DFS-10-13-00008-E Rules Governing Valuation of Life Insurance Reserves

7/31/13 N.Y. St. Reg. DFS-10-13-00008-E

NEW YORK STATE REGISTER

VOLUME XXXV, ISSUE 31

July 31, 2013

RULE MAKING ACTIVITIES

DEPARTMENT OF FINANCIAL SERVICES

EMERGENCY RULE MAKING

 

I.D No. DFS-10-13-00008-E

Filing No. 763

Filing Date. Jul. 15, 2013

Effective Date. Jul. 15, 2013

Rules Governing Valuation of Life Insurance Reserves

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

Action taken:

Amendment of Part 98 (Regulation 147) of Title 11 NYCRR.

Statutory authority:

Financial Services Law, sections 202 and 302; and Insurance Law, sections 301, 1304, 1308, 4217, 4218, 4240 and 4517

Finding of necessity for emergency rule:

Preservation of general welfare.

Specific reasons underlying the finding of necessity:

This amendment to Regulation 147 contains changes to the reserve requirements on universal life with secondary guarantee policies. The Department has been concerned about compliance and reserve adequacy issues with respect to product designs involving an imbalance between the guarantees and reserves held. The National Association of Insurance Commissioners (“NAIC”) attempted to address this issue with revisions to Actuarial Guideline 38. To prevent potential substantial reserve increases for in-force business, a bifurcated approach was adopted, which provides for separate reserve methodologies for in-force business and prospective business. The Guideline provides that for universal life with secondary guarantee business written between July 1, 2005 and December 31, 2012, the reserves will be determined using a principles-based approach, as adopted by an NAIC Committee in 2012. For business issued after January 1, 2013, the reserves will be calculated using a formulaic-based approach, until such time that principles-based reserving is enacted through a change in law.

These standards have already been adopted by the NAIC through its Accounting Practices and Procedures Manual. Since New York has a separate regulation addressing this subject matter, the revised standards are not automatically adopted and need to be adopted through an amendment to Regulation 147. This amendment incorporates the NAIC revisions identified in Actuarial Guideline 38, thus resulting in consistency between the NAIC’s and New York’s rules and promoting regulatory uniformity across the U.S. Companies domiciled in states that do not adopt these changes by December 31, 2012 will be holding reserves at a different level relative to companies domiciled in states that have adopted these changes.

For insurers that have not followed the intent of the current regulation, adoption of this amendment may increase reserves on business issued between July 1, 2005 and December 31, 2012 of New York authorized life insurers. For insurers that have followed the intent of the current regulation, reserves may decrease.

Insurers subject to this regulation must file quarterly financial statements based upon minimum reserve standards in effect on the date of filing. The filing date for the next quarterly statement is August 15, 2013. The insurers must be given advance notice of the applicable standards in order to file their reports in an accurate and timely manner. It is essential that this regulation be adopted on an emergency basis until such time as it can be adopted on a permanent basis.

For all of the reasons stated above, an emergency adoption of this fourth amendment to Regulation 147 is necessary for the general welfare.

Subject:

Rules governing valuation of life insurance reserves.

Purpose:

Prescribe rules and guidelines for valuing individual life insurance policies and certain group life insurance certificates.

Substance of emergency rule:

The Fourth Amendment to Insurance Regulation 147 provides revised reserve standards for universal life with secondary guarantee policies.

Section 98.9(c)(2) is amended to reference new subparagraphs (ix) and (x), which provide revised reserve standards for universal life with secondary guarantee policies.

Section 98.9(c)(2)(viii)(b)(2) is amended to change the applicability dates for applying lapse rates from policies issued on or after January 1, 2007 to before January 1, 2014 to policies issued on or after January 1, 2007 to before January 1, 2013.

Section 98.9(c)(2)(viii)(e) is amended to change the applicability dates for applying lapse rates in the calculation of the net single premium from policies issued on or after January 1, 2007 to before January 1, 2014 to policies issued on or after January 1, 2007 to before January 1, 2013.

Section 98.9(c)(2)(viii)(h)(2) is amended to change the applicability dates, when there is a reduction for surrender charges, from policies issued on or after January 1, 2007 to before January 1, 2014 to policies issued on or after January 1, 2007 to before January 1, 2013.

Section 98.9(c)(2)(viii)(j) is amended to change the applicability dates for universal life with secondary guarantee policies when a stand-alone asset adequacy analysis is required.

A new subparagraph (ix) is added to section 98.9(c)(2) to prescribe reserve standards for certain universal life with secondary guarantee policies that were issued on or after July 1, 2005 to before January 1, 2013. This amendment affects universal life with secondary guarantee products, with or without a shadow account, with multiple sets of interest rates or other credits, or multiple sets of cost of insurance, expense, or other charges that may become applicable to the calculation of the secondary guarantee measures in any one year.

A new subdivision (x) is added to section 98.9(c)(2) to prescribe revised reserve standards for universal life with secondary guarantee policies issued on or after January 1, 2013. The steps for calculating the reserve are specified in section 98.9(c)(2)(x)(a) – (i). Section 98.9(c)(2)(x)(j) adds Actuarial Opinion and Insurer Representation requirements to declare that the policies appropriately fit one of the design categories described in this subdivision. Additionally, if reserves are calculated under Method II, a report that describes the analytical review that was performed with respect to premium payment patterns must also be provided.

This notice is intended

to serve only as a notice of emergency adoption. This agency intends to adopt the provisions of this emergency rule as a permanent rule, having previously submitted to the Department of State a notice of proposed rule making, I.D. No. DFS-10-13-00008-P, Issue of March 6, 2013. The emergency rule will expire September 12, 2013.

Text of 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]

Regulatory Impact Statement

1. Statutory authority: The Superintendent’s authority to promulgate the Fourth Amendment to Insurance Regulation 147 (11 NYCRR 98) derives from sections 202 and 302 of the Financial Services Law (“FSL”) and sections 301, 1304, 1308, 4217, 4218, 4240 and 4517 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 the Superintendent 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 1304 requires every insurer authorized under the Insurance Law to transact the kinds of insurance specified in Insurance Law section 1113(a)(1)-(3) to maintain reserves as necessary on account of the insurer’s policies, certificates and contracts.

Insurance Law section 1308 describes when reinsurance is permitted, and the effect that reinsurance will have on an insurer’s reserves.

Insurance Law 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 insurer doing business in New York. Insurance Law 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; therefore, section 4217 does not expressly include references to lapses. However, the development of new types of life insurance that were not contemplated at the time section 4217 was enacted may cause lapses to be relevant in reserve calculations in certain instances.

Insurance Law section 4217(c)(6)(C) provides that reserves - according to the commissioner’s reserve valuation method for life insurance policies that provide 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).

Insurance Law section 4217(c)(6)(D) permits 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 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 insurer based on 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 sections 4217(c)(6) and 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 must be computed by a method that is consistent with the principles of sections 4217 and 4218, as determined by the Superintendent.

Insurance Law 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 commissioner’s 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.

Insurance Law 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 section 4240.

Insurance Law section 4517(b)(2) provides, with respect to fraternal benefit societies, that reserves according to the commissioner’s reserve valuation method for life insurance certificates that provide 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: One of the principal goals of the Legislature in enacting the Insurance Law is maintaining the solvency of insurers doing business in New York. One fundamental way the Insurance Law seeks to ensure solvency is by requiring all insurers and fraternal benefit societies that are authorized to do business in New York State to hold reserve funds in amounts that are sufficient in relation to the obligations made to policyholders. At the same time, an insurer benefits when it has adequate capital for company uses such as expansion, product innovation, and other forms of business development.

3. Needs and benefits: Interpretation of the previous standards for universal life with secondary guarantee products has not been consistent among the insurance industry and regulatory authorities across the U.S. In an effort to provide greater clarification of the standards, the National Association of Insurance Commissioners (“NAIC”) revised Actuarial Guideline 38. This amendment to Regulation 147 incorporates the NAIC’s revisions to Actuarial Guideline 38, which is intended to establish regulatory uniformity across the U.S. Insurers domiciled in states that do not adopt these changes by December 31, 2012 will be holding reserves at different levels relative to insurers domiciled in states that have adopted these changes, creating solvency concerns and an unlevel playing field among insurers.

The amendment, which is based on the previous NAIC Model, addresses the present situation, experienced nationwide, of insurers calculating reserves based on their various interpretations of the current regulation. The differing interpretations have resulted in some insurers setting imprudently low reserves and raising concerns about solvency and the ability of those insurers to meet their obligations. At the same time, those insurers that have set inappropriately low reserves have greater access to unrestricted funds that can be used for other purposes, creating an unlevel playing field to the disadvantage of those insurers that have properly set their reserves. This amendment will make certain that all insurers use the same approach to calculating reserves and ensure that proper reserves will be set, and insurers will not be under-reserved.

4. Costs: Costs to insurers and fraternal benefit societies that are authorized to do business in New York that are impacted by this amendment could be significant. The cost would include the actual modifications to existing computer software to incorporate the new methodologies for in-force and prospective business, as well as the testing and implementation of the changes to the software. Some insurers may find it necessary to redesign the policies that are offered for sale to fit one of the policy designs addressed in the regulation.

Insurers that had not been complying with the full intent of the current regulation may find it necessary to increase reserves for policies issued between July 1, 2005 and December 31, 2012 upon adoption of the amendment, which provides greater clarification of the regulation’s requirements. Insurers that have complied with the current regulation may find that their reserves have decreased.

Cost estimates range from $100,000 to $1.1 million nationwide for impacted insurers based on information provided by the Life Insurance Council of New York, Inc. Many insurers, however, would be incurring these costs in any event since they must comply with the same requirements imposed by other states in which they are licensed. The changes to reserving methodology contained in the regulation are also being adopted in other states to conform with the NAIC revisions to the Actuarial Guideline. After an insurer has modified its computer systems and developed new policy forms to comply with the regulation, only minimal additional costs should be anticipated.

The amendment is expected to result in the need for significant training of Department staff. The cost of such training will be absorbed through the Department’s normal budget. 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: For policies issued between January 1, 2007 and December 31, 2012, the amendment does not alter the regulation’s requirement that insurers annually prepare a stand-alone Actuarial Memorandum that sets forth the reserve analysis performed on the business. However, insurers subject to Section 98.9(c)(2)(ix) (respecting certain policies issued July 1, 2005 through December 31, 2012) are made subject to the requirements of Part 98 (Insurance Regulation 172), which provides for the adoption of the NAIC Accounting Practices & Procedures Manual (“NAIC Manual”). Under the 2013 edition of the NAIC Manual, such insurers must submit an additional Actuarial Memorandum to document compliance with the NAIC Manual’s valuation of reserves requirements. Also, for policies issued on or after January 1, 2013, the regulation requires, at the time of filing or approval of a new product, each insurer to file with the Superintendent an Actuarial Opinion and an Insurer Representation made with respect to the applicable policy forms. Those insurers that use Method II, as described in section 98.9(c)(2)(x)(a)(2) of the amendment to Regulation 147, must submit a report that briefly describes the analytical review performed, the insurer’s conclusions following the analytical review, and whether any additional premium payment patterns, other than those required, were tested as a result of the review.

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

8. Alternatives: The only alternative considered by the Department was to not adopt the recent changes to the NAIC model regulation or the provisions in the new version of Actuarial Guideline 38. This would create an unlevel playing field for insurers, and reserves calculated by New York domestic insurers would be held at a different level then reserves held by non-domestic insurers.

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

10. Compliance schedule: This amendment to the regulation applies to 2012 annual statements due March 1, 2013 and statements filed thereafter. This amendment provides revised reserve standards for calculating reserves on universal life with secondary guarantee policies. The NAIC conducted outreach on a national level. In New York, the Department engaged in discussions with the affected insurers’ trade association, the Life Insurance Council of New York (LICONY). The Department was notified by LICONY on December 21, 2012 that its members support the amendment to Regulation 147. Since the standards contained in the amendment were already adopted by the NAIC, insurers should have adequate time to comply with the regulation.

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 insurers and fraternal benefit societies 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 insurers and fraternal benefit societies 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 and fraternal benefit societies covered by the 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: There are separate reporting and compliance requirements for policies issued between July 1, 2005 and December 31, 2012 and for policies issued on or after January 1, 2013. Additionally, for policies issued on or after January 1, 2013, the regulation requires insurers to file an Actuarial Opinion with the Superintendent.

3. Costs: Costs to insurers and fraternal benefit societies that are authorized to do business in New York State that are impacted by this amendment could be significant. The costs would include the actual modifications to existing computer software to incorporate the new methodologies for in-force and prospective business, as well as the testing and implementation of the changes to the software. Some insurers may find it necessary to redesign the policies that are offered for sale to fit one of the policy designs addressed in the regulation. Insurers that had not been complying with the full intent of the current regulation may find it necessary to increase reserves for policies issued between July 1, 2005 and December 31, 2012 upon adoption of the amendment, which provides greater clarification of the regulation’s requirements. Insurers that have complied with the current regulation may find that their reserves have decreased.

Cost estimates range from $100,000 to $1.1 million nationwide for impacted insurers based on information provided by the Life Insurance Council of New York, Inc. Many insurers, however, would be incurring these costs in any event since they must comply with the same requirements imposed by other states in which they are licensed. The changes to reserving methodology contained in the regulation are also being adopted in other states to conform with the NAIC revisions to Actuarial Guideline 38. After an insurer has modified its computer systems and developed new policy forms to comply with the regulation, only minimal additional costs should be anticipated.

The amendment is expected to result in the need for significant training of Department staff. The cost of such training will be absorbed through the Department’s normal budget. There are no costs to other government agencies or local governments.

4. Minimizing adverse impact: The regulation does not impose any adverse impact on rural areas.

5. Rural area participation: The NAIC conducted outreach on a national level. In New York, the Department engaged in discussions with the affected insurers’ trade association, the Life Insurance Council of New York (LICONY). The Department was notified by LICONY on December 21, 2012 that its members support the amendment to Regulation 147.

Job Impact Statement

The Department finds that this amendment should have no impact on jobs and employment opportunities. This amendment sets standards for setting life insurance reserves for insurers and fraternal benefit societies. Insurers should not need to hire additional employees or independent contractors to comply with these new standards.

Assessment of Public Comment

The agency received no public comment since publication of the last assessment of public comment.