General Calculation Requirements for Basic Reserves and Deficiency Reserves

Section 1409 Section 1409.40  General Calculation Requirements for Basic Reserves and Deficiency Reserves a)         Basic Reserves 1)         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. 2)         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; or B)        The select mortality factors found in Appendix A. b)         Deficiency Reserves Deficiency reserves, if any, are calculated for each policy as the excess, if greater than zero, 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.  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 select mortality factors found in Appendix A; or 3)         For durations in the first segment, X percent of the select mortality factors in Appendix A, subject to the following: 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 is such that, when using the valuation interest rate used for basic reserves, subsection (b)(3)(B)(i) is greater than or equal to subsection (b)(3)(B)(ii); i)          The actuarial present value of future death benefits, calculated using the mortality rates resulting from the application of X; ii)         The actuarial present value of future death benefits calculated using anticipated mortality experience without recognition of mortality improvement beyond the valuation date; 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 5 years after the valuation date; D)        The appointed actuary shall increase X at any valuation date when it is necessary to continue to meet all the requirements of this subsection (b)(3); E)        The appointed actuary may decrease X at any valuation date as long as X continues to meet all the requirements of this subsection (b)(3); F)         The appointed actuary shall specifically take into account the adverse effect on expected mortality and lapsation of any anticipated or actual increase in gross premiums; and G)        If X is less than 100% at any duration for any policy, the following requirements shall be met: i)          The appointed actuary shall annually prepare an actuarial opinion and memorandum based on asset adequacy analysis for the company.  The actuarial opinion shall be prepared in conformance with Section 223(1b)(B)(1) of the Code.  The actuarial memorandum shall be prepared in conformance with Section 223(1b)(A)(8) of the Code. ii)         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 iii)        The appointed actuary shall annually opine for all policies subject to this Part as to whether the mortality rates resulting from the application of X meet the requirements of this subsection (b)(3).  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 but only 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 insurer after issue and that are effective for more than one year after the date of the change shall be the greatest of the following: 1)         Reserves calculated ignoring the guarantee; 2)         Reserves assuming the guarantee was made at issue; and 3)         Reserves assuming that the policy was issued on the date of the guarantee. f)         The Director may require that the company document the extent of the adequacy of reserves for specified blocks.  This documentation may include a demonstration of the extent to which aggregation with other non-specified blocks of business is relied upon in the formation of the actuarial opinion.  In no event shall the aggregate reserves for all policies, contracts, and benefits be less than the aggregate reserves determined by the appointed actuary to be necessary to render the opinion required by Section 223(1b) of the Code.