Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) Basic Reserves.
Basic Reserves shall be calculated as the greater of the Segmented Reserves and the
Unitary Reserves. Both the Segmented Reserves and the Unitary Reserves for any
policy shall use the same valuation mortality table and select factors. At the
option of the insurer, in calculating Segmented Reserves and net premiums, either
the adjustment described in Paragraph (1) below or the adjustment described in
Paragraph (2) below may be made:
(1) Treat the
Unitary Reserve, if greater than zero, applicable at the end of each segment as a
pure endowment and subtract the Unitary Reserve, if greater than zero, applicable at
the beginning of each segment from the present value of guaranteed life insurance
and endowment benefits for each segment.
(2) Treat the guaranteed cash surrender value, if
greater than zero, applicable at the end of each segment as a pure endowment; and
subtract the guaranteed cash surrender value, if greater than zero, applicable at
the beginning of each segment from the present value of guaranteed life insurance
and endowment benefits for each segment.
(b) Deficiency Reserves
(1) The Deficiency Reserve at any duration shall
be calculated:
(A) On a unitary basis if the
corresponding basic reserve determined by Subdivision (a) of this Section
2542.5 is unitary;
(B) On a segmented basis if the corresponding
basic reserve determined by Subdivision (a) of this Section
2542.5 is segmented; or
(C) On the segmented basis if the corresponding
basic reserve determined by Subdivision (a) of this Section
2542.5 is equal to both the Segmented
Reserve and the Unitary Reserve.
(2) This Subdivision (b) 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
Subdivision (b) of Section
2542.4) 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 Subdivision (b) of Section
2542.4.
(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 shall use the same valuation mortality table and interest
rates as that used for the calculation of the Segmented Reserves. However, if select
mortality factors are used, they shall be the Ten-year Select Factors. 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:
1. The date of the next
unusual guaranteed cash surrender value, if any, that is scheduled after the
valuation date; or
2. 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 Item 1. divided by Item 2. as follows:
1. 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.
2. 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 Subdivision (d), 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) One
hundred ten percent (110%) of the Scheduled Gross Premium for that year;
(B) One hundred ten percent (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) Five percent (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 Subdivision (c) of this Section
2542.5.
(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 (e)(3)(A)
above.
(4) For purposes of
this Subdivision (e), the calculations use the Maximum Valuation Interest Rate and
the 1980 CSO Valuation Tables with or without Ten-year Select Factors, or any other
table adopted by the NAIC after July 1, 2000 and approved by regulation promulgated
or bulletin issued by the commissioner for this purpose.
(5) A reinsurance agreement shall be considered
YRT reinsurance for purposes of this Subdivision (e) if only the mortality risk is
reinsured.
(6) If the assuming company
chooses this optional exemption, the ceding company's reinsurance reserve credit
shall be limited to the amount of reserve held by the assuming company for the
affected policies.
(f)
Optional Exemption for Attained-Age-Based Yearly Renewable Term Life Insurance
Policies. At the election of the company, the following approach 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 Subdivision (c)
of this Section
2542.5.
(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)
above.
(4) For purposes of
this Subdivision (f), the calculations use the Maximum Valuation Interest Rate and
the 1980 CSO Valuation Tables with or without Ten-year Select Factors, or any other
table adopted by the NAIC after July 1, 2000 and approved by regulation promulgated
or bulletin issued by the commissioner for this purpose.
(5) A policy shall be considered an
attained-age-based YRT life insurance policy for purposes of this Subdivision (f)
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 Subdivision
(f) may be used after the initial period if:
(A)
After the initial period of coverage, the policy meets the conditions of Paragraph
(5) above; and
(B) The conditions of
either Item 1. or Item 2. below are satisfied:
1.
The initial period runs to a common attained age for all insureds of the same sex,
risk class and plan of insurance; or
2.
The initial period is constant for all insureds of the same sex, risk class and plan
of insurance.
(7) If
this election is made, this approach shall be applied in determining reserves for
all attained-age-based YRT life insurance policies issued on or after the effective
date of this article.
(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 following conditions 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 that 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 10 years and less than
twice the length 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 Ten-year Select 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 following
conditions are met, based upon the initial current premium scale at issue:
(1) At issue, the insured is age twenty-four (24)
or younger;
(2) Until the insured
reaches the end of the juvenile period, which shall occur at or before age
twenty-five (25), 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.
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.
