PROPOSED RULEMAKING
INSURANCE DEPARTMENT
[31 PA. CODE CH. 84c]
Valuation of Life Insurance Policies
[30 Pa.B. 23] The Insurance Department (Department) proposes to adopt Chapter 84c (relating to valuation of life insurance policies), to read as set forth in Annex A, under the authority of sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412) and section 301(c)(1) and (3) of The Insurance Department Act of 1921 (40 P. S. § 71(c)(1) and (2)) (act).
Purpose
The purpose of the proposed rulemaking is to implement section 301(c)(1) and (3) of the act by adopting select mortality factors for use in determining minimum standards of valuation and by interpreting the minimum reserve standard for the valuation of life insurance plans with nonlevel premiums or benefits and plans with secondary guarantees. Reserves held by life insurance companies that market life insurance policies in this Commonwealth must comply with the minimum standards of valuation. The Department's adoption of the proposed rulemaking will help to assure the solvency of insurance companies by requiring adequate reserves.
Section 301(c)(1) of the act establishes as a minimum standard of valuation any mortality table adopted after 1980 by the NAIC and approved by regulation by the Commissioner for this purpose. The select mortality factors in the proposed rulemaking were adopted by the National Association of Insurance Commissioners (NAIC) as part of the Valuation of Life Insurance Model Regulation.
Section 301(c)(3) of the act provides that the minimum reserve valuation method for policies with nonlevel premiums or benefits shall be a method consistent with the principles of the act. The proposed rulemaking defines a valuation method that is intended to be consistent with the principles of the act.
The proposed rulemaking is patterned after the NAIC's Valuation of Life Insurance Model Regulation adopted in March 1999. The Department is seeking to implement the NAIC model regulation as part of a Nationwide initiative by State insurance regulators to achieve uniform reserve requirements. The majority of states are in the process of implementing the NAIC Valuation of Life Insurance Model Regulation with an effective date of January 1, 2000. The Department believes that it is essential that life insurance companies have uniform reserving requirements throughout the United States. For the Commonwealth to have different requirements would place a financial burden on life insurance companies doing business in this Commonwealth and may cause life insurance companies to cease doing business in this Commonwealth, to the detriment of insurance consumers of this Commonwealth. The Insurance Federation of Pennsylvania, representing a substantial portion of the life insurance industry operating in this Commonwealth, has expressed support for the adoption of this proposed rulemaking.
Explanation of Regulatory Requirements
The following is a description of the significant features in the proposed rulemaking.
Section 84c.2 (relating to applicability) provides that the proposed rulemaking will apply to policies issued on and after the effective date of the rulemaking. The section also describes policies that are exempt from the proposed rulemaking.
Section 84c.4 (relating to segmented and unitary reserve methods) defines the segmented and unitary minimum reserve valuation methods to be applied in the valuation of life insurance plans with nonlevel premiums or benefits and plans with secondary guarantees.
Section 84c.5 (relating to general requirements for basic reserves and premium deficiency reserves) sets forth by reference to the Appendix A table of select mortality factors that may be used in determining the minimum mortality standard. In accordance with section 301(c)(1) of the act, select mortality factors may at the option of the insurer be used in determining the minimum mortality standard. The section also describes rules for using select mortality factors that are less than the factors in the Appendix in determining the minimum mortality standard for calculating deficiency reserves.
Section 84c.6 (relating to minimum valuation standard for policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits (other than universal life policies)) describes the rules for using the segmented and unitary minimum reserve valuation methods for the valuation of policies with nonlevel premiums or benefits. An optional exemption is provided for yearly renewable term insurance and reinsurance and for certain juvenile policies.
Section 84c.7 (relating to minimum valuation standard for flexible premium and fixed premium universal life insurance policies that contain provisions resulting in the ability of a policyowner to keep a policy in force over a secondary guarantee period) describes the rules for using the segmented minimum reserve valuation method for the valuation of universal life insurance policies that contain a secondary guarantee. The section also describes the policy provisions that are considered as a secondary guarantee.
Affected Parties
The proposed rulemaking will apply to life insurance companies and fraternal benefit societies marketing life insurance policies in this Commonwealth.
Fiscal Impact
State Government
There will be no increase in cost to the Department due to the adoption of the proposed rulemaking. The Department currently reviews valuation filings submitted by domestic life insurance companies and fraternal benefit societies for compliance with the minimum standards of valuation. The proposed select mortality factors and the interpretation of the minimum reserve standard for plans with nonlevel premiums or benefits and for plans with secondary guarantees will not affect the time required to review a valuation filing.
General Public
Consumers will benefit from the advantages of purchasing life insurance from an insurance industry that is establishing sound and reasonable reserves to fulfill contractual obligations. Insurers may increase premium rates for policies sold after the effective date of this proposal because of an increase in the required reserves.
Political Subdivisions
Adoption of the proposed rulemaking will not impose additional costs on political subdivisions. Because this rulemaking promotes stability and sound reserves in the insurance industry, political subdivisions' tax revenues may benefit as a result of fewer insurance company insolvencies. Fewer insolvencies may also result in less unemployment.
Private Sector
The specific select factors and the rules for using the segmented reserve valuation method in the proposed rulemaking do not apply to policies issued prior to the effective date of this proposal. An insurance company may need to increase reserves on policies issued on and after the effective date of the proposal. The rulemaking does permit an insurance company to recognize the company's specific mortality experience in calculating deficiency reserves. This should ensure that the reserves for a company are sound and reasonable.
Paperwork
The adoption of the proposed rulemaking will not impose additional paperwork on the Department or the insurance industry. The select mortality factors and the interpretation of the minimum reserve standard affect an insurance company's reserve calculation but will not result in additional paperwork.
Effectiveness/Sunset Date
The proposed rulemaking will become effective upon final adoption and publication in the Pennsylvania Bulletin as final rulemaking. No sunset date has been assigned.
Contact Person
Questions or comments regarding the proposed rulemaking may be addressed in writing to Peter J. Salvatore, Regulatory Coordinator, 1326 Strawberry Square, Harrisburg, PA 17120 within 30 days following the publication of this notice in the Pennsylvania Bulletin.
Questions or comments may also be E-mailed to psalvato@ins.state.pa.us or faxed to (717) 772-1969.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on December 21, 1999, the Department submitted a copy of these proposed rulemaking to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the Senate Banking and Insurance Committee and the House Insurance Committee. In addition to the submitted proposed rulemaking, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the agency in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of that material is available to the public upon request.
If IRRC has objections to any portion of the proposed rulemaking, it will notify the agency within 10 days of the close of the Committees' review period. The notification shall specify the regulatory review criteria that have not been met by that portion. The Regulatory Review Act specifies detailed procedures for the agency, the Governor and the General Assembly to review these objections before final publication of the regulations.
M. DIANE KOKEN,
Insurance CommissionerFiscal Note: 11-196. No fiscal impact; (8) recommends adoption.
Annex A
TITLE 31. INSURANCE
PART IV. LIFE INSURANCE
CHAPTER 84c. VALUATION OF LIFE INSURANCE POLICIES Sec.
84c.1. Purpose. 84c.2. Applicability. 84c.3. Definitions. 84c.4. Segmented and unitary reserve methods. 84c.5. General requirements for basic reserves and premium deficiency reserves. 84c.6. Minimum valuation standard for policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits (other than universal life policies). 84c.7. Minimum valuation standard for universal life insurance policies that contain provisions resulting in the ability of a policyowner to keep a policy in force over a secondary guarantee period. § 84c.1. Purpose.
This chapter implements section 301(c)(1) and (3) of the act (40 P. S. § 71(c)(1) and (3)) by adopting select mortality factors for use in determining minimum standards of valuation and by interpreting the minimum reserve standard for the valuation of life insurance plans with nonlevel premiums or benefits and plans with secondary guarantees. The method for calculating basic reserves defined in this chapter will constitute the Commissioner's Reserve Valuation Method for policies to which this chapter is applicable.
§ 84c.2. Applicability.
(a) This chapter applies to all life insurance policies, with or without nonforfeiture values, issued on or after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.), subject to the following exceptions:
(b) This chapter does not apply to:
(1) An individual life insurance policy issued on or after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) if the policy is issued in accordance with and as a result of the exercise of a reentry provision contained in the original life insurance policy of the same or greater face amount, issued before _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) that guarantees the premium rates of the new policy. This chapter also does not apply to subsequent policies issued as a result of the exercise of the reentry provision, or a derivation of the provision, in the new policy.
(2) A universal life policy that meets all the following requirements:
(i) Secondary guarantee period, if any, is 5 years or less.
(ii) Specified premium for the secondary guarantee period is not less than the net level reserve premium for the secondary guarantee period based on the 1980 CSO valuation tables and the applicable maximum valuation interest rate.
(iii) The initial surrender charge is not less than 100% of the first year annualized specified premium for the secondary guarantee period.
(3) A variable life insurance policy that provides for life insurance, the amount or duration of which varies according to the investment experience of any separate account.
(4) A variable universal life insurance policy that provides for life insurance, the amount or duration of which varies according to the investment experience of any separate account.
(5) A group life insurance certificate unless the certificate provides for a stated or implied schedule of maximum gross premiums required to continue coverage in force for a period in excess of 1 year.
§ 84c.3. Definitions.
The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:
Act--The Insurance Department Act of 1921 (40 P. S. §§ 1--321).
Appointed actuary--The actuary as defined in § 84b.4 (relating to definitions).
Basic reserves--Reserves calculated in accordance with section 301 of the act (40 P. S. § 71).
Commissioner--The Insurance Commissioner of the Commonwealth.
Deficiency reserves--The excess, if greater than zero, of minimum reserves calculated in accordance with section 303 of the act (40 P. S. § 73) over basic reserves.
Guaranteed gross premiums--The premiums under a policy of life insurance that are guaranteed and determined at issue.
Maximum valuation interest rates--The interest rates defined in section 301(c)(2) of the act that are to be used in determining the minimum standard for the valuation of life insurance policies.
NAIC--The National Association of Insurance Commissioners.
1980 CSO valuation tables--The Commissioners' 1980 Standard Ordinary Mortality Table without 10-year selection factors, adopted in section 301(c)(1) of the act and the smoker and nonsmoker variations of the table adopted in § 84.6 (relating to 1980 CSO and 1980 CET smoker and nonsmoker mortality tables).
Scheduled gross premium--The smallest illustrated gross premium at issue for other than universal life insurance policies. For universal life insurance policies, the term means the smallest specified premium described in § 84c.7(a)(3) (relating to minimum valuation standard for universal life insurance policies that contain provisions resulting in the ability of a policyowner to keep a policy in force over a secondary guarantee period), if any, or else the minimum premium described in § 84c.7(a)(4).
Tabular cost of insurance--The net single premium at the beginning of a policy year for 1-year term insurance in the amount of the guaranteed death benefit in that policy year.
10-year select mortality factors--The select mortality factors adopted in section 301(c)(1) of the act.
Universal life insurance policy--An individual life insurance policy under the provisions of which separately identified mortality and expense charges and interest credits other than in connection with dividend accumulations, premium deposit funds or other supplementary accounts are made to the policy.
§ 84c.4. Segmented and unitary reserve methods.
(a) Segmented reserves. Segmented reserves shall be calculated as follows:
(1) Segmented reserves shall equal the present value of all future guaranteed benefits less the present value of all future net premiums in the current segment and in all subsequent segments.
(2) The length of each segment is determined by the contract segmentation method, as described in subsection (b).
(3) The net premiums within each segment are a uniform percentage of the respective guaranteed gross premiums within the segment. The uniform percentage for each segment is such that, at the beginning of the segment, the present value of the net premiums within the segment equals the present value of the death benefits within the segment, plus the present value of any unusual guaranteed cash value occurring at the end of the segment, less any unusual guaranteed cash value occurring at the start of the segment, plus for the first segment only, the excess of subparagraph (i) over subparagraph (ii), as follows:
(i) A net level annual premium equal to the present value, at the date of issue, of the benefits provided for in the first segment after the first policy year, divided by the present value, at the date of issue, of an annuity of 1 per year payable on the first and each subsequent anniversary within the first segment on which a premium falls due. However, the net level annual premium may not exceed the net level annual premium on the 19-year premium whole life plan of insurance of the same renewal year equivalent level amount at an age 1 year higher than the age at issue of the policy.
(ii) A net 1-year term premium for the benefits provided for in the first policy year.
(4) The interest rates used in the present value calculations for any policy may not exceed the maximum valuation interest rate, determined with a guarantee duration equal to the sum of the lengths of all segments of the policy.
(b) Contract segmentation method. The contract segmentation method is the method of dividing the period from issue to mandatory expiration of a policy into successive segments. The segments shall be calculated as follows:
(1) The length of a particular contract segment shall be set equal to the minimum of the value t for which Gt is greater than Rt (if Gt never exceeds Rt the segment length is deemed to be the number of years from the beginning of the segment to the mandatory expiration date of the policy), where Gt and Rt are as follows:
(i) R1 may be increased or decreased by 1% in any policy year, at the company's option, but Rt may not be less than 1.
(ii) If GPx+k+t is greater than 0 and GPx+k+t-1 is equal to 0, Gt shall be deemed to be 1,000. If GPx+k+t and GPx+k+t-1 are both equal to 0, Gt shall be deemed to be 0.
(2) The symbols used in paragraph (1) have the following meanings:
(i) x = original issue age.
(ii) k = the number of years from the date of issue to the beginning of the segment.
(iii) t = 1, 2, . . . ; t is reset to 1 at the beginning of each segment.
(iv) GPx+k+t-1 = Guaranteed gross premium per thousand of face amount for year t of the segment, ignoring policy fees only if level for the premium paying period of the policy.
(v) qx+k+t-1 = valuation mortality rate for deficiency reserves in policy year k+t but using the mortality of § 84c.5(b)(2) (relating to general requirements for basic reserves and premium deficiency reserves) if § 84c.5(b)(3) is elected for deficiency reserves.
(c) Unitary reserves. Unitary reserves shall be calculated as follows:
(1) Unitary reserves shall equal the present of all future guaranteed benefits less the present value of all future modified net premiums to the mandatory expiration of the policy.
(2) Modified net premiums are a uniform percentage of the respective guaranteed gross premiums, where the uniform percentage is such that, at issue, the present value of the net premiums equals the present value of all death benefits and pure endowments, plus the excess of subparagraph (i) over subparagraph (ii), as follows:
(i) A net level annual premium equal to the present value, at the date of issue, of the benefits provided for after the first policy year, divided by the present value, at the date of issue, of an annuity of 1 per year payable on the first and each subsequent anniversary of the policy on which a premium falls due. However, the net level annual premium may not exceed the net level annual premium on the 19-year premium whole life plan of insurance of the same renewal year equivalent level amount at an age 1 year higher than the age at issue of the policy.
(ii) A net 1-year term premium for the benefits provided for in the first policy year.
(3) The interest rates used in the present value calculations for any policy may not exceed the maximum valuation interest rate, determined with a guarantee duration equal to the length from issue to the mandatory expiration of the policy.
§ 84c.5. General requirements for basic reserves and premium deficiency reserves.
(a) Basic reserves minimum standard. At the election of the company for any one or more specified plans of life insurance, the minimum mortality standard for basic reserves may be calculated using the 1980 CSO valuation tables (or any other valuation mortality table adopted by the NAIC after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) and promulgated by regulation by the Commissioner for the purpose of calculating basic reserves) with select mortality factors. If select mortality factors are elected, they may be one of the following:
(1) The 10-year select mortality factors.
(2) The select mortality factors in Appendix A (relating to select mortality factors).
(3) Any other table of select mortality factors adopted by the NAIC after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) and promulgated by regulation by the Commissioner for the purpose of calculating basic reserves.
(b) Deficiency reserves minimum standard. Deficiency reserves, if any, are calculated for each policy as the excess, if greater than zero, of the quantity A over the basic reserve. The quantity A is obtained by recalculating the basic reserve for the policy using guaranteed gross premiums instead of net premiums when the guaranteed gross premiums are less than the corresponding net premiums. At the election of the company for any one or more specified plans of insurance, the quantity A and the corresponding net premiums used in the determination of quantity A may be based upon the 1980 CSO valuation tables (or any other valuation mortality table adopted by the NAIC after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) and promulgated by regulation by the Commissioner for the purpose of calculating deficiency reserves) with select mortality factors. If select mortality factors are elected, they may be one of the following:
(1) The 10-year select mortality factors.
(2) The select mortality factors in Appendix A.
(3) For durations in the first segment, X% of the select mortality factors in Appendix A, subject to the following:
(i) X may vary by policy year, policy form, underwriting classification, issue age, or any other policy factor expected to affect mortality experience.
(ii) X may not be less than 20%.
(iii) X may not decrease in any successive policy years.
(iv) X is such that, when using the valuation interest rate used for basic reserves, the actuarial present value of future death benefits, calculated using the mortality rates resulting from the application of X, is greater than or equal to the actuarial present value of future death benefits calculated using anticipated mortality experience without recognition of mortality improvement beyond the valuation date.
(v) X is such that the mortality rates resulting from the application of X are at least as great as the anticipated mortality experience, without recognition of mortality improvement beyond the valuation date, in each of the first 5 years after the valuation date.
(vi) The appointed actuary shall increase X at any valuation date when it is necessary to continue to meet all the requirements of paragraph (3).
(vii) The appointed actuary may decrease X at any valuation date as long as X does not decrease in any successive policy years and as long as it continues to meet all the requirements of paragraph (3).
(viii) The appointed actuary shall specifically take into account the adverse effect on expected mortality and lapsation of any anticipated or actual increase in gross premiums.
(ix) If X is less than 100% at any duration for any policy, the following requirements shall be met:
(A) The appointed actuary shall annually prepare an actuarial opinion and memorandum for the company in conformance with § 84b.8 (relating to statement of actuarial opinion based on an asset adequacy analysis).
(B) The appointed actuary shall annually opine for all policies subject to this chapter as to whether the mortality rates resulting from the application of X meet the requirements of paragraph (3). This opinion shall be supported by an actuarial report, subject to appropriate Actuarial Standards of Practice promulgated by the Actuarial Standards Board of the American Academy of Actuaries. The X factors shall reflect anticipated future mortality, without recognition of mortality improvement beyond the valuation date, taking into account relevant emerging experience.
(4) Any other table of select mortality factors adopted by the NAIC after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) and promulgated by regulation by the Commissioner for the purpose of calculating deficiency reserves.
(c) Application of select mortality factors. The select mortality factors may be used in calculating the minimum mortality standard for basic and deficiency reserves only for the first segment. However, if the first segment is less than 10 years, the appropriate 10-year select mortality factors may be used thereafter through the 10th policy year from the date of issue.
(d) Policy fees. In determining basic reserves or deficiency reserves, guaranteed gross premiums without policy fees may be used when the calculation involves the guaranteed gross premium but only if the policy fee is a level dollar amount after the first policy year. In determining deficiency reserves, policy fees may be included in guaranteed gross premiums, even if not included in the actual calculation of basic reserves.
(e) Changes in guarantees. Reserves for policies that have changes to guaranteed gross premiums, guaranteed benefits, guaranteed charges or guaranteed credits that are unilaterally made by the insurer after issue and that are effective for more than 1 year after the date of the change shall be the greatest of the following:
(1) Reserves calculated ignoring the guarantee.
(2) Reserves assuming the guarantee was made at issue.
(3) Reserves assuming that the policy was issued on the date of the guarantee.
(f) Documentation. The Commissioner may require that the company document the extent of the adequacy of reserves for specified blocks, including policies issued prior to _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.). This documentation may include a demonstration of the extent to which aggregation with other nonspecified blocks of business is relied upon in the formation of the appointed actuary opinion under and consistent with § 84b.8.
§ 84c.6. Minimum valuation standard for policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits (other than universal life policies).
(a) Basic reserves. Basic reserves shall be calculated as the greater of the segmented reserves and the unitary reserves. Both the segmented reserves and the unitary reserves for any policy shall use the same valuation mortality table and selection factors. At the option of the insurer, in calculating segmented reserves and net premiums, either of the following adjustments may be made:
(1) Treat the unitary reserve, if greater than zero, applicable at the end of each segment as a pure endowment and subtract the unitary reserve, if greater than zero, applicable at the beginning of each segment from the present value of guaranteed life insurance and endowment benefits for each segment.
(2) Treat the guaranteed cash surrender value, if greater than zero, applicable at the end of each segment as a pure endowment and subtract the guaranteed cash surrender value, if greater than zero, applicable at the beginning of each segment from the present value of guaranteed life insurance and endowment benefits for each segment.
(b) Deficiency reserves. The deficiency reserve at any duration shall be calculated as follows:
(1) On a unitary basis if the corresponding basic reserve is unitary.
(2) On a segmented basis if the corresponding basic reserve is segmented. The segment lengths shall equal those determined for segmented basic reserves.
(3) On the segmented basis if the corresponding basic reserve is equal to both the segmented reserve and the unitary reserve. The segment lengths shall equal those determined for segmented basic reserves.
(c) Minimum value. Basic reserves may not be less than the tabular cost of insurance for the balance of the policy year, if mean reserves are used. Basic reserves may not be less than the tabular cost of insurance for the balance of the current modal period or to the paid-to-date, if later, but not beyond the next policy anniversary, if mid-terminal reserves are used. The tabular cost of insurance shall use the same valuation mortality table and interest rates as that used for the calculation of the segmented reserves. However, if select mortality factors are used, they shall be the 10-year select factors. Total reserves (including basic reserves, deficiency reserves and any reserves held for supplemental benefits that would expire upon contract termination) may not be less than the amount that the policyowner would receive (including the cash surrender value of the supplemental benefits, if any, referred to in this section), exclusive of any deduction for policy loans, upon termination of the policy.
(d) Unusual pattern of guaranteed cash surrender values. The following requirement applies to any policy with an unusual pattern of guaranteed cash surrender values. This calculation is independent of the segmented and unitary reserves.
(1) The reserves actually held prior to the first unusual guaranteed cash surrender value may not be less than the reserves calculated by treating the first unusual guaranteed cash surrender value as a pure endowment and treating the policy as an n year policy providing term insurance plus a pure endowment equal to the unusual cash surrender value, where n is the number of years from the date of issue to the date the unusual cash surrender value is scheduled.
(2) The reserves actually held subsequent to any unusual guaranteed cash surrender value may not be less than the reserves calculated by treating the policy as an n year policy providing term insurance plus a pure endowment equal to the next unusual guaranteed cash surrender value, and treating any unusual guaranteed cash surrender value at the end of the prior segment as a net single premium. n shall equal the number of years from the date of the last unusual guaranteed cash surrender value prior to the valuation date to the earlier of the date of the next unusual guaranteed cash surrender value, if any, that is scheduled after the valuation date or the mandatory expiration date of the policy. The net premium for a given year during the n year period shall equal the product of the net to gross ratio and the respective gross premium where the net to gross ratio is subparagraph (i) divided by subparagraph (ii) as follows:
(i) The present value, at the beginning of the n year period, of death benefits payable during the n year period plus the present value, at the beginning of the n year period, of the next unusual guaranteed cash surrender value, if any, minus the amount of the last unusual guaranteed cash surrender value, if any, scheduled at the beginning of the n year period.
(ii) The present value, at the beginning of the n year period, of the scheduled gross premiums payable during the n year period.
(3) A policy is considered to have an unusual pattern of guaranteed cash surrender values if any future guaranteed cash surrender value exceeds the prior year's guaranteed cash surrender value by more than the sum of the following:
(i) 110% of the scheduled gross premium for that year.
(ii) 110% of 1 year's accrued interest on the sum of the prior year's guaranteed cash surrender value and the scheduled gross premium using the nonforfeiture interest rate used for calculating policy guaranteed cash surrender values.
(iii) 5% of the first policy year surrender charge, if any.
(e) Optional exemption for yearly renewable term reinsurance. At the option of the company, the following approach for reserves on yearly renewable term reinsurance may be used:
(1) Calculate the valuation net premium for each future policy year as the tabular cost of insurance for that future year.
(2) Basic reserves shall never be less than the tabular cost of insurance for the appropriate period, as defined in subsection (c).
(3) Deficiency reserves shall never be less than the sum of the present values, at the date of valuation, of the excess in each policy year of the valuation net premium over the respective maximum guaranteed gross premium. The excess for each policy year may not be less than zero.
(4) The calculations use the maximum valuation interest rate and the 1980 CSO valuation tables with or without 10-year select mortality factors, or any other table adopted after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) by the NAIC and promulgated by regulation by the Commissioner for the purpose of calculating basic and deficiency reserves.
(5) A reinsurance agreement shall be considered yearly renewable term reinsurance for purposes of subsection (e) if only the mortality risk is reinsured.
(6) If the assuming company chooses this optional exemption, the ceding company's reinsurance reserve credit shall be limited to the amount of reserve held by the assuming company for the affected policies.
(f) Optional exemption for attained-age-based yearly renewable term life insurance policies. At the option of the company, the following approach for reserves for attained-age-based yearly renewable term life insurance policies may be used:
(1) Calculate the valuation net premium for each future policy year as the tabular cost of insurance for that future year.
(2) Basic reserves shall never be less than the tabular cost of insurance for the appropriate period, as defined in subsection (c).
(3) Deficiency reserves shall never be less than the sum of the present values, at the date of valuation, of the excess in each policy year of the valuation net premium over the respective maximum guaranteed gross premium. The excess for each year may not be less than zero.
(4) The calculations use the maximum valuation interest rate and the 1980 CSO valuation tables with or without 10-year select mortality factors, or any other table adopted after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) by the NAIC and promulgated by regulation by the Commissioner for the purpose of calculating basic and deficiency reserves.
(5) A policy shall be considered an attained-age-based yearly renewable term life insurance policy for purposes of subsection (f) if both of the following apply:
(i) The premium rates (on both the initial current premium scale and the guaranteed maximum premium scale) are based upon the attained age of the insured so that the rate for any given policy at a given attained age of the insured is independent of the year the policy was issued.
(ii) The premium rates (on both the initial current premium scale and the guaranteed maximum premium scale) are the same as the premium rates for policies covering all insureds of the same sex, risk class, plan of insurance and attained age.
(6) For policies that become attained-age-based yearly renewable term policies and meet the conditions in paragraph (5) after an initial period of coverage, the approach of subsection (f) may be used after the initial period if the initial period is constant for all insureds of the same sex, risk class and plan of insurance or if the initial period runs to a common attained age for all insureds of the same sex, risk class and plan of insurance.
(7) If the approach in subsection (f) is elected, the approach shall be applied in determining reserves for all attained-age-based yearly renewable term life insurance policies issued on or after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.).
(g) Exemption from unitary reserves for certain renewable term life insurance policies. Unitary basic reserves and unitary deficiency reserves need not be calculated for a policy if the following conditions are met:
(1) The policy consists of a series of periods where the length of the period is the same for each period, except that for the final renewal period the length may be truncated or extended to reach the expiry age, provided that this final renewal period is less than 10 years and less than twice the length of the earlier periods, and for each period, the premium rates on both the initial current premium scale and the guaranteed maximum premium scale are level.
(2) The guaranteed gross premiums in all periods are not less than the corresponding net premiums based upon the 1980 CSO valuation tables with or without the 10-year select mortality factors.
(3) There are no cash surrender values in any policy year.
(h) Exemption from unitary reserves for certain juvenile policies. Unitary basic reserves and unitary deficiency reserves need not be calculated for a policy if the following conditions are met, based upon the initial current premium scale at issue:
(1) At issue, the insured is age 24 or younger.
(2) Until the insured reaches the end of the juvenile period, which shall occur at or before age 25, the gross premiums and death benefits are level, and there are no cash surrender values.
(3) After the end of the juvenile period, gross premiums are level for the remainder of the premium paying period, and death benefits are level for the remainder of the life of the policy.
§ 84c.7. Minimum valuation standard for universal life insurance policies that contain provisions resulting in the ability of a policyowner to keep a policy in force over a secondary guarantee period.
(a) General requirements.
(1) Each of the following shall be considered a policy with a secondary guarantee:
(i) A policy with a guarantee that the policy will remain in force at the original schedule of benefits, subject only to the payment of specified premiums.
(ii) A policy in which the minimum premium at any duration is less than the corresponding 1-year valuation premium, calculated using the maximum valuation interest rate and the 1980 CSO valuation tables with or without 10-year select mortality factors, or any other table adopted after _____ (Editor's Note: The blank refers to the effective date of adoption of this proposal.) by the NAIC and promulgated by regulation by the Commissioner for this purpose.
(2) A secondary guarantee period is the period for which the policy is guaranteed to remain in force subject only to a secondary guarantee. When a policy contains more than 1 secondary guarantee, the minimum reserve shall be the greatest of the respective minimum reserves at that valuation date of each unexpired secondary guarantee, ignoring all other secondary guarantees. Secondary guarantees that are unilaterally changed by the insurer after issue shall be considered to have been made at issue. Reserves described in subsections (b) and (c) shall be recalculated from issue to reflect these changes.
(3) Specified premiums mean the premiums specified in the policy, the payment of which guarantees that the policy will remain in force at the original schedule of benefits, but which otherwise would be insufficient to keep the policy in force in the absence of the guarantee if maximum mortality and expense charges and minimum interest credits were made and any applicable surrender charges were assessed.
(4) The minimum premium for any policy year is the premium that, when paid into a policy with a zero account value at the beginning of the policy year, produces a zero account value at the end of the policy year. The minimum premium calculation shall use the policy cost factors (including mortality charges, loads and expense charges) and the interest crediting rate, which are all guaranteed at issue.
(5) The 1-year valuation premium means the net 1-year premium based upon the original schedule of benefits for a given policy year. The 1-year valuation premiums for all policy years are calculated at issue. The select mortality factors defined in § 84c.5(b)(2)--(4) (relating to general requirements for basic reserves and premium deficiency reserves) may not be used to calculate the 1-year valuation premiums.
(6) The 1-year valuation premium should reflect the frequency of fund processing, as well as the distribution of deaths assumption employed in the calculation of the monthly mortality charges to the fund.
(b) Basic reserves for the secondary guarantees. Basic reserves for the secondary guarantees shall be the segmented reserves for the secondary guarantee period. In calculating the segments and the segmented reserves, the gross premiums shall be set equal to the specified premiums, if any, or otherwise to the minimum premiums, that keep the policy in force and the segments will be determined according to the contract segmentation method as defined in § 84c.4(b)(relating to segmented and unitary reserve methods).
(c) Deficiency reserves for the secondary guarantees. Deficiency reserves, if any, for the secondary guarantees shall be calculated for the secondary guarantee period in the same manner as described in § 84c.6(b) (relating to minimum valuation standard for policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits (other than universal life policies)) with gross premiums set equal to the specified premiums, if any, or otherwise to the minimum premiums that keep the policy in force.
(d) Minimum reserves. The minimum reserves during the secondary guarantee period are the greater of the basic reserves for the secondary guarantee plus the deficiency reserve, if any, for the secondary guarantees or the minimum reserves required by other rules or regulations governing universal life plans.
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