California Code of Regulations
Title 10 - Investment
Chapter 5 - Insurance Commissioner
Subchapter 3 - Insurers
Article 12.3 - Valuation of Life Insurance Policies
Section 2542.3 - Definitions

Universal Citation: 10 CA Code of Regs 2542.3

Current through Register 2024 Notice Reg. No. 38, September 20, 2024

For purposes of this article:

(a) "Basic Reserves" means reserves calculated in accordance with California Insurance Code Section 10489.5.

(b) "Contract Segmentation Method" means 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 Subdivision (f) of this Section 2542.3 (or any other valuation mortality table adopted by the National Association of Insurance Commissioners (NAIC) after July 1, 2000 and approved by regulation promulgated or bulletin issued by the commissioner for this purpose), and, if elected, the optional minimum mortality standard for Deficiency Reserves stipulated in Section 2542.4(b) of this article.

The length of a particular contract segment shall be set equal to the minimum of the value t for which Gt is greater than Rt (if Gt never exceeds Rt the segment length is deemed to be the number of years from the beginning of the segment to the mandatory expiration date of the policy), where Gt and Rt are defined as follows:

GPx+k+t
Gt =___________________________
GPx+k+t-1

where:

x = original issue age;

k = the number of years from the date of issue to the beginning of the segment;

t = 1, 2, ...; t is reset to 1 at the beginning of each segment;

GPx+k+t-1 = Guaranteed gross premium per thousand of face amount for year t of the segment, ignoring policy fees only if level for the premium paying period of the policy.

qx+k+t
Rt =___________________________however, Rt may be increased or decreased by
qx+k+t-1one percent in any policy year, at the company's option, but Rt shall not be less than one;

where:

x, k and t are as defined above, and

qx+k+t-1 = valuation mortality rate per 1000 for Deficiency Reserves in policy year k+t but using the mortality of Section 2542.4(b)(2) if Section 2542.4(b)(3) is elected for Deficiency Reserves.

However, if GPx+k+t is greater than 0 and GPx+k+t-1 is equal to 0, Gt shall be deemed to be 1000. If GPx+k+t and GPx+k+t-1 are both equal to 0, Gt shall be deemed to be 0.

(c) "Deficiency Reserves" means the excess, if greater than zero, of

(1) Minimum reserves calculated in accordance with California Insurance Code Section 10489.9 over

(2) Basic Reserves.

(d) "Guaranteed Gross Premiums" means the premiums under a policy of life insurance that are guaranteed and determined at issue.

(e) "Maximum Valuation Interest Rates" means the interest rates defined in California Insurance Code Section 10489.4 (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.

(f) "1980 CSO Valuation Tables" means the Commissioners' 1980 Standard Ordinary Mortality Table (1980 CSO Table) (1981 Transactions of the Society of Actuaries, Volume 33, pp. 618, 673), without select factors, incorporated into the 1980 amendments to the NAIC Standard Valuation Law, and variations of the 1980 CSO Table approved by the NAIC and approved by regulation promulgated or bulletin issued by the commissioner. "1980 CSO Valuation Tables" includes the 1980 CSO Female Smoker and Non-smoker Mortality Rates, and the 1980 CSO Male Smoker and Non-smoker Mortality Rates, tables approved by the NAIC in December 1983 (1984 Proceedings of the National Association of Insurance Commissioners, I, pp. 406-407, 410-411), which tables are approved by the commissioner for purposes of this article. For valuation under this article of life insurance contracts issued pursuant to arrangements which may be considered terms, conditions, or privileges of employment within the meaning of Subdivision (f) of Insurance Code Section 790.03, "1980 CSO Valuation Tables" also includes the Blended 1980 CSO Tables B through F, approved by the NAIC in December 1983 (1984 Proceedings of the National Association of Insurance Commissioners, I, pp. 396-400), which tables are approved by the commissioner for purposes of this article only for use with such contracts. The 1980 CSO Valuation Tables are hereby incorporated herein by reference.

(g) "Scheduled Gross Premium" means 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 Section 2542.6(a)(3), if any, or else the minimum premium described in Section 2542.6(a)(4).

(h)

(1) "Segmented Reserves" means 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 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 Section 2542.5(d)) 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 Item 1. over Item 2., as follows:
1. 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.

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

(2) The length of each segment is determined by the "Contract Segmentation Method," as defined in this Section 2542.3.

(3) The interest rates used in the present value calculations for any policy may not exceed the Maximum Valuation Interest Rates determined with a guarantee duration equal to the sum of the lengths of all segments of the policy.

(4) For both Basic Reserves and Deficiency Reserves computed by the segmented method, present values shall include future benefits and net premiums in the current segment and in all subsequent segments.

(i) "Tabular Cost of Insurance" means 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.

(j) "Ten-year Select Factors" means the select factors (1981 Transactions of the Society of Actuaries, Volume 33, p. 669) adopted with the 1980 amendments to the NAIC Standard Valuation Law. The Ten-year Select Factors are hereby incorporated herein by reference.

(k)

(1) "Unitary Reserves" means 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 Item 1. over Item 2., as follows:
1. 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.

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

(2) The interest rates used in the present value calculations for any policy may not exceed the Maximum Valuation Interest Rates determined with a guarantee duration equal to the length from issue to the mandatory expiration of the policy.

(l) "Universal Life Insurance Policy" means 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.

1. New section filed 11-19-2002; operative 1-1-2003 (Register 2002, No. 47).

Note: Authority cited: Section 10489.94, Insurance Code. Reference: Sections 790.03, 10489.15, 10489.2, 10489.4, 10489.5, 10489.7, 10489.9 and 10489.94, Insurance Code.

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