Current through 2024-38, September 18, 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 selection factors. At the option of the insurer, in calculating
segmented reserves and net premiums, either of the adjustments described in
Paragraph (1) or (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 Subsection A is
unitary;
(b) On a segmented basis
if the corresponding basic reserve determined by Subsection A is segmented;
or
(c) On the segmented basis if
the corresponding basic reserve determined by Subsection A 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 Section
5(B) 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 Section
5(B).
(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
incorporated into the 1980 amendments of the NAIC Standard Valuation Law. 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
Drafting Note: This requirement is independent of
both the segmentation process and the unitary process. After the greater of the
segmented or the unitary reserve has been determined, then this subsection
imposes an additional floor on the ultimate reserve. The purpose of this
subsection is to assure adequate funding of significant increases in 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 Item (i) divided by Item (ii) 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) 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 Reinsurance. At the option of the company, the following
approach for reserves on YRT reinsurance may be used:
Drafting Note: Traditional reserves for yearly
renewable term (YRT) reinsurance, the calculations of which this section
describes, are already adequate and sufficient. However, without this option in
the rule, YRT reinsurance would be subject to the more complex segmentation
calculations.
(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.
(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 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 rule by the NAIC and promulgated by
rule by the Superintendent for this purpose.
(5) A reinsurance agreement shall be
considered YRT reinsurance for purposes of this subsection 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
option of the company, the following approach for reserves for
attained-age-based YRT life insurance policies may be used:
Drafting Note: Traditional reserves for
attained-age-based YRT policies, the calculations of which this subsection
describes, are already adequate and sufficient. However, without this option in
the rule, these policies would be subject to the more complex segmentation
calculations.
(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 6C.
(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 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 rule by the NAIC and promulgated by
rule by the Superintendent 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)
above.
(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 rule.
G.
Exemption from Unitary Reserves for
Certain n-Year Renewable Term Life Insurance Policies.
Unitary basic reserves and unitary deficiency reserves need not be calculated
for a policy if the following conditions are met:
Drafting Note: Without this exemption, companies
issuing certain n-year renewable term policies could be forced to hold reserves
higher than n-year term reserves, even though in many cases gross premiums are
well above valuation mortality rates.
(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 size 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 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 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.
Drafting Note:The jumping juvenile policy described
has traditionally been valued in two segments. This exemption will allow that
practice to continue without requiring the calculation of reserves on a unitary
basis. However, within each segment, both basic and deficiency reserves shall
comply with the segmented reserve requirements.
