DFS-16-14-00002-P Market Value Separate Accounts Funding Guaranteed Benefits; Separate Account Operations and Reserve Requirements

4/23/14 N.Y. St. Reg. DFS-16-14-00002-P

NEW YORK STATE REGISTER

VOLUME XXXVI, ISSUE 16

April 23, 2014

RULE MAKING ACTIVITIES

DEPARTMENT OF FINANCIAL SERVICES

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. DFS-16-14-00002-P

Market Value Separate Accounts Funding Guaranteed Benefits; Separate Account Operations and Reserve Requirements

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

Proposed Action:

Amendment of Part 97 (Regulation 128) of Title 11 NYCRR.

Statutory authority:

Financial Services Law, sections 202 and 302; and Insurance Law, sections 301, 1403, 1405, 1414, 4217 and 4240

Subject:

Market Value Separate Accounts Funding Guaranteed Benefits; Separate Account Operations and Reserve Requirements.

Purpose:

To revise the discount rate used to determine guaranteed contract liabilities and the filing due date of actuarial memoranda.

Text of proposed rule:

Section 97.2(b) is amended to read as follows:

(b) For separate accounts otherwise subject to this Part and established prior to the effective date of this Part:

(1) Those [which] that were required in writing by the superintendent as a condition for approval [fo] to comply with the requirements of this Part shall comply immediately to the extent so required.

(2) Those [which] that are used to fund contracts issued after such effective date shall comply immediately.

(3) All others shall comply immediately with all sections other than section 97.4 of this Part.

Section 97.2(d) is amended to read as follows:

(d) Where the funding of the applicable contracts or agreements in subdivision (a) of this section is by a combination of general account assets (other than those referred to in section 97.5(c) of this Part) and of separate account assets valued at market, then effective January 1, 1993 this Part applies to the appropriate portion of the benefits [which are] that is funded by the separate account. However, the requirement for the separate account may require integration of the reserve and asset valuation procedures with the general account portion and be based on combined procedures no less conservative than as required by this Part if the contract were considered to be subject in full to this Part.

Section 97.3(j) is amended to read as follows:

(j) Duration matched means, with respect to a separate account or a subportfolio thereof funding specified guaranteed contract liabilities as described in the plan of operations pursuant to section 97.4(b)(11) of this Part, that at least 80 percent of the market value of the separate account assets or the subportfolio thereof [consist] consists solely of cash and/or one or more of the following securities (and hedging instruments purchased in connection therewith): short-term debt, United States government obligations, investment grade obligations and investment grade commercial mortgage loans; and, after taking into account any prepayment provisions of such securities and the provisions of such hedging instruments, payments to be made from the separate account assets (or the subportfolio thereof) are in the aggregate substantially certain both in amount and timing and the duration of the separate account assets (or the subportfolio thereof) differs from the duration of the guaranteed contract liabilities (or, in the case of a subportfolio of assets, the duration of such specified guaranteed contract liabilities) by less than one-half year; provided that, to the extent that guaranteed contract liabilities are denominated in the currency of a foreign country rated in one of the two highest rating categories by an independent nationally recognized United States rating agency acceptable to the superintendent and are supported by investments denominated in the currency of such foreign country, duration matching may be determined by utilizing spot rates of substantially similar securities denominated in the currency of such foreign country.

Section 97.3(r) is amended to read as follows:

(r) Macaulay duration means, with respect to a sequence of anticipated payments A 1, A 2, …A n occurring at times t 1, t 2, … [A] t n from the valuation date (whether such payments represent anticipated benefits payable consistent with the minimum value of guaranteed contract liabilities under section 97.5(k) of this Part or whether such payments represent anticipated asset cash flows consistent with actual or assumed market values) the quotient of (a) divided by (b) where

(a) =	n Σ j=1	tAVtj,
(b) =	n Σ j=1	AVtj,

[V^tj = (1 + 1)^-tj] V^tj = (1 + i)^-tj, and

ij is the discount rate used under section 97.5(k) of this Part.

Thus, for benefits payments corresponding to guaranteed contract liabilities referred to in section 97.5(k) of this Part, the denominator, i.e., (b) above, is identical to the value P, the base amount of guaranteed contract liabilities described in that section.

Section 97.4(b)(3) is amended to read as follows:

(3) a description of how the guaranteed contract liabilities are to be valued, including with respect to fixed or guaranteed minimum benefits, a description of the methodology for calculating spot rates and the rates proposed to be used to discount guaranteed contract liabilities if higher than the applicable spot rates, provided that the rate or rates used shall not exceed [104.5 percent of the spot rate, except that if the expected time of payment of a contract benefit is more than 30 years, it shall be discounted from the expected time of payment to year 30 at a rate of no more than the lesser of six percent and of 80 percent of the 30-year spot rate and for 30 additional years at a rate not greater than 104.5 percent of the 30-year spot rate,] the maximum rates allowed to be used to calculate the minimum value of guaranteed contract liabilities described in section 97.5(k) of this Part, and must conservatively reflect expected investment returns (taking into account foreign exchange risks);

Section 97.4(d) is amended to read as follows:

(d) Notwithstanding the descriptions in the plan of operations, the insurance company may change the rate used pursuant to section 97.5(k) of this Part to discount guaranteed contract liabilities and other items applicable to the separate account, such as if the investment portfolio is different from that anticipated by the plan of operations, provided that the rate or rates used shall not exceed [104.5 percent of the spot rate (except that if the expected time of payment of a contract benefit is more than 30 years, it shall be discounted from the expected date of payment to year 30 at a rate of no more than the lesser of six percent and of 80 percent of the 30-year spot rate and for 30 additional years at a rate not greater than 104.5 percent of the 30-year spot rate)] the maximum rates allowed to be used to calculate the minimum value of guaranteed contract liabilities described in section 97.5(k) of this Part, and must conservatively reflect expected investment returns (taking into account any foreign-exchange risks). Any such change must be disclosed and justified in the actuary’s opinion and memorandum submitted pursuant to section 97.6 of this Part.

Section 97.5(g)(1)(iii) is amended to read as follows:

(iii) Any separate account assets that do not comply with the limitations of this paragraph shall, to the extent that such assets exceed such limitations, be subject to an additional deduction of 10 percent of the market value thereof in determining the asset maintenance and reserve requirements in subdivisions (b) and (c) of this section.

Section 97.5(j) is amended to read as follows:

(j) The account contracts may provide for the allocation to one or more supplemental accounts of all or any portion of the amount needed to meet the [minimum] asset maintenance requirement. If the account contract provides that the assets in the separate account shall not be chargeable with liabilities arising out of any other business of the insurer, the insurance company shall maintain in a supplemental account the amount of any separate account assets in excess of the amounts contributed by the contract holder and the earnings thereon in accordance with the contract.

Section 97.5(k) is amended to read as follows:

(k) For purposes of this Section, the minimum value of guaranteed contract liabilities is defined to be an amount equal to the product of P and (1 + x), where P is the base amount of guaranteed contract liabilities, and x is the contract risk factor determined at least annually in accordance with subdivision (l) of this section. The base amount of guaranteed contract liabilities, P, shall be the sum of the expected guaranteed contract benefits, each discounted at a rate corresponding to the expected time of payment of the contract benefit that is not greater than the maximum multiple of the spot rate supportable by the expected return from the separate account assets [(and in no event greater than 104.5 percent of the spot rate)] as described in the plan of operations or the actuary’s opinion and memorandum (pursuant to [the ]section 97.4(d) of this Part) [, except that if the expected time of payment of a contract benefit is more than 30 years, it shall be discounted from the expected date of payment to year 30 at a rate of no more than the lesser of six percent and 80 percent of the 30 year spot rate and for 30 additional years at a rate not greater than 104.5 percent of the 30-year spot rate]. In no event shall the discount rates exceed the rates given in the following table:

Years from Valuation Date to Payment Date	Maximum Discount Rate
0 ≤ t ≤ 10	Max (105% x St, Min(St + 1%, 2%))
10 < t ≤ 30	Min (9%, Max(105% x St, Min(St + 1%, 3%)))
30 < t	Min (6%, 80% x St) for discounting from duration t to duration 30

where t is the length of time in years between the valuation date and the expected date of the cashflow payment, and St is the spot rate for time t. In projecting cash flows for annuity and life insurance benefits, the mortality tables for such benefits prescribed or authorized by section 4217 of the Insurance Law shall be used.

Section 97.5(l)(2)(ii)(a)(2) is amended to read as follows:

(2) the number of years form the valuation date for which interest rates provided in the contract are guaranteed to exceed the last published calendar year statutory valuation interest rate for life insurance policies (other than single premium policies of the kind referred to in section 4217(c)(4)(B)(vi) of the Insurance Law) with guarantee durations in excess of 20 years; and

Section 97.5(m)(1) is amended to read as follows:

(1) Where any guarantee (whether for fixed benefits or guaranteed minimum benefits) is provided under a separate account valued at market, the amount accumulated from risk charges deducted from considerations received or from the separate account, net of losses and the amount of losses, shall be shown in the annual statement. This may be shown as a footnote to the appropriate line in the analysis of operations by line of business pertaining to net transfers to [or (from)] (or from) the separate account. The footnote should include the amounts for the current year and the cumulative amounts from inception to date.

Section 97.5(n) is amended to read as follows:

(n) The superintendent may modify the application of any provision of this section upon application of the insurance company, if the company can demonstrate to the satisfaction of the superintendent that it has provided other appropriate and equally effective safeguards against the risks and uncertainties addressed in this section.

Section 97.6(a) is amended to read as follows:

(a) An insurance company that maintains one or more separate accounts subject to this Part shall submit to the superintendent annually an actuarial opinion by March 1st and an actuarial memorandum by March 15th [to the superintendent annually by March 1st] following the December 31st valuation date showing the status of such accounts as of December 31st. The actuarial opinion and memorandum must be in form and substance satisfactory to the superintendent.

Section 97.6(b) is amended to read as follows:

(b) The actuarial opinion shall state that, after taking into account any risk charge payable from the separate account assets and the amount of any reserve liability of the general account with respect to the asset maintenance requirement, the account assets make good and sufficient provision for contract liabilities. The opinion shall be accompanied by a certificate of an officer of the company responsible for the daily monitoring of compliance with the asset maintenance and reserve requirements for such separate accounts, describing the extent to and manner in which during the preceding year:

Section 97.6(c) is amended to read as follows:

(c) The actuarial opinion shall cover the applicable points set forth in section [95.7] 95.8 of Part 95 of this Title.

Section 97.7 is amended to read as follows:

§ 97.7 Mandatory securities valuation reserve.

When the insurance company values separate account assets at market and complies with the asset maintenance requirements of section 97.5 of this Part, it need not maintain [a mandatory securities] an asset valuation reserve or an interest maintenance reserve with respect to such assets.

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

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

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Five-Year Review of Existing Rules

An assessment of public comments is not attached because no comments were received.

Regulatory Impact Statement

1. Statutory authority: The Superintendent’s authority to promulgate the First Amendment to Insurance Regulation 128 (11 NYCRR 97) derives from sections 202 and 302 of the Financial Services Law (“FSL”) and sections 301, 1403, 1405, 1414, 4217, and 4240 of the Insurance Law.

FSL section 202 establishes the office of the Superintendent and designates the Superintendent as the head of the Department of Financial Services.

FSL section 302 and Insurance Law section 301 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, among other things.

Insurance Law section 1403 identifies the types of investments that an insurer may make, and provides, subject to limited exceptions, that investments made for separate accounts are not subject to the investment limitations set forth in section 1403.

Insurance Law section 1405 identifies additional types of investments that a life insurer may make.

Insurance Law section 1414 provides for the valuation of investments.

Insurance Law section 4217(a)(1) requires the Superintendent annually to value, or cause to be valued, the reserve liabilities (“reserves”) for all outstanding policies and contracts of every life insurer doing business in New York, except that with respect to an alien insurer the valuation is limited to its U.S. business. The Superintendent may certify the amount of reserves, specifying the mortality table or tables, rate or rates of interest, and methods used in the calculation of the reserves.

Insurance Law section 4217(c)(6)(D) authorizes the Superintendent to issue, by regulation, guidelines for the application of the reserve valuation provisions of section 4217 to such policies and contracts as the Superintendent deems appropriate.

Insurance Law section 4240(a)(5)(iii) requires a life insurer to submit an actuarial opinion and memorandum related to assets held in a separate account. Section 4240(d)(6) prohibits a life insurer from discriminating unfairly between separate accounts or between separate and other accounts, but does not require a life insurer to follow uniform investment policies for all of its accounts.

2. Legislative objectives: Maintaining the solvency of insurers doing business in New York is a principal focus of the Insurance Law. One fundamental way in which the Insurance Law seeks to ensure insurer solvency is by requiring all insurers authorized to do business in New York State to hold reserve funds in an amount sufficient to meet the obligations made to policyholders. The Insurance Law prescribes the mortality tables and interest rates that should be used for calculating such reserves.

3. Needs and benefits: This amendment prescribes minimum and maximum rates for discounting guaranteed benefit cashflows, which are based on the Treasury discount rate, to ensure that prudent levels of reserves are maintained by life insurers. A minimum discount rate, applicable when Treasury discount rates are exceptionally low, provides insurers with a moderate relief from reserve requirements. A maximum discount rate, to be applied if Treasury discount rates are significantly increased, will prevent an over-release of reserves.

This amendment also changes the filing due date of the actuarial memorandum that life insurers are required to file with the Department, pursuant to Section 97.6 of this rule, from March 1 to March 15. The Department has provided a filing extension date to several insurers that requested additional time to file the actuarial memorandum. This amendment will allow all life insurers adequate time to prepare their filings after submitting to the Department several other statutory filings that are due by March 1.

4. Costs: Insurers may have to make minor modifications to existing computer software to change the discount rate in accordance with this amendment. The costs to insurers that are affected by this amendment to make such changes will likely vary from insurer to insurer but are expected to be minimal. Once initial modifications to the software have been made, no additional costs should be incurred.

The Department anticipates little if any additional costs to the Department as a result of this rule. There are no costs to other government agencies or local governments.

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 amendment imposes no new reporting requirement.

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

8. Alternatives: The Department deliberated the use of a discount rate based on a 65/35 weighting of Treasuries and a corporate bond index. After lengthy consideration, the Department decided against this approach, mainly due to the belief that the theoretically “correct” discount rate for liabilities is actually no higher than the risk-free rate. The Department also considered not amending the regulation. However, not amending the rule would mean that insurers would be unable to obtain reserve relief during periods of extremely low Treasury discount rates, which insurers specifically requested.

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

10. Compliance schedule: This amendment applies to financial statements filed on or after December 31, 2013. The Life Insurance Council of New York, Inc., the trade association for insurers affected by this rule, was involved in the process of developing the changes to the discount rate that are included in this amendment and the change of the filing due date of the Actuarial Memorandum from March 1 to March 15. Insurers will have ample time to revise their computer software systems to update the usable discount rates in accordance with this amendment.

Regulatory Flexibility Analysis

1. Small businesses: The Department 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 life insurers that are authorized to do business in New York State, none of which comes within the definition of “small business” provided in section 102(8) of the State Administrative Procedure Act. The Department reviewed filed reports on examination and annual statements of authorized life insurers and concludes that none of these entities comes within the definition of “small business,” because there are none that are both independently owned and have fewer than 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

1. Types and estimated number of rural areas: Insurers covered by this amendment do business in every county in this state, including rural areas as defined in State Administrative Procedure Act (“SAPA”) section 102(10).

2. Reporting, recordkeeping and other compliance requirements; and professional services: This amendment does not impose any new reporting, recordkeeping, or other compliance requirements, and is not likely to require the use of professional services of outside contractors. The revisions insurers will need to make to their computer software are most likely to be handled by the insurers’ own staffs.

3. Costs: All insurers subject to this rule will likely have to make minor modifications to existing computer software to change the discount rate in accordance with this amendment. The costs to insurers that are affected by this amendment to make such changes will likely vary from insurer to insurer but are expected to be minimal, whether the insurer is located in a rural or non-rural area. Once initial modifications to the software have been made, no additional costs should be incurred.

4. Minimizing adverse impact: This amendment does not impose any adverse impact on rural areas.

5. Rural area participation: The Life Insurance Council of New York, Inc. (“LICONY”), the trade association for insurers affected by this rule, was involved in the process of developing the changes to the discount rate that are included in this amendment and the change of the filing due date of the Actuarial Memorandum from March 1 to March 15. Additionally, interested parties will have the opportunity to comment on the proposed rule for 45 days following publication in the State Register.

Job Impact Statement

The Department finds that this amendment should have no impact on jobs and employment opportunities. This amendment prescribes minimum and maximum rates for discounting guaranteed benefit cashflows to ensure that prudent levels of reserves are maintained by life insurers. The amendment also changes the filing due date of the actuarial memorandum that life insurers are required to file with the Department, pursuant to section 97.6 of this rule, from March 1 to March 15. Insurers should not need to hire additional employees or independent contractors to comply with these new standards.