Part 1.
TEXAS DEPARTMENT OF INSURANCE
Chapter 3.
LIFE, ACCIDENT AND HEALTH INSURANCE AND ANNUITIES
Subchapter Q. ACTUARIAL OPINION AND MEMORANDUM REGULATION
28 TAC §§3.1601 - 3.1611
The Commissioner of Insurance adopts the repeal of §§3.1601
- 3.1611 concerning the submission of actuarial opinions and their supporting
memoranda with the annual statement of life insurance companies. The repeal
of these sections is adopted without changes to the proposal published in
the December 17, 2004 issue of the
Texas Register
(29 TexReg 11543).
The repeal of the sections is necessary to adopt new §§3.1601
- 3.1608 which appear elsewhere in this issue of the
Texas Register
. The new sections will provide consistent and stronger
standards for reserves held by life insurance companies.
The purpose of the repeal is to eliminate obsolete sections.
No comments were received on the proposal.
The repeal of the sections is adopted under the Insurance Code
Article 3.28 and §36.001. Insurance Code Article 3.28, §2A, authorizes
and requires the department to define the specific requirements of actuarial
opinions required under Article 3.28, including matters deemed to be necessary
to the scope of such opinions, as well as to prescribe the qualifications
of the persons who may certify to such opinions. Section 36.001 provides that
the Commissioner of Insurance may adopt any rules necessary and appropriate
to implement the powers and duties of the Texas Department of Insurance under
the Insurance Code and other laws of this state.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of
the Secretary of State on May 31, 2005.
TRD-200502185
Gene C. Jarmon
General Counsel and Chief Clerk
Texas Department of Insurance
Effective date: June 20, 2005
Proposal publication date: December 17, 2004
For further information, please call: (512) 463-6327
28 TAC §§3.1601 - 3.1608
The Commissioner of Insurance adopts new §§3.1601
- 3.1608, concerning the submission of actuarial opinions and their supporting
memoranda with the annual statements of life insurance companies. Sections
3.1604, 3.1606 and 3.1607 are adopted with changes to the proposal published
in the December 17, 2004, issue of the
Texas Register
(29 TexReg 11543). Sections 3.1601 - 3.1603, 3.1605 and 3.1608 are
adopted without changes.
The new sections are necessary to provide consistent and stronger standards
for reserves held by life insurance companies. Insurance Code Article 3.28 §2A(a)
requires every life insurance company doing business in this state to annually
submit to the department the opinion of a qualified actuary that states whether
the reserves and related actuarial items held in support of the policies and
contracts of the insurer are computed appropriately, are based on assumptions
which satisfy contractual provisions, are consistent with prior reported amounts
and comply with applicable laws of this state. The sections are substantially
based on the National Association of Insurance Commissioners "Model Actuarial
Opinion and Memorandum Regulation." The sections replace the existing §§3.1601
- 3.1611 which are repealed elsewhere in this issue of the
Texas Register
. In §§3.1604(6), 3.1606(b)(2) and 3.1607(b),
an incorrect citation to §3.1605(d) was changed to §3.1605(c). Also
in §3.1606(b)(2) an incorrect citation to §3.1605(e)(2) was changed
to §3.1605(d)(2). Finally, in §3.1607(a)(5) a typographical error
was corrected to accurately reflect the Department's post office box number.
The new sections will require companies to develop information to better
manage risks inherent to its business including those related to assets in
support of reserves. The sections require all life insurance companies, with
the exception of life insurance companies that only do business in Texas,
to provide an actuarial opinion based on an asset adequacy analysis with their
2005 annual statement and thereafter. The sections establish standards that
support adequate reserve levels in light of the assets held for such reserves
and, to assist regulatory review, provide for a summary of analysis performed
by the actuary. In addition to an actuarial opinion based on an asset adequacy
analysis, the sections require the preparation of an actuarial memorandum
which includes an asset adequacy analysis and a regulatory asset adequacy
issues summary. Section 3.1601 states the purpose of Subchapter Q. Section
3.1602 states the scope and applicability of the subchapter. Section 3.1603
provides the commissioner may require a life insurance company that only does
business in Texas to provide an actuarial opinion based on an asset adequacy
analysis in accordance with the subchapter when he or she determines such
an opinion is necessary. Section 3.1604 defines terms used in the subchapter.
Section 3.1605 describes the general requirements for an actuarial opinion
required by Insurance Code Article 3.28. Section 3.1606 describes the requirements
for an actuarial opinion based on an asset adequacy analysis. Section 3.1607
describes the requirements for an actuarial memorandum including an asset
adequacy analysis and a regulatory asset adequacy issues summary. Section
3.1608 provides an exemption for life insurance companies that only do business
in Texas. Such companies do not have to perform the asset adequacy analysis
required by §3.1606 unless directed by the commissioner to do so under §3.1603.
No comments were received regarding the proposed new sections.
The new sections are adopted under Insurance Code Article 3.28
and §36.001. Insurance Code Article 3.28, §2A, authorizes and requires
the department to define the specific requirements of actuarial opinions required
under Article 3.28, including matters deemed to be necessary to the scope
of such opinions, as well as to prescribe the qualifications of the persons
who may certify to such opinions. Section 36.001 provides that the commissioner
may adopt any rules necessary and appropriate to implement the powers and
duties of the Texas Department of Insurance under the Insurance Code and other
laws of this state.
§3.1604.Definitions.
The following words and terms, when used in this subchapter, shall
have the following meanings, unless the context clearly indicates otherwise.
(1)
AVR--Asset valuation reserve.
(2)
Actuarial opinion--The opinion of an appointed actuary
regarding the adequacy of the reserves and related actuarial items based on
an asset adequacy analysis in accordance with §3.1606 of this title (relating
to Statement of Actuarial Opinion Based on an Asset Adequacy Analysis) and
with applicable Actuarial Standards of Practice.
(3)
Actuarial Standards Board--The board established by the
American Academy of Actuaries to develop and promulgate standards of actuarial
practice.
(4)
Annual statement--That financial statement as of December
31st of the preceding year required to be filed annually by the company with
the Texas Department of Insurance.
(5)
Appointed actuary--A qualified actuary who is appointed
or retained to prepare the statement of actuarial opinion required by this
subchapter, either directly by or by the authority of the board of directors
through an executive officer of the company other than the qualified actuary.
(6)
Asset adequacy analysis--An analysis that meets the standards
and other requirements referred to in §3.1605(c) of this title (relating
to General Requirements).
(7)
Company--A life insurance company or reinsurer subject
to the provisions of this subchapter which includes a stipulated premium insurance
company insuring or assuming risk for coverages under Insurance Code §884.307
or §884.402.
(8)
IMR--Interest maintenance reserve.
(9)
Qualified actuary--An individual who:
(A)
is a member in good standing of the American Academy of
Actuaries;
(B)
is qualified to sign statements of actuarial opinion for
life and health insurance company annual statements in accordance with the
American Academy of Actuaries qualification standards for actuaries signing
such statements;
(C)
is familiar with the valuation requirements applicable
to life and health insurance companies;
(D)
has not been found by the commissioner (or if so found
has subsequently been reinstated as a qualified actuary), following appropriate
notice and opportunity for hearing, to have:
(i)
violated any provision of, or any obligation imposed by,
the Insurance Code or other law in the course of his or her dealings as a
qualified actuary;
(ii)
been found guilty of fraudulent or dishonest practices;
(iii)
demonstrated his or her incompetency, lack of cooperation,
or untrustworthiness to act as a qualified actuary;
(iv)
submitted to the commissioner during the past five years,
pursuant to this subchapter, an actuarial opinion or memorandum that the commissioner
rejected because it did not meet the provisions of this subchapter including
standards set by the Actuarial Standards Board; or
(v)
resigned or been removed as an actuary within the past
five years as a result of acts or omissions indicated in any adverse report
on examination or as a result of failure to adhere to generally acceptable
actuarial standards; and
(E)
has not failed to notify the commissioner of any action
taken by any commissioner of any other state similar to that under subparagraph
(D) of this paragraph.
§3.1606.Statement of Actuarial Opinion Based on an Asset Adequacy Analysis.
(a)
General description. The statement of actuarial opinion
required by this section shall consist of the following paragraphs:
(1)
a paragraph identifying the appointed actuary and his or
her qualifications, recommended language is provided in subsection (b)(1)
of this section;
(2)
a scope paragraph, recommended language is provided in
subsection (b)(2) of this section, identifying the subjects on which an opinion
is to be expressed and describing the scope of the appointed actuary’s
work, including a tabulation delineating the reserves and related actuarial
items that have been analyzed for asset adequacy and the method of analysis,
and identifying the reserves and related actuarial items covered by the opinion
that have not been so analyzed;
(3)
a reliance paragraph, recommended language is provided
in subsection (b)(3) of this section, describing those areas, if any, where
the appointed actuary has deferred to other experts in developing data, procedures
or assumptions, (e.g., anticipated cash flows from currently owned assets,
including variation in cash flows according to economic scenarios) supported
by a statement of each such expert with the information prescribed by subsection
(e) of this section; and
(4)
an opinion paragraph expressing the appointed actuary’s
opinion with respect to the adequacy of the supporting assets to mature the
liabilities, recommended language is provided in subsection (b)(6) of this
section.
(5)
One or more additional paragraphs will be needed in individual
company cases as follows:
(A)
if the appointed actuary considers it necessary to state
a qualification of his or her opinion;
(B)
if the appointed actuary must disclose an inconsistency
in the method of analysis or basis of asset allocation used at the prior opinion
date with that used for this opinion;
(C)
if the appointed actuary must disclose whether additional
reserves as of the prior opinion date are released as of this opinion date,
and the extent of the release; or
(D)
if the appointed actuary chooses to add a paragraph briefly
describing the assumptions that form the basis for the actuarial opinion.
(b)
Recommended language. The following paragraphs are to be
included in the statement of actuarial opinion in accordance with this section.
The language is that which should be included in typical circumstances in
a statement of actuarial opinion. The language may be modified as needed to
meet the circumstances of a particular case, but the appointed actuary should
use language which clearly expresses his or her professional judgment. Regardless
of the language used, the opinion shall retain all pertinent aspects of the
language provided in this section.
(1) The opening paragraph should generally indicate the appointed
actuary’s relationship to the company and his or her qualifications
to sign the opinion.
(A) For a company actuary, the opening paragraph of the actuarial
opinion should include a statement such as:
Figure: 28 TAC §3.1606(b)(1)(A)
(B)
For a consulting actuary, the opening paragraph should
include a statement such as:
Figure: 28 TAC §3.1606(b)(1)(B)
(2) The scope paragraph should include a statement such as:
(3)
If the appointed actuary has relied on other experts to
develop certain portions of the analysis, the reliance paragraph should include
a statement such as:
(4)
If the appointed actuary has examined the underlying asset
and liability records, the reliance paragraph should include a statement such
as:
(5)
If the appointed actuary has not examined the underlying
records, but has relied upon data (e.g., listings and summaries of policies
in force or asset records) prepared by the company, the reliance paragraph
should include a statement such as:
(6)
The opinion paragraph should include a statement such as:
(c)
Assumptions for new issues. The adoption for new issues
or new claims or other new liabilities of an actuarial assumption that differs
from a corresponding assumption used for prior new issues or new claims or
other new liabilities is not a change in actuarial assumptions within the
meaning of this section.
(d)
Adverse opinions. If the appointed actuary is unable to
form an opinion, then he or she shall refuse to issue a statement of actuarial
opinion. If the appointed actuary’s opinion is adverse or qualified,
then he or she shall issue an adverse or qualified actuarial opinion explicitly
stating the reasons for the opinion. This statement should follow the scope
paragraph and precede the opinion paragraph.
(e)
Reliance on information furnished by other persons. If
the appointed actuary relies on the certification of others on matters concerning
the accuracy or completeness of any data underlying the actuarial opinion,
or the appropriateness of any other information used by the appointed actuary
in forming the actuarial opinion, the actuarial opinion should so indicate
the persons the actuary is relying upon and a precise identification of the
items subject to reliance. In addition, the persons on whom the appointed
actuary relies shall provide a certification that precisely identifies the
items on which the person is providing information and a statement as to the
accuracy, completeness or reasonableness, as applicable, of the items. This
certification shall include the signature, title, company, address and telephone
number of the person rendering the certification, as well as the date on which
it is signed.
(f)
Alternate option.
(1)
Insurance Code Article 3.28 gives the commissioner broad
authority to accept the valuation of a foreign insurer when that valuation
meets the requirements applicable to a company domiciled in this state in
the aggregate. As an alternative to the requirements of subsection (b)(6)
of this section, the commissioner may make one or more of the following additional
approaches available to the opining actuary:
(A)
a statement that the reserves "meet the requirements of
the insurance laws and regulations of the State of (state of domicile) and
the formal written standards and conditions of this state for filing an opinion
based on the law of the state of domicile." If the commissioner chooses to
allow this alternative, a formal written list of standards and conditions
shall be made available. If a company chooses to use this alternative, the
standards and conditions in effect on July 1 of a calendar year shall apply
to statements for that calendar year, and they shall remain in effect until
they are revised or revoked. If no list is available, this alternative is
not available.
(B)
a statement that the reserves "meet the requirements of
the insurance laws and regulations of the State of (state of domicile) and
I have verified that the company’s request to file an opinion based
on the law of the state of domicile has been approved and that any conditions
required by the commissioner for approval of that request have been met."
If the commissioner chooses to allow this alternative, a formal written statement
of such allowance shall be issued no later than March 31 of the year it is
first effective. It shall remain valid until rescinded or modified by the
commissioner. The rescission or modifications shall be issued no later than
March 31 of the year they are first effective. Subsequent to that statement
being issued, if a company chooses to use this alternative, the company shall
file a request to do so, along with justification for its use, no later than
April 30 of the year of the opinion to be filed. The request shall be deemed
approved on October 1 of that year if the commissioner has not denied the
request by that date.
(C)
a statement that the reserves "meet the requirements of
the insurance laws and regulations of the State of (state of domicile) and
I have submitted the required comparison as specified by this state."
(i)
If the commissioner chooses to allow this alternative,
a formal written list of products (to be added to the table in clause (ii)
of this paragraph) for which the required comparison shall be provided will
be published. If a company chooses to use this alternative, the list in effect
on July 1 of a calendar year shall apply to statements for that calendar year,
and it shall remain in effect until it is revised or revoked. If no list is
available, this alternative is not available.
(ii)
If a company desires to use this alternative, the appointed
actuary shall provide a comparison of the gross nationwide reserves held to
the gross nationwide reserves that would be held under §7.18 of this
title (relating to NAIC Accounting Practices and Procedures Manual). Gross
nationwide reserves are the total reserves calculated for the total company
in force business directly sold and assumed, indifferent to the state in which
the risk resides, without reduction for reinsurance ceded. The information
provided shall be at least:
Figure: 28 TAC §3.1606(f)(1)(C)(ii)
(iii)
The information listed shall include all products identified
by either the state of filing or any other states subscribing to this alternative.
(iv)
If there is no codification standard for the type of product
or risk in force or if the codification standard does not directly address
the type of product or risk in force, the appointed actuary shall provide
detailed disclosure of the specific method and assumptions used in determining
the reserves held.
(2)
The commissioner may reject an opinion based on the laws
and regulations of the state of domicile and require an opinion based on the
laws of this state. If a company is unable to provide the opinion within 60
days of the request or such other period of time determined by the commissioner
after consultation with the company, the commissioner may contract with an
independent actuary at the company’s expense to prepare and file the
opinion.
§3.1607.Description of Actuarial Memorandum Including an Asset Adequacy Analysis and Regulatory Asset Adequacy Issues Summary.
(a)
General. Any actuarial memorandum required by the provisions
of this subchapter shall be prepared in accordance with and subject to the
provisions and qualifications of paragraphs (1) - (5) of this subsection.
(1)
In accordance with Insurance Code Article 3.28, §2A,
the appointed actuary shall prepare a memorandum to the company describing
the analysis done in support of his or her opinion regarding the reserves
under the opinion. The memorandum shall be made available for examination
by the commissioner upon his or her request.
(2)
In preparing the memorandum, the appointed actuary may
rely on, and include as a part of his or her own memorandum, memoranda prepared
and signed by other actuaries who are qualified within the meaning of §3.1604
of this title (relating to Definitions), with respect to the areas covered
in such memoranda, and so state in their memoranda.
(3)
If the commissioner requests a memorandum and no such memorandum
exists or if the commissioner finds that the analysis described in the memorandum
fails to meet the standards of the Actuarial Standards Board as required by §3.1605
of this title (relating to General Requirements), or the standards and requirements
of this subchapter, the commissioner may designate a qualified actuary to
review the opinion and prepare such supporting memorandum as is required for
review. The reasonable and necessary expense of the independent review shall
be paid by the company but shall be directed and controlled by the commissioner.
(4)
The reviewing actuary shall have the same status as an
examiner for purposes of obtaining data from the company and the work papers
and documentation of the reviewing actuary shall be retained by the commissioner.
The reviewing actuary shall not be an employee of a consulting firm involved
with the preparation of any prior memorandum or opinion for the insurer required
by this subchapter for any one of the current year or the preceding three
years.
(5)
In accordance with Insurance Code Article 3.28, §2A,
the appointed actuary shall prepare a regulatory asset adequacy issues summary,
the contents of which are specified in subsection (c) of this section. The
regulatory asset adequacy issues summary will be submitted to the Actuarial
Division, Financial Program, M.C. 302-3A, Texas Department of Insurance, 333
Guadalupe, P.O. Box 149104, Austin, Texas 78714-9104 no later than March 15
of the year following the year for which a statement of actuarial opinion
based on asset adequacy is required.
(b)
Details of the memorandum section documenting asset adequacy
analysis. When an actuarial opinion under §3.1606 of this title (relating
to Statement of Actuarial Opinion Based on an Asset Adequacy Analysis) is
provided, the memorandum shall demonstrate that the analysis has been done
in accordance with the standards for asset adequacy referred to in §3.1605(c)
of this title and any additional standards under this subchapter. The documentation
of the assumptions used in paragraphs (1) and (2) of this subsection shall
be such that an actuary reviewing the actuarial memorandum could form a conclusion
as to the reasonableness of the assumptions. The memorandum shall specify:
(1)
for reserves:
(A)
product descriptions including market description, underwriting
and other aspects of a risk profile and the specific risks the appointed actuary
deems significant;
(B)
source of liability in force;
(C)
reserve method and basis;
(D)
investment reserves;
(E)
reinsurance arrangements;
(F)
identification of any explicit or implied guarantees made
by the general account in support of benefits provided through a separate
account or under a separate account policy or contract and the methods used
by the appointed actuary to provide for the guarantees in the asset adequacy
analysis;
(G)
documentation of assumptions to test reserves for the following:
(i)
lapse rates (both base and excess);
(ii)
interest crediting rate strategy;
(iii)
mortality;
(iv)
policyholder dividend strategy;
(v)
competitor or market interest rate;
(vi)
annuitization rates;
(vii)
commissions and expenses; and
(viii)
morbidity.
(2)
For assets:
(A)
portfolio descriptions, including a risk profile disclosing
the quality, distribution and types of assets;
(B)
investment and disinvestment assumptions;
(C)
source of asset data;
(D)
asset valuation bases; and
(E)
documentation of assumptions made for:
(i)
default costs;
(ii)
bond call function;
(iii)
mortgage prepayment function;
(iv)
determining market value for assets sold due to disinvestment
strategy; and
(v)
determining yield on assets acquired through the investment
strategy.
(3)
For the analysis basis:
(A)
methodology;
(B)
rationale for inclusion or exclusion of different blocks
of business and how pertinent risks were analyzed;
(C)
rationale for degree of rigor in analyzing different blocks
of business (include in the rationale the level of "materiality" that was
used in determining how rigorously to analyze different blocks of business);
(D)
criteria for determining asset adequacy (include in the
criteria the precise basis for determining if assets are adequate to cover
reserves under "moderately adverse conditions" or other conditions as specified
in relevant actuarial standards of practice); and
(E)
whether the impact of federal income taxes was considered
and the method of treating reinsurance in the asset adequacy analysis;
(4)
summary of material changes in methods, procedures, or
assumptions from prior year’s asset adequacy analysis;
(5)
summary of results; and
(6)
conclusions.
(c)
Details of the regulatory asset adequacy issues summary.
(1)
The regulatory asset adequacy issues summary shall include:
(A)
descriptions of the scenarios tested (including whether
those scenarios are stochastic or deterministic) and the sensitivity testing
done relative to those scenarios. If negative ending surplus results under
certain tests in the aggregate, the actuary should describe those tests and
the amount of additional reserve as of the valuation date which, if held,
would eliminate the negative aggregate surplus values. Ending surplus values
shall be determined by either extending the projection period until the in
force and associated assets and liabilities at the end of the projection period
are immaterial or by adjusting the surplus amount at the end of the projection
period by an amount that appropriately estimates the value that can reasonably
be expected to arise from the assets and liabilities remaining in force.
(B)
the extent to which the appointed actuary uses assumptions
in the asset adequacy analysis that are materially different than the assumptions
used in the previous asset adequacy analysis.
(C)
the amount of reserves and the identity of the product
lines that had been subjected to asset adequacy analysis in the prior opinion
but were not subject to analysis for the current opinion.
(D)
comments on any interim results that may be of significant
concern to the appointed actuary.
(E)
the methods used by the actuary to recognize the impact
of reinsurance on the company’s cash flows, including both assets and
liabilities, under each of the scenarios tested.
(F)
whether the actuary has been satisfied that all options
whether explicit or embedded, in any asset or liability (including but not
limited to those affecting cash flows embedded in fixed income securities)
and equity-like features in any investments have been appropriately considered
in the asset adequacy analysis.
(2)
The regulatory asset adequacy issues summary shall contain
the name of the company for which the regulatory asset adequacy issues summary
is being supplied and shall be signed and dated by the appointed actuary rendering
the actuarial opinion.
(3)
The regulatory asset adequacy issues summary will be used
to examine the company's financial condition and ability to meet its liabilities.
It will be considered information obtained during the course of an examination
under Insurance Code Article 1.15 and treated as confidential.
(d)
Conformity to standards of practice. The memorandum shall
include a statement with wording substantially similar to that of this subsection
as follows: Actuarial methods, considerations and analyses used in the preparation
of this memorandum conform to the appropriate Standards of Practice as promulgated
by the Actuarial Standards Board, which standards form the basis for this
memorandum.
(e)
Use of assets supporting the IMR and the AVR. An appropriate
allocation of assets in the amount of the IMR, whether positive or negative,
shall be used in any asset adequacy analysis. Analysis of risks regarding
asset default may include an appropriate allocation of assets supporting the
AVR; these AVR assets may not be applied for any other risks with respect
to reserve adequacy. Analysis of these and other risks may include assets
supporting other mandatory or voluntary reserves available to the extent not
used for risk analysis and reserve support. The amount of the assets used
for the AVR shall be disclosed in the table of reserves and liabilities of
the opinion and in the memorandum. The method used for selecting particular
assets or allocated portions of assets shall be disclosed in the memorandum.
(f)
Documentation retention. The appointed actuary shall retain
on file, for at least seven years, sufficient documentation so that it will
be possible to determine the procedures followed, the analyses performed,
the bases for assumptions and the results obtained.
This agency hereby certifies that the adoption has been reviewed
by legal counsel and found to be a valid exercise of the agency's legal authority.
Filed with the Office of
the Secretary of State on May 31, 2005.
TRD-200502184
Gene C. Jarmon
General Counsel and Chief Clerk
Texas Department of Insurance
Effective date: June 20, 2005
Proposal publication date: December 17, 2004
For further information, please call: (512) 463-6327