The Texas Department of Insurance proposes a new Subchapter EE, §§3.4501-3.4508, concerning the Valuation of Life Insurance Policies, to replace the existing Subchapter EE which is proposed for repeal elsewhere in this issue of the Texas Register .

The new Subchapter EE will apply to all life insurance policies, with or without nonforfeiture values, with certain exceptions and conditions. The proposed subchapter is a substantive adoption of the National Association of Insurance Commissioners' (NAIC) model regulation titled "Valuation of Life Insurance Policies" (the model regulation is frequently referred to as "XXX"). The purpose new subchapter is to substantively adopt the current NAIC model regulation which was adopted by the NAIC on March 8, 1999. The new subchapter proposes to adopt tables of select mortality factors; rules for their use; rules concerning a minimum standard for the valuation of plans with nonlevel premiums or benefits; and rules concerning a minimum standard for the valuation of plans with secondary guarantees. The method for calculating basic reserves defined in the subchapter will constitute the Commissioners' Reserve Valuation Method for policies to which this subchapter would apply. Section 3.4502 contains six tables of select mortality factors that were adopted by the NAIC on March 8, 1999, in connection with the adoption by the NAIC of the updated model regulation for the valuation of life insurance policies.

The department will consider adoption of Subchapter EE, Valuation of Life Insurance Policies, in a public hearing under Docket Number 2412, scheduled for 9:00 a.m. on September 7, 1999, in Room 100 of the William P. Hobby, Jr. State Office Building, 333 Guadalupe Street in Austin, Texas. The department encourages any interested party to provide the department with any comments prior to the hearing or at the hearing.

Betty Patterson, Associate Commissioner for the Financial Program, has determined that for the first five-year period the proposed subchapter is in effect, there will be no fiscal implications for state or local government as a result of enforcing or administering the regulation.

Ms. Patterson has determined that for each year of the first five years the subchapter is in effect, the public benefits anticipated as a result of enforcing the regulation will be greater consistency in adequacy of reserves and reserving practices. In addition, the new mortality rates allowed by this regulation will enable insurers to reserve and price more closely in line with level of mortality and risks encountered. The estimated cost of compliance to insurers will vary depending on the types of products offered and on the amount of reserves currently held. One type of product significantly affected by the proposed subchapter is the type where the guaranteed maximum premiums after the initial period of years are much higher than the guaranteed low premiums during the initial period of years. In estimating the cost, it is assumed that the guaranteed maximum premiums for the product described in the preceding sentence are approximately ten to fifteen times higher in later years than the initial guaranteed premium. These products are referred to as "Indeterminate Premium Reduction Policies." Insurers with these products that hold reserves only to provide for the expected cost of insurance in the current year may experience an increase in reserves as a result of this regulation. This increase will vary by such factors as the length of the initial period of years (as referenced above), reserve method, reserve interest rate, the amount of increase of the guaranteed maximum premiums, issue age, length of the benefit period, and the degree of selection in the risks covered. Anticipated ranges of the increase in reserves for these products based on the length of the initial guarantee period are as follows: 1) Immaterial increase where the initial period is less than 5 years; 2) An increase of 2-5 times where the initial period is 10 years; and 3) An increase of approximately 10 times where the initial period is 20 years. These ranges assume that the insurer is currently providing reserves for only the anticipated cost of insurance in the current year. Department staff assumes that the ranges set out above are the highest levels that could occur at some point in the coverage period, and particular results may vary. Department staff further assumes that the insurer is not making full use of an "X" factor which would further reduce the reserve impact. Increasing reserves to the levels mentioned above would provide a similar level of reserve conservatism to these products as is already required of other life products which should promote greater solvency protection to both the insurer and the public. For insurers who experience the anticipated ranges of reserve increases listed above, the range of increases in the price of these products is estimated to be as follows: 1) Immaterial price increase where the initial period is less than 5 years; 2) An approximate 5% price increase where the initial period is 10 years; and 3) An approximate 28% price increase where the initial period is 20 years. Such price increases would only be anticipated if an insurer (subject to the assumptions mentioned above and without full use of the "X" factor, which could reduce the impact) funds any reserve increase solely out of premiums rather than other sources, and would also depend on whether the insurer chooses to continue to offer the particular product as presently designed, or decides to make modifications to its policy forms. Costs to the insurer given any increase in reserves would be the cost of funds required to be in reserves versus available for other uses. The impact of the cost, as with any increase in liabilities, depends on the opportunities for use of funds available to an insurer. The public benefit served by the change is the establishment of reasonable reserve conservatism to promote solvency and the provision for similar reserve conservatism for indeterminate premium products as required of other products. The result therefore promotes leveling of the competitive position of various term life products. The numerous other products where such reserve conservatism is currently required are anticipated to generally experience a lower but still reasonable amount of reserve conservatism due to the use of improved mortality tables that this regulation will provide in the calculation of reserves. This reduction of reserves may result in lower prices for these other products. As stated previously, this regulation will result in a similar level of acceptable required reserve conservatism to be extended to all products to which this regulation applies, which will promote solvency benefits to both the insurer and the public. In addition, this regulation will promote reasonable competition across the various product lines which is a benefit to the insurer in having similar reserve standards and is expected to be a benefit to the public in lower prices for many products.

To analyze the economic effect of the regulation on small businesses, the cost of compliance is divided into two components. First, the regulation will require the establishment of reserves for policies issued after the effective date of the regulation which probably will be higher than reserves presently established by many insurers for products significantly affected by this regulation, such as indeterminate premium reduction policies. Second, insurers will have to develop systems to monitor compliance and calculate reserves in accordance with the regulation.

Based on the department's experience and discussions with actuaries, the actual impact on reserves will vary from company to company as a result of the factors discussed previously. On the basis of $100 premium paid, the cost of establishing the reserves for policies issued after the effective date of this regulation will be similar for small and large businesses. This assumes that reserves are funded by the premiums paid plus the investment income on those premiums. While an insurer may actually derive these funds from other sources from time to time, in the long run the premiums paid must be adequate to provide the funds necessary to perform the insurance contract.

The cost to develop systems to monitor compliance and calculate reserves in accordance with this regulation could be up to $100,000 for the largest insurers and as low as $5,000 for small insurers based on the department's experience and discussions with actuaries. These costs would be incurred in the first year the regulation is in effect. Large insurers have staff actuaries who the department assumes will develop the systems to monitor compliance and calculate reserves required by the regulation. Since the larger insurers generally have more complexity in their products and systems, the department estimates that the cost of developing a system for a large insurer will be approximately $100,000. A large insurer with total premium volume of $500 million that incurred a $100,000 cost in developing a system would have a cost of $.02 per $100 of premium. Small insurers generally do not have staff actuaries, but engage consulting actuarial firms. Such actuarial firms estimate that it would cost $30,000 to develop a system to monitor compliance and calculate reserves for the products and systems typically found in small insurers. A consulting actuarial firm would then attempt to spread this cost of development among its client companies. For example, if an actuarial consulting firm had six client insurers that purchased their system, then approximately $5,000 of the actuarial firm's cost of $30,000 would be prorated to each client insurer. Assuming the small insurer had $500,000 in total premiums, the cost per $100 of total premium would be $1.00. In summary, on the basis of $100 of premium, large and small insurers will incur a similar reserve impact for similar products. In developing the systems to monitor compliance and calculate reserves, small insurers will incur a cost of $1.00 per $100 of premium while large companies would incur a cost of $.02 per $100 of premium. The costs are approximations based on the department's experience and discussions with actuaries. In order to provide equal protection to policyholders, Insurance Code, Article 3.28, requires large and small insurers alike to establish minimum reserves, therefore, the department finds it is neither legal nor feasible to reduce the effect of the proposed subchapter for small insurers that offer the type of products impacted by this regulation.

Comments on the proposal must be submitted in writing within 30 days after publication of the proposed sections in the Texas Register to: Lynda H. Nesenholtz, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comments should be submitted to Mike Boerner, Managing Actuary, Mail Code 305-3A, Texas Department of Insurance, P. O. Box 149104, Austin, Texas 78714-9104.

The subchapter is proposed under the Insurance Code, Articles 3.28 and 1.03A. Article 3.28 authorizes the commissioner of insurance to adopt mortality tables adopted by the National Association of Insurance Commissioners and modifications to those mortality tables and methods consistent with Article 3.28. Article 1.03A provides the commissioner with the authority to adopt rules and regulations for the conduct and execution of the duties and functions of the department only as authorized by a statute.

The Insurance Code, Article 3.28, is affected by the proposed subchapter.

§3.4501. Purpose.

(a)

The purpose of this subchapter is to provide:

(1)

Tables of select mortality factors and rules for their use;

(2)

Rules concerning a minimum standard for the valuation of plans with nonlevel premiums or benefits; and

(3)

Rules concerning a minimum standard for the valuation of plans with secondary guarantees.

(b)

The method for calculating basic reserves defined in this subchapter will constitute the Commissioners' Reserve Valuation Method for policies to which this subchapter is applicable.

§3.4502. Adoption of Tables of Select Mortality Factors.

The six tables of select mortality factors adopted in this section are from the NAIC model regulation titled "Valuation of Life Insurance Policies Model Regulation" which was adopted by the NAIC on March 8, 1999. The six tables of base select mortality factors include: male aggregate, male nonsmokers, male smoker, female aggregate, female nonsmoker, and female smoker. These tables apply to both age last birthday and age nearest birthday mortality tables.

Figure: 28 TAC §3.4502

§3.4503. Applicability.

This subchapter shall apply to all life insurance policies, with or without nonforfeiture values, issued on or after the effective date of this subchapter, subject to the following exceptions in paragraph (1) of this section and conditions in paragraph (2) of this section.

(1)

Exceptions.

(A)

This subchapter shall not apply to any individual life insurance policy issued on or after the effective date of this subchapter 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 the effective date of this subchapter, that guarantees the premium rates of the new policy. This subchapter also shall not apply to subsequent policies issued as a result of the exercise of such a provision, or a derivation of the provision, in the new policy.

(B)

This subchapter shall not apply to any universal life policy that meets all the following requirements:

(i)

secondary guarantee period, if any, is five 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 valuation interest rate; and

(iii)

the initial surrender charge is not less than 100% of the first year annualized specified premium for the secondary guarantee period.

(C)

This subchapter shall not apply to any 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 or accounts.

(D)

This subchapter shall not apply to any 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 or accounts.

(E)

This subchapter shall not apply to a group life insurance certificate unless the certificate provides for a stated or implied schedule of maximum gross premiums required in order to continue coverage in force for a period in excess of one year.

(2)

Conditions.

(A)

Calculation of the minimum valuation standard for policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits (other than universal life policies), or both, shall be in accordance with the provisions of §3.4506 of this title (relating to Calculation of Minimum Valuation Standard for Policies with Guaranteed Nonlevel Gross Premiums or Guaranteed Nonlevel Benefits (Other than Universal Life Policies)).

(B)

Calculation of the minimum valuation standard for flexible premium and fixed premium universal life insurance policies, that contain provisions resulting in the ability of a policyholder to keep a policy in force over a secondary guarantee period, shall be in accordance with the provisions of §3.4507 of this title (relating to Calculation of 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).

§3.4504. Definitions.

The following words and terms, when used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1)

Basic reserves - reserves calculated in accordance with the principles of Insurance Code, Article 3.28, §6.

(2)

Contract segmentation method - the method of dividing the period from issue to mandatory expiration of a policy into successive segments, with the length of each segment being defined as the period from the end of the prior segment (from policy inception, for the first segment) to the end of the latest policy year as determined below. All calculations are made using the 1980 CSO valuation tables, as defined in this section, (or any other valuation mortality table adopted by the NAIC after the effective date of this subchapter and promulgated by regulation by the commissioner for this purpose), and, if elected, the optional minimum mortality standard for deficiency reserves stipulated in §3.4505(b) of this title (relating to General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves).

Figure: 28 TAC §3.4504(2)

(3)

Deficiency reserves - the excess, if greater than zero, of the minimum reserves calculated in accordance with the principles of Insurance Code, Article 3.28, §10 over the basic reserves.

(4)

Guaranteed gross premiums - the premiums under a policy of life insurance that are guaranteed and determined at issue.

(5)

Maximum valuation interest rates - the interest rates defined in Insurance Code, Article 3.28, §5(b)(1), Computation of Minimum Standard by Calendar Year of Issue, that are to be used in determining the minimum standard for the valuation of life insurance policies.

(6)

NAIC - National Association of Insurance Commissioners.

(7)

1980 CSO valuation tables - the Commissioners' 1980 Standard Ordinary Mortality Table (1980 CSO Table) without ten-year selection factors, incorporated into the 1980 amendments to the NAIC Standard Valuation Law, and variations of the 1980 CSO Table approved by the NAIC, such as the smoker and nonsmoker versions approved in December 1983.

(8)

Scheduled gross premium - the smallest illustrated gross premium at issue for other than universal life insurance policies. For universal life insurance policies, scheduled gross premium means the smallest specified premium described in §3.4507(a)(3) of this title (relating to Calculation of 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) if any, or else the minimum premium described in §3.4507(a)(4) of this title (relating to Calculation of 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).

(9)

Segmented reserves - reserves, calculated using segments produced by the contract segmentation method, equal to the present value of all future guaranteed benefits less the present value of all future net premiums to the mandatory expiration of a policy, where the net premiums within each segment are a uniform percentage of the respective guaranteed gross premiums within the segment. The length of each segment is determined by the "contract segmentation method," as defined in this section. 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. For both basic reserves and deficiency reserves computed by the segmented method, present values must include future benefits and net premiums in the current segment and in all subsequent segments. 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:

(A)

the present value of the death benefits within the segment, plus

(B)

the present value of any unusual guaranteed cash value (see §3.4506(d) of this title (relating to Calculation of Minimum Valuation Standard for Policies with Guaranteed Nonlevel Gross Premiums or Guaranteed Nonlevel Benefits (Other than Universal Life Policies)) occurring at the end of the segment, less

(C)

any unusual guaranteed cash value occurring at the start of the segment, plus

(D)

for the first segment only, the excess of clause (i) of this paragraph over clause (ii) of this paragraph, 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 one 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 shall not exceed the net level annual premium on the nineteen-year premium whole life plan of insurance of the same renewal year equivalent level amount at an age one year higher than the age at issue of the policy.

(ii)

a net one year term premium for the benefits provided for in the first policy year.

(10)

Tabular cost of insurance - the net single premium at the beginning of a policy year for one-year term insurance in the amount of the guaranteed death benefit in that policy year.

(11)

Ten-year select factors - the select factors in Insurance Code, Article 3.28.

(12)

Unitary reserves - the present value of all future guaranteed benefits less the present value of all future modified net premiums, where:

(A)

guaranteed benefits and modified net premiums are considered to the mandatory expiration of the policy; and

(B)

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 clause (i) of this subparagraph over clause (ii) of this subparagraph, 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 one 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 shall not exceed the net level annual premium on the nineteen-year premium whole life plan of insurance of the same renewal year equivalent level amount at an age one year higher than the age at issue of the policy.

(ii)

a net one year term premium for the benefits provided for in the first policy year.

(C)

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.

(13)

Universal life insurance policy - any individual life insurance policy under the provisions of which separately identified interest credits (other than in connection with dividend accumulations, premium deposit funds, or other supplementary accounts) and mortality or expense charges are made to the policy.

§3.4505. General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves.

(a)

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 with select mortality factors (or any other valuation mortality table adopted by the NAIC after the effective date of this subchapter and promulgated by regulation by the commissioner for this purpose). If select mortality factors are elected, they may be:

(1)

the ten-year select mortality factors incorporated in Insurance Code, Article 3.28, The Standard Valuation Law;

(2)

The select mortality factors adopted in §3.4502 of this title (relating to Adoption of Tables of Select Mortality Factors).

(3)

Any other table of select mortality factors adopted by the NAIC after the effective date of this regulation and promulgated by regulation by the commissioner for the purpose of calculating basic reserves.

(b)

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 with select mortality factors (or any other valuation mortality table adopted by the NAIC after the effective date of this regulation and promulgated by regulation by the commissioner). If select mortality factors are elected, they may be:

(1)

the ten-year select mortality factors in Insurance Code, Article 3.28;

(2)

the select mortality factors adopted in §3.4502 of this title (relating to Adoption of Tables of Select Mortality Factors);

(3)

For durations in the first segment, X% of the select mortality factors adopted in §3.4502 of this title (relating to Adoption of Tables of Select Mortality Factors), subject to the following:

(A)

X may vary by policy year, policy form, underwriting classification, issue age, or any other policy factor expected to affect mortality experience;

(B)

X shall not be less than 20%;

(C)

X shall not decrease in any successive policy years;

(D)

X is such that, when using the valuation interest rate used for basic reserves, clause (i) is greater than or equal to clause (ii) of this paragraph;

(i)

The actuarial present value of future death benefits, calculated using the mortality rates resulting from the application of X;

(ii)

The actuarial present value of future death benefits calculated using anticipated mortality experience without recognition of mortality improvement beyond the valuation date;

(E)

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 five years after the valuation date;

(F)

The appointed actuary shall increase X at any valuation date where it is necessary to continue to meet all the requirements of paragraph (3) of this subsection;

(G)

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) of this subsection; and

(H)

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.

(I)

If X is less than 100% at any duration for any policy, the following requirements shall be met:

(i)

The appointed actuary shall annually prepare an actuarial opinion and memorandum for the company in conformance with the requirements of §3.1608 of this title (relating to Statement of Actuarial Opinion Based on Asset Adequacy Analysis); and

(ii)

The appointed actuary shall annually opine for all policies subject to this regulation as to whether the mortality rates resulting from the application of X meet the requirements of paragraph (3) of this subsection. 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 the effective date of this regulation and promulgated by regulation by the commissioner for the purpose of calculating deficiency reserves.

(c)

This subsection applies to both basic reserves and deficiency reserves. Any set of select mortality factors may be used only for the first segment. However, if the first segment is less than ten years, the appropriate ten-year select mortality factors may be used thereafter through the tenth policy year from the date of issue.

(d)

In determining basic reserves or deficiency reserves, guaranteed gross premiums without policy fees may be used where 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)

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 one 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, and

(3)

reserves assuming that the policy was issued on the date of the guarantee.

(f)

The commissioner may require that the company document the extent of the adequacy of reserves for specified blocks, including but not limited to policies issued prior to the effective date of this subchapter. This documentation may include a demonstration of the extent to which aggregation with other non-specified blocks of business is relied upon in the formation of the appointed actuary opinion pursuant to and consistent with the requirements of §3.1608 of this title (relating to Statement of Actuarial Opinion based on Asset Adequacy Analysis).

§3.4506. Calculation of 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 must use the same valuation mortality table and selection factors. At the option of the insurer, in calculating segmented reserves and net premiums, either one of the two adjustments described in paragraphs (1) or (2) of this subsection may be made.

(1)

An insurer may use the adjustments described in this paragraph.

(A)

Treat the unitary reserve, if greater than zero, applicable at the end of each segment as a pure endowment; and

(B)

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)

An insurer may use the adjustments described in this paragraph.

(A)

Treat the guaranteed cash surrender value, if greater than zero, applicable at the end of each segment as a pure endowment; and

(B)

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.

(1)

The deficiency reserve at any duration shall be calculated:

(A)

on a unitary basis if the corresponding basic reserve determined by subsection (a) of this section is unitary;

(B)

on a segmented basis if the corresponding basic reserve determined by subsection (a) of this section is segmented; or

(C)

on the segmented basis if the corresponding basic reserve determined by subsection (a) of this section is equal to both the segmented reserve and the unitary reserve.

(2)

This subsection shall apply to any policy for which the guaranteed gross premium at any duration is less than the corresponding modified net premium calculated by the method used in determining the basic reserves, but using the minimum valuation standards of mortality specified in §3.4505(b) of this title (Relating to General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves) and rate of interest.

(3)

Deficiency reserves, if any, shall be calculated for each policy as the excess if greater than zero, for the current and all remaining periods, of the quantity A over the basic reserve, where A is obtained as indicated in §3.4505(b) of this title (Relating to General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves).

(4)

For deficiency reserves determined on a segmented basis, the quantity A is determined using segment lengths equal to 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 must use the same valuation mortality table and interest rates as that used for the calculation of the segmented reserves. However, if the select mortality factors are used, they shall be the ten-year select factors incorporated into Insurance Code, Article 3.28. In no case may total reserves (including basic reserves, deficiency reserves and any reserves held for supplemental benefits that would expire upon contract termination) be less than the amount that the policyowner would receive (including the cash surrender value of the supplemental benefits, if any, referred to above), exclusive of any deduction for policy loans, upon termination of the policy.

(d)

Unusual Pattern of Guaranteed Cash Surrender Values.

(1)

For any policy with an unusual pattern of guaranteed cash surrender values, the reserves actually held prior to the first unusual guaranteed cash surrender value shall 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 shall 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, where:

(A)

n is the number of years from the date of the last unusual guaranteed cash surrender value prior to the valuation date to the earlier of:

(i)

the date of the next unusual guaranteed cash surrender value, if any, that is scheduled after the valuation date; or

(ii)

the mandatory expiration date of the policy; and

(B)

the net premium for a given year during the n year period is equal to the product of the net to gross ratio and the respective gross premium; and

(C)

the net to gross ratio is equal to clause (i) of this subparagraph divided by clause (ii) of this subparagraph 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)

For purposes of this subsection , 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:

(A)

110% of the scheduled gross premium for that year;

(B)

110% of one 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; and

(C)

5% of the first policy year surrender charge, if any.

(e)

Optional Exemption for Yearly Renewable Term (YRT) Reinsurance. At the option of the company, the following approach for reserves on YRT 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) of this section.

(3)

Deficiency reserves.

(A)

For each policy year, calculate the excess, if greater than zero, of the valuation net premium over the respective maximum guaranteed gross premium.

(B)

Deficiency reserves shall never be less than the sum of the present values, at the date of valuation, of the excesses determined in accordance with subparagraph (A) of this paragraph.

(4)

For purposes of this subsection, the calculations use the maximum valuation interest rate and the 1980 CSO mortality tables with or without ten-year select mortality factors, or any other table adopted after the effective date of this regulation by the NAIC and promulgated by regulation by the commissioner for this purpose.

(5)

A reinsurance agreement shall be considered YRT reinsurance for purposes of this subsection 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 approach described in this subsection for reserves for attained-age-based YRT 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) of this section.

(3)

Deficiency reserves.

(A)

For each policy year, calculate the excess, if greater than zero, of the valuation net premium over the respective maximum guaranteed gross premium.

(B)

Deficiency reserves shall never be less than the sum of the present values, at the date of valuation, of the excesses determined in accordance with subparagraph (A) of this paragraph.

(4)

For purposes of this subsection, the calculations use the maximum valuation interest rate and the 1980 CSO valuation tables with or without ten-year select mortality factors, or any other table adopted after the effective date of this regulation by the NAIC and promulgated by regulation by the commissioner for this purpose.

(5)

A policy shall be considered an attained-age-based YRT life insurance policy for purposes of this subsection if:

(A)

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 such that the rate for any given policy at a given attained age of the insured is independent of the year the policy was issued; and

(B)

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 YRT policies after an initial period of coverage, the approach of this subsection may be used after the initial period if:

(A)

the initial period is constant for all insureds of the same sex, risk class and plan of insurance; or

(B)

the initial period runs to a common attained age for all insureds of the same sex, risk class and plan of insurance; and

(C)

after the initial period of coverage, the policy meets the conditions of paragraph (5) of this subsection.

(7)

If this election is made, this approach must be applied in determining reserves for all attained-age-based YRT life insurance policies issued on or after the effective date of this subchapter.

(g)

Exemption from Unitary Reserves for Certain n-Year Renewable Term Life Insurance Policies. Unitary basic reserves and unitary deficiency reserves need not be calculated for a policy if the conditions described in paragraphs (1)-(3) of this subsection are met.

(1)

The policy consists of a series of n-year periods, including the first period and all renewal periods, where n is the same for each period, except for the final renewal period, n may be truncated or extended to reach the expiry age, provided that this final renewal period is less than ten years and less than twice the size of the earlier n-year 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 n-year periods are not less than the corresponding net premiums based upon the 1980 CSO Table with or without the ten-year select mortality factors; and

(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 conditions described in paragraphs (1)-(3) of this subsection are met, based upon the initial current premium scale at issue.

(1)

At issue, the insured is age twenty-four or younger;

(2)

until the insured reaches the end of the juvenile period, which must occur at or before age twenty-five, the gross premiums and death benefits are level, and there are no cash surrender values; and

(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.

§3.4507. Calculation of 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.

( a)

General.

(1)

Policies with a secondary guarantee include:

(A)

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;

(B)

a policy in which the minimum premium at any duration is less than the corresponding one year valuation premium, calculated using the maximum valuation interest rate and the 1980 CSO valuation tables with or without ten-year select mortality factors, or any other table adopted after the effective date of this regulation by the NAIC and promulgated by regulation by the commissioner for this purpose; or

(C)

a policy with any combination of subparagraphs (A) and (B) of this paragraph.

(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 one 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) of this section must 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)

For purposes of this section, 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 must 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 one-year valuation premium means the net one-year premium based upon the original schedule of benefits for a given policy year. The one-year valuation premiums for all policy years are calculated at issue. The select mortality factors defined in §3.4505(b)(2),(3) and (4) of this title (relating to General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves) may not be used to calculate the one-year valuation premiums.

(6)

The one-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 §3.4504 of this title (relating to Definitions).

(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 §3.4506(b) of this title (Relating to Calculation of 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:

(1)

The basic reserves for the secondary guarantee plus the deficiency reserve, if any, for the secondary guarantees; or

(2)

The minimum reserves required by other rules or subchapters governing universal life plans.

§3.4508. Effective Date.

This subchapter is effective January 1, 2000.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on July 19, 1999.

TRD-9904329

Lynda H. Nesenholtz

General Counsel and Chief Clerk

Texas Department of Insurance

Earliest possible date of adoption: August 29, 1999

For further information, please call: (512) 463-6327