Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) General
(1)
In accordance with Section
10489.15 of the
Insurance Code, the Appointed Actuary shall prepare a memorandum to the Company
describing the analysis done in support of his or her opinion regarding the
reserves. The memorandum shall be made available for examination by the Commissioner
upon his or her request but shall be returned to the Company after such examination
and shall not be considered a record of the insurance department or subject to
automatic filing with the Commissioner.
(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
Section 2580.4(b) of this
regulation, 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 is received within 60 calendar days of
the date of mailing the request, or if the Commissioner finds that the analysis
described in the memorandum fails to meet the standards of the Actuarial Standards
Board or the standards and requirements of this regulation, 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 such
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 such reviewing actuary
shall be retained by the Commissioner; provided, however, that any information
provided by the Company to such reviewing actuary and included in the work papers
shall be considered as material provided by the Company to the Commissioner and
shall be kept confidential to the same extent as is prescribed by law with respect
to other material provided by the Company to the Commissioner pursuant to the
statute governing this regulation. 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 pursuant to this regulation for any one of the current year or the
preceding three years.
(5) In accordance
with Section
10489.15 of the
Insurance Code, the Appointed Actuary shall prepare a regulatory asset adequacy
issues summary, the contents of which are specified in Subsection
2580.6(c). The
regulatory asset adequacy issues summary will be submitted no later than March 15 of
the year following the year for which a statement of Actuarial Opinion based on
asset adequacy is required. The regulatory asset adequacy issues summary is to be
kept confidential to the same extent and under the same conditions as the actuarial
memorandum.
(b) Details of the
Memorandum Section Documenting Asset Adequacy Analysis.
When an Actuarial Opinion under Section
2580.5 is provided, the memorandum
shall demonstrate that the analysis has been done in accordance with the standards
for Asset Adequacy Analysis referred to in Subsection
2580.4(d) of this
regulation and any additional standards under this regulation. It 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; and
(G) Documentation of
assumptions to test reserves for the following:
1.
Lapse rates (both base and excess);
2.
Interest crediting rate strategy;
3.
Mortality;
4. Policyholder dividend
strategy;
5. Competitor or market
interest rate;
6. Annuitization
rates;
7. Commissions and expenses;
and
8. Morbidity.
The documentation of the assumptions shall be such that an
actuary reviewing the actuarial memorandum could form a conclusion as to the
reasonableness of the assumptions.
(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:
1. Default costs;
2. Bond call function;
3. Mortgage prepayment function;
4. Determining market value for assets sold due to
disinvestment strategy; and
5.
Determining yield on assets acquired through the investment strategy.
The documentation of the assumptions shall be such that an
actuary reviewing the actuarial memorandum could form a conclusion as to the
reasonableness of the assumptions.
(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 aggregate negative ending
surplus results under certain tests, 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
reflecting an appropriate estimate of 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 from 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; and
(G) Any
other items that the Commissioner may request.
(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.
(d) Conformity to Standards of Practice.
The memorandum shall include a statement:
"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 Interest Maintenance Reserve and the Asset Valuation Reserve.
An appropriate allocation of assets in the amount of the
Interest Maintenance Reserve (IMR), whether positive or negative, must be used in
any Asset Adequacy Analysis. Analysis of risks regarding asset default may include
an appropriate allocation of assets supporting the Asset Valuation Reserve (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 must 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 must be
disclosed in the memorandum.
(f)
Documentation.
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.
1. New section
filed 12-6-94; operative 1-5-95 (Register 94, No. 49).
2. Repealer of
former section 2580.6 and renumbering of former section
2580.8 and portions of former section
2580.9 to section 2580.6, including
amendment of section heading and section, filed 12-27-2004; operative 1-1-2005
pursuant to Government Code section
11343.4
(Register 2004, No. 53).
Note: Authority cited: Section
10489.15,
Insurance Code. Reference: Section
10489.15,
Insurance Code.
