Nebraska Administrative Code
Topic - INSURANCE, DEPARTMENT OF
Title 210 - NEBRASKA DEPARTMENT OF INSURANCE
Chapter 80 - SYNTHETIC GUARANTEED INVESTMENT CONTRACTS
Section 210-80-010 - Reserves

Universal Citation: 210 NE Admin Rules and Regs ch 80 ยง 010

Current through September 17, 2024

010.01 Asset maintenance requirements for segregated portfolios governed by this regulation:

010.01A At all times an insurer shall hold minimum reserves in the general account or one or more separate accounts, as appropriate, equal to the excess, if any, of the value of the guaranteed contract liabilities, determined in accordance with 010.01(F) and 010.01(G) of this subsection, over the market value of the assets in the segregated portfolio less the deductions provided for in 010.01B of this subsection. The reserve requirements of this subsection shall be applied on a contract-by-contract basis.

010.01B In determining compliance with the asset maintenance requirement and the reserve for guaranteed contract liabilities specified in Subsection 010.01A, the insurer shall deduct a percentage of the market value of an asset as follows:
010.01B(1) For debt instruments, the percentage shall be the NAIC asset valuation reserve "reserve objective factor," but the factor shall be increased by fifty percent (50%) for the purpose of this calculation if the difference in durations of the assets and liabilities is more than one-half year. The above notwithstanding, in the event that, under the terms of the synthetic guaranteed investment contract, the asset default risk for debt instruments is borne solely by the contract holder, there shall be no asset valuation reserve percentage deduction from the market value of an asset, for purposes of complying with the asset maintenance requirement and the reserve for guaranteed contract liabilities specified in Subsection 010.01A.

010.01B(2) For assets that are not debt instruments, the percentage shall be the NAIC asset valuation reserve "maximum reserve factor."

010.01C To the extent that guaranteed contract liabilities are denominated in the currency of a foreign country and are supported by segregated portfolio assets denominated in the currency of the foreign country, the percentage deduction for these assets under Subsection 010.01B shall be that for a substantially similar investment denominated in the currency of the United States.

010.01D To the extent that guaranteed contract liabilities are denominated in the currency of the United States and are supported by segregated portfolio assets denominated in the currency of a foreign country, and to the extent that guaranteed contract liabilities are denominated in the currency of a foreign country and are supported by segregated portfolio assets denominated in the currency of the United States, the deduction for debt instruments under 010.01B of this subsection shall be increased by fifteen percent (15%) of the market value of the assets unless the currency exchange risk on the assets has been adequately hedged, in which case the percentage deduction under 010.01B of this subsection shall be increased by one-half percent (.5%). No guaranteed contract liabilities denominated in the currency of a foreign country shall be supported by segregated portfolio assets denominated in the currency of another foreign country without the approval of the Director. For purposes of this paragraph, the currency exchange risk on an asset is deemed to be adequately hedged if:
010.01D(1) It is an obligation of
010.01D(1)(i) A jurisdiction that is rated in one of the two (2) highest rating categories by an independent nationally recognized United States rating agency acceptable to the Director;

010.01D(1)(ii) Any political subdivision or other governmental unit of such a jurisdiction, or any agency or instrumentality of jurisdiction, political subdivision or other governmental unit; or

010.01D(1)(iii) An institution that is organized under the laws of any such jurisdiction; and

010.01D(2) At all times the principal amount of the obligation and scheduled interest payments on the obligation are hedged against the United States dollar pursuant to contracts or agreements that are:
010.01D(2)(i) Issued by or traded on a securities exchange or board of trade regulated under the laws of the United States or Canada or a province of Canada;

010.01D(2)(ii) Entered into with a United States banking institution that has assets in excess of $5 billion and that has obligations outstanding, or has a parent corporation that has obligations outstanding, that are rated in one of the two (2) highest rating categories by an independent, nationally recognized, United States rating agency, or with a broker-dealer registered with the Securities and Exchange Commission that has net capital in excess of $250 million; or

010.01D(2)(iii) Entered into with any other banking institution that has assets in excess of $5 billion and that has obligations outstanding, or has a parent corporation that has obligations outstanding, that are rated in one of the two (2) highest rating categories by an independent, nationally recognized, United States rating agency and that is organized under the laws of a jurisdiction that is rated in one of the two (2) highest rating categories by an independent, nationally recognized United States rating agency.

010.01E These contracts may provide for the allocation to one or more separate accounts of all or any portion of the amount needed to meet the asset maintenance requirement. If the contract provides that the assets in the separate account shall not be chargeable with liabilities arising out of any other business of the insurer, the insurer shall maintain in a distinct separate account that is so chargeable:
010.01E(1) That portion of the amount needed to meet the asset maintenance requirement that has been allocated to separate accounts; less

010.01E(2) The amounts contributed to separate accounts by the contract holder in accordance with the contract and the earnings on the contract.

010.01F For purposes of this section, the minimum value of guaranteed contract liabilities is defined to be the sum of the expected guaranteed contract benefits, each discounted at a rate corresponding to the expected time of payment of the contract benefit that is not greater than the spot rate supportable by the expected return from the segregated portfolio assets, and in no event greater than the blended spot rate as described in the plan of operation (pursuant to Section 005) or the actuary's opinion and memorandum (pursuant to Subsection 010.02), except that if the expected time of payment of a contract benefit is more than thirty (30) years, it shall be discounted from the expected date of payment to year thirty (30) at a rate of no more than eighty percent (80%) of the thirty-year blended spot rate and from year thirty (30) to the date of valuation at a rate not greater than the thirty-year blended spot rate.

010.01G In calculating the minimum value of guaranteed contract benefits:
010.01G(1) All guaranteed benefits potentially available to the contract holder on an ongoing basis shall be considered in the valuation process and analysis, and the reserve held must be sufficient to fund the greatest present value of each independent guaranteed contract benefit. For purposes of this subparagraph, the right granted to the contract holder to exit the contract by discharging the insurer of its guarantee obligation under the contract and taking control of the assets in the segregated portfolio shall not be considered a guaranteed benefit.

010.01G(2) To the extent that future guaranteed cash flows are dependent upon the benefit responsiveness of an employer-sponsored plan, a best estimate based on company experience, or other reasonable criteria if company experience is not available, shall be used in the projections of future cash flows.

010.01G(3) The minimum value of guaranteed contract benefits under a contract issued to a pooled fund representing multiple employer-sponsored plans shall be determined so as to reflect projected plan sponsor contract value withdrawals available to the member plans in the pooled fund.

Projections of such future cash flows shall take into account (i) known plan sponsor withdrawals, and (ii) a prudent estimate of future plan sponsor withdrawals. The prudent estimate shall be based on company experience and other relevant criteria.

A single valuation rate shall be determined, consistent with Subsection 010.01F, equal to the lesser of:

010.01G(3)(i) The expected return from the segregated portfolio of assets, or

010.01G(3)(ii) The blended spot rate based on the duration of the segregated portfolio of assets.

This single valuation rate shall be used to model future market values of the segregated portfolio of assets. Future credited interest rates shall be modeled according to the contractually defined crediting rate formula. Modeled future contract values shall reflect modeled future market values, modeled future credited interest rates, known future plan sponsor withdrawals, the prudent estimate of future plan sponsor withdrawals, future withdrawals consistent with Subsection 010.01G(2) and any remaining final payment at the modeled contract termination date. All such modeled withdrawals and termination payments shall be discounted using the single valuation rate and the modeled times of those withdrawals and payments. The sum of these present values shall be deemed the minimum value of the guaranteed contract liabilities for a pooled fund contract.

010.02 Actuarial opinion and supporting memorandum for segregated portfolios governed by this regulation.

010.02A An insurer that issues a synthetic guaranteed investment contract subject to this regulation shall submit an actuarial opinion and, upon request, a supporting memorandum to the Director annually by March 1 following the December 31 valuation date showing the status of the accounts as of the prior December 31. For purposes of clarity, if an insurer submits to the Director an opinion and, if requested by the Director, a supporting memorandum in accordance with Title 210 Neb. Admin. Code § 69 that comply with the requirements set forth in Neb. Rev. Stat. § 44-8905, and such opinion and supporting memorandum collectively address the matters set forth in Subsections 010.02D, 010.02E and 010.02G, the insurer shall not be required to submit to the Director a separate actuarial opinion and supporting memorandum relating only to synthetic guaranteed investment contracts. The actuarial opinion and memorandum shall be in form and substance satisfactory to the Director.

010.02B The actuarial memorandum (or portion thereof) required by this regulation is deemed to be confidential to the same extent, and under the same conditions, as the actuarial memorandum required by Neb. Rev. Stat. § 44-8905.

010.02C Except in cases of fraud or willful misconduct, the valuation actuary shall not be liable for damages to any person (other than the insurance company and the Director) for any act, error, omission, decision, or conduct with respect to the actuary's opinion.

010.02D The statement of actuarial opinion and/or supporting memorandum submitted in accordance with Subsection 010.02A shall consist of:
010.02D(1) A paragraph identifying the valuation actuary and his or her qualification;

010.02D(2) A scope paragraph identifying the subjects on which the opinion and/or memorandum is to be expressed and describing the scope of the valuation actuary's work;

010.02D(3) A reliance paragraph describing those areas, if any, where the valuation actuary has deferred to other experts in developing data, procedures or assumptions;

010.02D(4) An opinion paragraph expressing the valuation actuary's opinion with respect to the matters described in Subsections 010.02E(1) and (2) below; and

010.02D(5) One or more additional paragraphs may be needed in individual company cases as follows:
010.02D(5)(i) If the valuation actuary considers it necessary to state a qualification of his or her opinion;

010.02D(5)(ii) If the valuation actuary must disclose an inconsistency in the method of analysis used at the prior opinion date with that used for this opinion;

010.02D(5)(iii) If the valuation actuary chooses to add a paragraph briefly describing the assumptions which form the basis of the actuarial opinion.

010.02E Contents of the actuarial opinion or supporting memorandum.
010.02E(1) The actuarial opinion or supporting memorandum shall include an asset adequacy analysis that measures the segregated portfolio assets and the amount of any reserve liability with respect to the asset maintenance requirement to determine whether the account assets make adequate provision for contract liabilities after taking into account any risk charge payable.

010.02E(2) The actuarial opinion or supporting memorandum shall also substantively state:
010.02E(2)(i) Reserves for contract liabilities are calculated pursuant to the requirements of Subsection 010.01A;

010.02E(2)(ii) After taking into account any reserve liability with respect to the asset maintenance requirement, the amount of the account assets satisfied the asset maintenance requirement;

010.02E(2)(iii) The fixed-income segregated portfolio conformed to and justified the rates used to discount contract liabilities for valuation pursuant to Subsection 010.01F;

010.02E(2)(iv) Whether any rates used pursuant to Subsection 010.01F to discount guaranteed contract liabilities and other items applicable to the segregated portfolio were modified from the rate or rates described in the plan of operation filed pursuant to Section 005; and

010.02E(2)(v) The level of risk charges, if any, retained in the general account was appropriate in view of such factors as the nature of the guaranteed contract liabilities and losses experienced in connection with account contracts and other pricing factors.

010.02F The actuarial opinion and supporting memorandum shall be accompanied by a certificate of an officer of the insurance company responsible for monitoring compliance with the asset maintenance requirements for synthetic guaranteed investment contracts describing the extent to and manner in which, during the preceding year:
010.02F(1) Actual benefit payments conformed to the benefit payment estimated to be made as described in the plan of operation;

010.02F(2) The determination of the fair market value of the segregated portfolio conformed to the valuation procedures described in the plan of operation, including a statement of the procedures and sources used during the year; and

010.02F(3) Any assets were transferred to or from the insurer's general account, or any amounts were paid to the insurer by any contract holder to support the insurer's guarantee.

010.02G The actuarial memorandum supporting the actuarial opinion shall:
010.02G(1) Substantially conform with those portions of Title 210 Neb. Admin. Code § 69 that are applicable to asset adequacy testing and either:
010.02G(1)(i) Demonstrate the adequacy of account assets based upon cash flow analysis, or

010.02G(1)(ii) Explain why cash flow testing analysis is not appropriate, describe the alternative methodology of asset adequacy testing used, and demonstrate the adequacy of account assets under that methodology;

010.02G(2) Clearly describe the assumptions the valuation actuary used in support of the actuarial opinion, including any assumptions made in projecting cash flows under each class of assets, and any dynamic portfolio hedging techniques utilized and the tests performed on the utilization of the techniques;

010.02G(3) Clearly describe how the valuation actuary has reflected the cost of capital;

010.02G(4) Clearly describe how the valuation actuary has reflected the risk of default on obligations and mortgage loans, including obligations and mortgage loans that are not investment grade;

010.02G(5) Clearly describe how the valuation actuary has reflected withdrawal risks, if applicable, including a discussion of the positioning of the contracts within the benefit withdrawal priority order pertaining to the contracts, the impact of any dynamic lapse assumption and the results of sensitivity testing the prudent estimate of future plan sponsor withdrawals pursuant to Subsection 010.01G(3);

010.02G(6) If the plan of operation provides for investments in segregated portfolio assets other than United States government obligations, demonstrate that the rates used to discount contract liabilities pursuant to Subsection 010.01G conservatively reflect expected investment returns, taken into account any foreign exchange risks;

010.02G(7) If the contracts provide that in certain circumstances they would cease to be funded by a segregated portfolio and, instead would become contracts funded by the general account, clearly describe how any increased reserves would be provided for if and to the extent these circumstances occurred;

010.02G(8) State the amount of account assets maintained in a separate account that are not chargeable with liabilities arising out of any other business of the insurance company;

010.02G(9) State the amount of reserves and supporting assets as of December 31 and where the reserves are shown in the annual statement;

010.02G(10) State the amount of any contingency reserve carried as part of surplus;

010.02G(11) State the market value of the segregated asset portfolio; and

010.02G(12) Where separate account assets are not chargeable with liabilities arising out of any other business of the insurance company, describe how the level of risk charges payable to the general account provides an appropriate compensation for the risk taken by the general account.

010.03 When the insurer issues a synthetic guaranteed investment contract and complies with the asset maintenance requirements of Subsection 010.01, it need not maintain an asset valuation reserve with respect to those account assets.

010.04 This section describes the reserve valuation requirements for contracts subject to this regulation.

010.04A Reserves for synthetic investment contracts subject to this regulation shall be an amount equal to the sum of the following:
010.04A(1) The amounts determined as the minimum reserve as required under Subsection 010.01A;

010.04A(2) Any additional amount determined by the insurer's valuation actuary as necessary to make adequate provision for all contract liabilities; and

010.04A(3) Any additional amount determined as necessary by the Director due to the nature of the benefits.

010.04B The amount of any reserves required by Subsection 010.04A may be established by either:
010.04B(1) Allocating sufficient assets to one or more separate accounts; or

010.04B(2) Setting up the additional reserves in the general account.

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