28 TAC §§3.14001-3.14008
The Texas Department of Insurance proposes new Subchapter
NN concerning the valuation of life insurance policies. Subchapter NN will
apply to all life insurance policies, with or without nonforfeiture values,
with certain exceptions and conditions. The purpose of the regulation is to
adopt tables of select mortality factors; and, 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 proposed subchapter will constitute the commissioners' reserve
valuation method for policies to which this subchapter would apply. The effective
date is proposed as December 31, 1998, in order to provide affected insurers
time to prepare for these new requirements. Section 3.14002 contains six tables
of base select mortality factors that were adopted by the NAIC on March 12,
1995, in connection with the adoption by the NAIC of the model regulation
for the valuation of life insurance policies.
Jose Montemayor, Associate Commissioner for the financial program, has
determined that for the first five-year period the rules are in effect, there
will be no fiscal implications for state or local government as a result of
enforcing or administering the regulation.
Mr. Montemayor has determined that for each year of the first five years
the regulation is in effect, the public benefits anticipated as a result of
enforcing the regulation will be improved regulation of insurers' reserving
practices, which promotes solvency of insurers through consistency in reserving
for the products subject to the regulation and use of more current mortality
tables. The estimated cost of compliance to insurers will vary depending on
the types of products offered and on the amount of reserves currently held.
The type of products most affected by the regulation are those where the guaranteed
maximum premiums after an 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. Increasing reserves to the required levels
would then extend 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
7% price increase where the initial period is 10 years; and 3) An approximate
20% 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) 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 that required of other products. The
result therefore is a 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 the same 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 the 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 regulation 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 Caroline Scott, 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 302-3A, Texas Department of Insurance,
P. O. Box 149104, Austin, Texas 78714-9104.
The new sections are 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 these proposed new sections.
§3.14001. 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.
§3.14002. Adoption of Tables of Base Select Mortality Factors.
The six tables of base select mortality factors in this section are
from the model regulation titled "Valuation of Life Insurance Policies Model
Regulation" which was adopted by the NAIC on March 12, 1995. 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. The tables are the bases to which the respective percentage of §3.14005(a)(2)
and (3) and (b)(1)(B) and (C) of this title (relating to General Calculation
Requirements for Basic Reserves and Premium Deficiency Reserves) are applied.
FIGURE NO. 1: 28 TAC §3.14002
§3.14003. 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 subsection (a) of this
section and conditions in subsection (b) 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 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.
(C)
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.
(D)
This subchapter shall not apply to group life insurance
certificates unless the certificates provide 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 premiums or guaranteed nonlevel benefits (other than
universal life policies), or both, shall be in accordance with the provisions
of §3.14006 of this title (relating to Calculation of Minimum Valuation
Standard for Policies with Guaranteed Nonlevel 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 of more than five years, shall be
in accordance with the provisions of §3.14007 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 of More than Five Years).
§3.14004. Definitions.
The following words and terms, when used in this subchapter, shall
have the following meanings, unless the context clearly indicates otherwise.
Basic reserves
-reserves calculated in accordance with the
principles of Insurance Code, Article 3.28, §6.
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 Section 3.14005(b) of this title (relating to General Calculation
Requirements for Basic Reserves and Premium Deficiency Reserves).
FIGURE NO. 2: 28 TAC §3.14004
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.
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.
NAIC
-National Association of Insurance Commissioners.
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.
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 §3.14007(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
of More than Five Years) if any, or else the minimum premium described in
§3.14007(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 of More than Five Years).
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 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:
(A)
the present value of the death benefits within
the segment, plus
(B)
the present value of any unusual guaranteed cash
value (see §3.14006(d) of this title (relating to Calculation of Minimum
Valuation Standard for Policies with Guaranteed Nonlevel 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. 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.
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.
Ten-year select factors
-the select factors in Insurance Code,
Article 3.28.
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.
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.
§3.14005. 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)
150% of the base select mortality factors adopted
by reference in §3.14002 of this title (relating to Adoption by Reference
of Tables of Base Select Mortality Factors); or
(3)
150% of the base select mortality factors adopted
by reference in §3.14002 of this title (relating to Adoption by Reference
of Tables of Base Select Mortality Factors) for the first ten policy years;
then linearly graded from the resulting tenth year factor to 100% at policy
year sixteen; or
(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 basic reserves.
(b)
Deficiency reserves are required in addition to the basic
reserves under the conditions described in this subsection.
(1)
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:
(A)
the ten-year select mortality factors in Insurance Code,
Article 3.28;
(B)
120% of the base select mortality factors adopted by reference
in §3.14002 of this title (relating to Adoption by Reference of Tables
of Base Select Mortality Factors);
(C)
120% of the base select mortality factors adopted by reference
in §3.14002 of this title (relating to Tables of Base Select Mortality
Factors) for the first ten policy years; then linearly graded from the resulting
tenth year factor to 100% at policy year sixteen;
(D)
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.
(2)
Notwithstanding the above, if the length of
the first segment as determined by the contract segmentation method for the
basic reserves is not greater than five years (safe harbor), then for that
length of time measured from issue, for either the unitary method or the contract
segmentation method, gross premiums need not be substituted for net premiums
even if the gross premiums are less than the net premiums. For subsequent
periods, gross premiums must be substituted for net premiums if the gross
premiums are less than the corresponding net premiums.
(3)
For any policies for which the company chooses to
use the "safe harbor" describe in paragraph (2) of this subsection, the company
must demonstrate annually to the satisfaction of the commissioner, by submitting
a statement of actuarial opinion signed by the appointed actuary, that the
reserves held for all such policies are adequate.
(c)
In applying percentages to the base select mortality factors:
(1)
do not round any result; and
(2)
set equal to 100 any result that exceeds 100.
(d)
This subsection applies to both basic reserves and deficiency
reserves. Any set of base 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.
(e)
In determining basic reserves or deficiency reserves,
gross premiums without policy fees may be used where the calculation involves
the gross premium but only if the policy fee is a level dollar amount for
the entire premium-paying period of the policy. In determining deficiency
reserves, policy fees may be included in gross premiums even if not included
in the actual calculation of basic reserves.
§3.14006. Calculation of Minimum Valuation Standard for Policies with Guaranteed Nonlevel 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 subsection (b) of this section 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 subsection (b) of this section.
(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,
select mortality factor and interest rates as that used for the calculation
of both the segmented and the unitary reserves. 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 subparagraph (i) of
this paragraph divided by subparagraph (ii) of this paragraph 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:
(A)
the reinsurance premium rates (on both the initial current
premium scale and the guaranteed maximum premium scale) for any given year
are independent of both the premium rates and the plan of the original policy;
and
(B)
only the mortality risk is reinsured.
(f)
Optional Exemption for Attained-Age-Based Yearly Renewable
Term Life Insurance Policies. At the option of the company, the approach described
in paragraphs (1) and (2) of 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 Polices. 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,
and for each n-year 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.
§3.14007.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 of More Than Five Years.
(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 over a period exceeding five
years, subject only to the payment of specified premiums;
(B)
a policy in which the minimum premium at any future duration
beyond the end of the fifth policy year 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 paragraphs (A) and (B)
of this paragraph.
(2)
A secondary guarantee period is the longest
period for which the policy is guaranteed to remain in force subject only
to a secondary guarantee. Secondary guarantees that are unilaterally extended
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 the extensions.
(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 §3.14005(b)(1)(B), (C), and (D)
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.
(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 §3.14004(b) 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 §3.14006(b)
of this title (Calculation of Minimum Valuation Standard for Policies with
Guaranteed Nonlevel 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.
§3.14008. Effective Date.
This subchapter is effective December 31, 1998.
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
January 12, 1998.
TRD-9800417
Caroline Scott
General Counsel and Chief Clerk
Texas Department of Insurance
Earliest possible date of adoption: February 23, 1998
For further information, please call: (512) 463-6327