with impaired health by enabling insurers to keep costs at a lower level because they will not need to hold standard reserves. Because insurers may hold lower reserves, they will be more likely to sell the product because the product will be less capital intensive and insurers may offer these annuities at a more competitive price to the annuitant. This standard was adopted by the National Association of Insurance Commissioners in its Actuarial Guideline IX-C in 2001. Most states are already using this standard since Actuarial Guidelines are generally adopted automatically by most states when they adopt the Accounting Practices and Procedures Manual.

4. Costs: This amendment allows for the use of a constant addition to the mortality rate used to calculate reserves for impaired lives under individual single premium immediate annuities. The constant addition is a specified number of extra deaths per 1000 lives that is added to the mortality rate. The constant addition to the mortality rate will lower reserves held on these contracts due to the shortened life expectancy of the annuitant. However, an insurer need not modify its current computer systems if it continues to maintain higher reserves, which it always has the option to do.

Administrative costs to most insurers and fraternal benefit societies authorized to do business in New York State will be minimal. Although the insurer may have additional administrative costs, they are likely to be offset by being permitted to establish lower reserves. Since many states have already adopted the lower reserve requirements, insurers that already comply with this standard in other states will likely need to make only minor modifications to their computer systems for use in New York. Further, this is voluntary on the insurer's part, and it may continue to maintain the higher reserves if it does not choose to do the additional things required by this Part to maintain the lower reserves.

Costs to the Department of Financial Services for this amendment will be minimal, as existing personnel are available to verify that the appropriate reserves are held by insurers for contracts affected by the amendment to Insurance Regulation 151. There are no costs to other government agencies or local governments.

5. Local government mandates: The amendment to 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 requires that insurers maintain records of actual to expected mortality to monitor the appropriateness of the substandard mortality. The regulation requires no additional paperwork for the Department.

7. Duplication: The amendment to the regulation does not duplicate any existing law or regulation.

8. Alternatives: As part of the drafting process, the regulation was sent out to the following groups: The Life Insurance Council of New York (LICONY), New York Public Interest Research Group, Consumer Federation of America, Division of Consumer Protection at the Department of State ("DCP"), The Insurance Forum, and the American Association of Retired Persons. The Department met with the DCP on November 28, 2011 to discuss questions they had on the draft regulation. The DCP recommended no additional changes being made to the text of the amendment. Additionally, the Department received some minor comments from LICONY on December 8, 2011. After discussion, LICONY recommended no changes to the text of the amendment. The Department received no comments from any of the other consumer groups.

The only alternative considered was to not allow the use of substandard mortality for individuals with impaired health and documented lower life expectancy. However, this would require New York authorized life insurers and fraternal benefit societies to maintain higher reserve requirements on these contracts than insurers in states that have adopted the 2001 NAIC model. This might raise the cost to consumers because insurers would be subject to a higher reserve requirement. It was determined that this alternative would not be appropriate.

9. Federal standards: There are no federal standards in the subject area.

10. Compliance schedule: This amendment to the regulation applies to financial statements filed on or after December 31, 2012. This amendment allows the use of substandard annuity mortality tables in valuing impaired lives under individual single premium immediate annuities. Voluntary election of such table is conditional and dependent upon the insurer meeting the requirements set forth in the current rule with respect to the medical assessment of the annuitant or measuring life. Since this standard has been adopted on a national basis for many years, insurers that would be impacted by this amendment have already been complying with these requirements in other states.

Regulatory Flexibility Analysis

1. Small businesses:

The Department of Financial Services finds that this amendment 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 falls within the definition of "small business" as found in section 102(8) of the State Administrative Procedure Act. The 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 amendment does not impose any impacts, including any adverse impacts, or reporting, recordkeeping, or other compliance requirements on any local governments.

Rural Area Flexibility Analysis

The Department of Financial Services finds that this rule does not impose any additional burden on persons located in rural areas and that it will not have an adverse impact on rural areas. This rule applies uniformly to regulated parties that do business in both rural and non-rural areas of New York State.

Job Impact Statement

This rule will not adversely impact job or employment opportunities in New York. It prescribes minimum reserve standards for valuing impaired lives under individual single premium immediate annuities using substandard annuity mortality tables. The rule is likely to have no measurable impact on jobs and employment opportunities because existing personnel should be able to monitor the insurer's compliance with the reserve requirements. In addition, there should be no region in New York that would experience an adverse impact on jobs and employment opportunities. Finally, this rule would not have a measurable impact on self-employment opportunities.