Titles of Regulations: 14VAC5-319. Life Insurance Reserves (amending 14VAC5-319-40).

14VAC5-322. Use of the 2001 CSO Preferred Class Structure Mortality Table in Determining Reserve Liabilities (amending 14VAC5-322-20, 14VAC5-322-30, 14VAC5-322-40).

Statutory Authority: §§ 12.1-13 and 38.2-223 of the Code of Virginia.

Effective Date: September 30, 2009.

Agency Contact: Raquel C. Pino-Moreno, Principal Insurance Analyst, Bureau of Insurance, State Corporation Commission, 1300 East Main Street, P.O. Box 1157, Richmond, VA 23218, telephone (804) 371-9499, FAX (804) 371-9511, or email raquel.pino-moreno@scc.virginia.gov.

Summary:

The amendments allow the Bureau of Insurance to authorize insurance companies to use the 2001 CSO Preferred Mortality Table for policies issued on or after January 1, 2004, if certain conditions are met (14VAC5-322), and will eliminate the constraints on the X factors used in determining deficiency reserves (14VAC5-319). The revisions are based on the NAIC's Life and Health Actuarial Task Force's revisions to the NAIC Valuation of Life Insurance Policies Model Regulation and the Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in Determining Minimum Reserve Liabilities, which were adopted by the NAIC on September 23, 2009. The changes from the proposed revisions to the final, adopted rules include the following: (i) in 14VAC5-322-30 the date allowed for use of the 2001 CSO Preferred Mortality Tables has been changed from July 1, 2004, to January 1, 2004; (ii) in 14VAC5-322-30 a sentence has been added allowing the Commissioner of Insurance to rely on the consent given to the insurance company by the commissioner of its state of domicile for use of the 2001 CSO Preferred Mortality Table; and (iii) in 14VAC5-322-40 D the restrictions for the use of the 2001 CSO Preferred Mortality Table for the valuation of policies issued prior to January 1, 2007, in any statutory financial statement, has been rewritten. The original language listed two accounting practices whose use precluded use of the 2001 CSO Preferred Mortality Table. The adopted provision describes the same two offending accounting practices, but does so much more precisely, thus more narrowly defining the offending practice. Also, the original language allowed a company to use the 2001 CSO Preferred Mortality Table even though it used the offending accounting practice, if it could demonstrate enough redundant reserves in another block of business. The final language provides for an aggregate accounting entry, which removes the surplus gain provided by the accounting practice in order to use the 2001 CSO Preferred Mortality Table.

AT RICHMOND, SEPTEMBER 29, 2009

COMMONWEALTH OF VIRGINIA

At the relation of the

STATE CORPORATION COMMISSION

CASE NO. INS-2009-00008

Ex parte: In the matter of
Adopting Revisions to the Rules
Governing Life Insurance Reserves
And Use of the 2001 CSO Preferred
Class Structure Mortality Table in
Determining Reserve Liabilities

ORDER ADOPTING RULES

By Order To Take Notice ("Order") entered January 23, 2009, all interested persons were ordered to take notice that subsequent to February 24, 2009, the State Corporation Commission ("Commission") would consider the entry of an order adopting revisions to the rules entitled "Life Insurance Reserves" and "Use of the 2001 CSO Preferred Class Structure Mortality Table in Determining Reserve Liabilities" ("Rules"), proposed by the Bureau of Insurance ("Bureau") which amend the Rules at 14 VAC 5-319-40, 14 VAC 5-322-20, 14 VAC 5-322-30, and 14 VAC 5-322-40, unless on or before February 24, 2009, any person objecting to the adoption of the proposed revisions to the Rules filed a request for a hearing with the Clerk of the Commission ("Clerk").

The Order also required all interested persons to file their comments in support of or in opposition to the proposed revisions to the Rules on or before February 24, 2009.

No request for a hearing was filed with the Clerk. By letter dated February 12, 2009, Genworth Financial filed with the Clerk comments suggesting amendments to the proposed revisions to the Rules. By letter dated February 23, 2009, the American Council of Life Insurers filed with the Clerk comments suggesting amendments to the proposed revisions to the Rules. The amendments suggested by the commenting parties were substantively similar. The comments note that the proposed language in 14 VAC 5-322-40 D limits the reduction in minimal reserve requirements by only allowing the use of the 2001 CSO Preferred Class Structure Mortality Table ("Table") in those instances where the company can demonstrate that the surplus relief granted by using the Table is offset by redundant reserves in other blocks of business for which the Table is not being used. The comments also note that 14 VAC 5-322-30 precludes the application of the Table when an insurer's reserve credit exceeds the proportional direct reserve because of its reference to 14 VAC 5-322-40 D. The comments also note that the requirement proposed in 14 VAC 5-319-40 B that requires the appointed actuary who utilizes X factors in reducing deficiency reserves to disclose if assets might be insufficient to cover benefits, expenses or reserves for any policy in any one or more future interim periods.

The Bureau reviewed the comments and recommendations and filed its response with the Clerk on September 29, 2009. The Bureau does not recommend adopting the suggested amendments to the proposed revised regulations. However, the Bureau does recommend that the proposed revised regulations be amended to conform the regulation to the National Association of Insurance Commissioners' model regulation on the same subject.

THE COMMISSION, having considered the Bureau's recommendation and the comments received, is of the opinion that the attached revisions to the Rules should be adopted.

Accordingly, IT IS ORDERED THAT:

(1) The revisions to the Rules entitled "Life Insurance Reserves" and "Use of the 2001 CSO Preferred Class Structure Mortality Table in Determining Reserve Liabilities" at 14 VAC 5‑319-40, 14 VAC 5-322-20, 14 VAC 5-322-30, and 14 VAC 5-322-40, which are attached hereto and made a part hereof, should be, and they are hereby, ADOPTED to be effective September 30, 2009.

(2) AN ATTESTED COPY hereof, together with a copy of the adopted Rules, shall be sent by the Clerk to the Bureau in care of Deputy Commissioner Douglas C. Stolte, who forthwith shall give further notice of the adoption of the revised Rules by mailing a copy of this Order, together with the revised Rules, to all licensed life insurers, burial societies, fraternal benefit societies, and qualified reinsurers authorized by the Commission pursuant to Title 38.2 of the Code of Virginia, and certain interested parties designated by the Bureau.

(3) The Commission's Division of Information Resources forthwith shall cause a copy of this Order, together with the attached Rules, to be forwarded to the Virginia Registrar of Regulations for appropriate publication in the Virginia Register of Regulations.

(4) The Commission's Division of Information Resources shall make available this Order and the adopted Rules on the Commission's website, http://www.scc.virginia.gov/case.

(5) The Bureau shall file with the Clerk an affidavit of compliance with the notice requirements of Ordering Paragraph (2) above.

14VAC5-319-40. General calculation requirements for basic reserves and premium deficiency reserves.

A. At the election of the company for any one or more specified plans of life insurance, the minimum mortality standard for basic reserves may be calculated using the 1980 CSO valuation tables with select mortality factors, or any other valuation mortality table adopted by the NAIC on or after January 1, 2000, and promulgated by regulation by the commission for this purpose. If select mortality factors are elected, they may be:

1. The 10-year select mortality factors incorporated into the 1980 amendments to the NAIC Standard Valuation Law;

2. The 20-year select mortality factors in 14VAC5-319-70; or

3. Any other table of select mortality factors adopted by the NAIC on or after January 1, 2000, and promulgated by regulation by the commission for the purpose of calculating basic reserves.

B. Deficiency reserves, if any, are calculated for each policy as the excess, if greater than 0, of the quantity A over the basic reserve. The quantity A is obtained by recalculating the basic reserve for the policy using guaranteed gross premiums instead of net premiums when the guaranteed gross premiums are less than the corresponding net premiums. At the election of the company for any one or more specified plans of insurance, the quantity A and the corresponding net premiums used in the determination of quantity A may be based upon the 1980 CSO valuation tables with select mortality factors, or any other valuation mortality table adopted by the NAIC on or after January 1, 2000, and promulgated by regulation by the commission.

1. If select mortality factors are elected, they may be:

a. The 10-year select mortality factors incorporated into the 1980 amendments to the NAIC Standard Valuation Law;

b. The 20-year select mortality factors in 14VAC5-319-70;

c. For durations in the first segment, X percent of the 20-year select mortality factors in 14VAC5-319-70, subject to the conditions set forth in subdivisions B 2 and B 3 of this section; or

d. Any other table of select mortality factors adopted by the NAIC after January 1, 2000, and promulgated by regulation by the commission for the purpose of calculating deficiency reserves.

2. When calculating X as provided by this section, the following shall apply:

a. X may vary by policy year, policy form, underwriting classification, issue age or any other policy factor expected to affect mortality experience;

b. X shall not be less than 20%;

c. X shall not decrease in any successive policy years;

d. b. X is such that, when using the valuation interest rate used for basic reserves, subdivision (1) is greater than or equal to subdivision (2), as follows:

(1) The actuarial present value of future death benefits, calculated using the mortality rates resulting from the application of X;

(2) The actuarial present value of future death benefits calculated using anticipated mortality experience without recognition of mortality improvement beyond the valuation date;

e. c. X is such that the mortality rates resulting from the application of X are at least as great as the anticipated mortality experience, without recognition of mortality improvement beyond the valuation date, in each of the first five years after the valuation date;

f. d. The appointed actuary shall increase X at any valuation date where it is necessary to continue to meet all the requirements of subdivisions B 2 and B 3 of this section;

g. e. The appointed actuary may decrease X at any valuation date as long as X does not decrease in any successive policy years and as long as it continues to meet all the requirements of subdivisions B 2 and B 3 of this section; and

h. f. The appointed actuary specifically shall take into account the adverse effect on expected mortality and lapsation of any anticipated or actual increase in gross premiums.

3. If X is less than 100% at any duration for any policy, the following requirements shall be met:

a. The appointed actuary annually shall prepare an actuarial opinion and memorandum for the company in conformance with the requirements of 14VAC5-310-90; and

b. The appointed actuary shall disclose, in the regulatory asset adequacy issues summary, the impact of the insufficiency of assets to support the payment of benefits and expenses and the establishment of statutory reserves during one or more interim periods; and

c. The appointed actuary annually shall opine for all policies subject to this regulation as to whether the mortality rates resulting from the application of X meet the requirements of subdivisions B 2 and B 3 of this section. This opinion shall be supported by an actuarial report, subject to appropriate Actuarial Standards of Practice promulgated by the Actuarial Standards Board of the American Academy of Actuaries. The X factors shall reflect anticipated future mortality, without recognition of mortality improvement beyond the valuation date, taking into account relevant emerging experience.

C. This subsection applies to both basic reserves and deficiency reserves. Any set of select mortality factors may be used only for the first segment. However, if the first segment is less than 10 years, the appropriate 10-year select mortality factors incorporated into the 1980 amendments to the NAIC Standard Valuation Law may be used thereafter through the tenth policy year from the date of issue.

D. In determining basic reserves or deficiency reserves, guaranteed gross premiums without policy fees may be used where the calculation involves the guaranteed gross premium if the policy fee is a level dollar amount after the first policy year. In determining deficiency reserves, policy fees may be included in guaranteed gross premiums, even if not included in the actual calculation of basic reserves.

E. Reserves for policies that have changes to guaranteed gross premiums, guaranteed benefits, guaranteed charges or guaranteed credits that are unilaterally made by the company after issue and that are effective for more than one year after the date of the change shall be the greatest of the following: (i) reserves calculated ignoring the guarantee, (ii) reserves assuming the guarantee was made at issue, and (iii) reserves assuming that the policy was issued on the date of the guarantee.

F. The commission may require that the company document the extent of the adequacy of reserves for specified blocks, including but not limited to policies issued prior to January 1, 2000. This documentation may include a demonstration of the extent to which aggregation with other nonspecified blocks of business is relied upon in the formation of the appointed actuary opinion pursuant to and consistent with the requirements of 14VAC5-310-90.

G. This section is effective for valuations on and after December 31, 2008.

14VAC5-322-20. Definitions.

The following words and terms when used in this chapter shall have the following meanings unless the context clearly indicates otherwise:

"2001 CSO Mortality Table" means that mortality table, consisting of separate rates of mortality for male and female lives, developed by the American Academy of Actuaries CSO Task Force from the Valuation Basic Mortality Table developed by the Society of Actuaries Individual Life Insurance Valuation Mortality Task Force, and adopted by the NAIC in December 2002. The 2001 CSO Mortality Table is included in the Proceedings of the NAIC (2nd Quarter 2002) and supplemented by the 2001 CSO Preferred Class Structure Mortality Table. Unless the context indicates otherwise, the "2001 CSO Mortality Table" includes both the ultimate form of that table and the select and ultimate form of that table and includes both the smoker and nonsmoker mortality tables and the composite mortality tables. It also includes both the age-nearest-birthday and age-last-birthday bases of the mortality tables. The 2001 CSO Mortality Table may be accessed via the American Academy of Actuaries' website, http://www.actuary.org/life/cso/appendix_a_jun02.xls. Mortality tables in the 2001 CSO Mortality Table include the following:

1. "2001 CSO Mortality Table (F)" means that mortality table consisting of the rates of mortality for female lives from the 2001 CSO Mortality Table.

2. "2001 CSO Mortality Table (M)" means that mortality table consisting of the rates of mortality for male lives from the 2001 CSO Mortality Table.

3. "Composite mortality tables" means mortality tables with rates of mortality that do not distinguish between smokers and nonsmokers.

4. "Smoker and nonsmoker mortality tables" means mortality tables with separate rates of mortality for smokers and nonsmokers.

"2001 CSO Preferred Class Structure Mortality Table" means mortality tables with separate rates of mortality for Super Preferred Nonsmokers, Preferred Nonsmokers, Residual Standard Nonsmokers, Preferred Smokers, and Residual Standard Smoker splits of the 2001 CSO Nonsmoker and Smoker tables adopted by the NAIC in September 2006. The 2001 CSO Preferred Class Structure Mortality Table is included in the Proceedings of the NAIC (3rd Quarter 2006). Unless the context indicates otherwise, the "2001 CSO Preferred Class Structure Mortality Table" includes both the ultimate form of that table and the select and ultimate form of that table. It includes both the smoker and nonsmoker mortality tables. It includes both the male and female mortality tables and the gender composite mortality tables. It also includes both the age-nearest-birthday and age-last-birthday bases of the mortality table. The 2001 CSO Preferred Class Structure Mortality Table may be accessed via the Society of Actuaries website, [ http://www.soa.org/ccm/content/areas-of-practice/life-insurance/experience-s tudies/2001-cso-pref-mort-tables/ http://www.soa.org/research/individual-life/intl-2001-cso-preferred-class-structure-mortality-tables.aspx ].

"Commission" means the State Corporation Commission.

"Commissioner" means the Commissioner of Insurance in Virginia unless specific reference is made to another state, in which case "commissioner" means the insurance commissioner, director, superintendent or other supervising regulatory official of a given state who is responsible for administering the insurance laws of that state.

"NAIC" means the National Association of Insurance Commissioners.

"Statistical agent" means an entity with proven systems for protecting the confidentiality of individual insured and insurer information; demonstrated resources for and history of ongoing electronic communications and data transfer ensuring data integrity with insurers, which are its members or subscribers; and a history of and means for aggregation of data and accurate promulgation of the experience modifications in a timely manner.

14VAC5-322-30. 2001 CSO Preferred Class Structure Mortality Table.

At the election of the insurer, for each calendar year of issue, for any one or more specified plans of insurance and subject to satisfying the conditions stated in this chapter, the 2001 CSO Preferred Class Structure Mortality Table may be substituted in place of the 2001 CSO Smoker or Nonsmoker Mortality Table as the minimum valuation standard for policies issued on or after January 1, 2007, or, with the consent of the commissioner and subject to the conditions set forth in 14VAC5-322-40 D, [ July January ] 1, 2004. [ In determining such consent, the commissioner may rely on the consent of the commissioner of the company's state of domicile. ] No such election shall be made until the insurer demonstrates at least 20% of the business to be valued on this table is in one or more of the preferred classes. A table from the 2001 CSO Preferred Class Structure Mortality Table used in place of a 2001 CSO Mortality Table, pursuant to the requirements of this chapter, will be treated as part of the 2001 CSO Mortality Table only for purposes of reserve valuation pursuant to the requirements of the rules entitled "Use of the 2001 CSO Mortality Table In Determining Minimum Reserve Liabilities And Nonforfeiture Benefits" (14VAC5-321).

14VAC5-322-40. Conditions.

A. For each plan of insurance with separate rates for Preferred and Standard Nonsmoker lives, an insurer may use the Super Preferred Nonsmoker, Preferred Nonsmoker, and Residual Standard Nonsmoker tables to substitute for the Nonsmoker mortality table found in the 2001 CSO Mortality Table to determine minimum reserves. At the time of election and annually thereafter, except for business valued under the Residual Standard Nonsmoker Table, the appointed actuary shall certify that:

1. The present value of death benefits over the next 10 years after the valuation date, using the anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the valuation basic table corresponding to the valuation table being used for that class.

2. The present value of death benefits over the future life of the contracts, using anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the valuation basic table corresponding to the valuation table being used for that class.

B. For each plan of insurance with separate rates for Preferred and Standard Smoker lives, an insurer may use the Preferred Smoker and Residual Standard Smoker tables to substitute for the Smoker mortality table found in the 2001 CSO Mortality Table to determine minimum reserves. At the time of election and annually thereafter, for business valued under the Preferred Smoker Table, the appointed actuary shall certify that:

1. The present value of death benefits over the next 10 years after the valuation date, using the anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the Preferred Smoker valuation basic table corresponding to the valuation table being used for that class.

2. The present value of death benefits over the future life of the contracts, using anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the Preferred Smoker valuation basic table.

C. Unless exempted by the commission, every authorized insurer having elected to substitute the 2001 CSO Preferred Class Structure Mortality Table pursuant to this chapter shall file annually with a statistical agent designated by the NAIC and acceptable to the commission, statistical reports showing mortality and such other information as the commission may deem necessary or expedient for the administration of the provisions of this chapter. The commission shall require the use of a statistical report form established by the NAIC or by a statistical agent designated by the NAIC and acceptable to the commission.

[ D. If a company uses the 2001 CSO Preferred Class Structure Mortality Table for the valuation of policies issued prior to January 1, 2007, and reports either of the following in any statutory financial statement, the company must demonstrate to the commissioner that surplus relief granted by such accounting treatment has been offset by redundant reserves in blocks of business to which the 2001 CSO Preferred Class Structure Mortality Table has not been applied.

1. A deferred premium asset that is based on the valuation net premiums, even if greater than the corresponding gross premiums, or the greater of the policy gross and valuation net premiums, and the reduction in the deferred premium asset resulting from reinsurance is based on the modal premium payments to the reinsurer; or

2. A reserve credit that exceeds the reserve the insurer would report in the absence of reinsurance, on the proportion of the policies reinsured.

D. The use of the 2001 CSO Preferred Class Structure Mortality Table for the valuation of policies issued prior to January 1, 2007, shall not be permitted in any statutory financial statement in which a company reports, with respect to any policy or portion of a policy coinsured, either of the following:

1. In cases where the mode of payment of the reinsurance premium is less frequent than the mode of payment of the policy premium, a reserve credit that exceeds, by more than the amount specified in this subdivision as Y, the gross reserve calculated before reinsurance. Y is the amount of the gross reinsurance premium that (i) provides coverage for the period from the next policy premium due date to the earlier of the end of the policy year and the next reinsurance premium due date, and (ii) would be refunded to the ceding entity upon the termination of the policy.

2. In cases where the mode of payment of the reinsurance premium is more frequent than the mode of payment of the policy premium, a reserve credit that is less than the gross reserve, calculated before reinsurance, by an amount that is less than the amount specified in this subdivision as Z. Z is the amount of the gross reinsurance premium that the ceding entity would need to pay the assuming company to provide reinsurance coverage from the period of the next reinsurance premium due date to the next policy premium due date minus any liability established for the proportionate amount not remitted to the reinsurer.

For purposes of this condition, both the reserve credit and the gross reserve before reinsurance (i) for the mean reserve method shall be defined as the mean reserve minus the deferred premium asset, and (ii) for the mid-terminal reserve method shall include the unearned premium reserve. A company may estimate and adjust its accounting on an aggregate basis in order to meet the conditions to use the 2001 CSO Preferred Class Structure Mortality Table. ]

E. This section is effective for valuations on and after December 31, 2008.