WSR 00-04-090

PROPOSED RULES

OFFICE OF THE

INSURANCE COMMISSIONER

[ Insurance Commissioner Matter R 99-6 -- Filed February 2, 2000, 9:22 a.m. ]

Original Notice.

Preproposal statement of inquiry was filed as WSR 99-13-197.

Title of Rule: The valuation of life insurance policies regulation. This regulation is also known as "Triple X" or "XXX."

Purpose: The purpose of the model regulation is to provide a better method of ensuring adequate and realistic reserves for life insurance policies.

Statutory Authority for Adoption: RCW 48.02.060 and 48.74.030.

Statute Being Implemented: RCW 48.74.040, 48.74.070, and 48.74.080.

Summary: The model regulation includes tables of select mortality factors and rules for their use; rules concerning a minimum standard for valuation of plans with nonlevel premiums or benefits; and rules concerning a minimum standard for the valuation of plans with secondary guarantees.

Reasons Supporting Proposal: The regulation will provide a level playing between life insurers and between domestic companies and companies domiciled elsewhere. The better reserving practices will increase company solvency and consumer confidence. Over time it may lead to lower rates.

Name of Agency Personnel Responsible for Drafting and Implementation: Roy Olson, Olympia, Washington, (360) 753-7305; and Enforcement: Bethany Weidner, Olympia, Washington, (360) 664-8137.

Name of Proponent: Deborah Senn, Insurance Commissioner, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: In 1999, the National Association of Insurance Commissioners (NAIC) adopted a model regulation on the valuation of life insurance policies. This model regulation is also known as "Triple X." The purpose of the model regulation is to provide a better method of ensuring adequate and realistic reserves for life insurance policies. Reserves are the funds set aside by the insurer for payment of claims.

The model regulation includes: Tables of select mortality factors and rules for their use; rules concerning a minimum standard for valuation of plans with nonlevel premiums or benefits; and rules concerning a minimum standard for the valuation of plans with secondary guarantees.

The proposed rule implements the model regulation and includes additional provisions for disclosure, and a rewording of terms for clarity and consistency to more closely tie the regulation to the underlying intent and wording of Washington law.

Proposal does not change existing rules.

A small business economic impact statement has been prepared under chapter 19.85 RCW.

Small Business Economic Impact Statement

Overview: In 1999, the National Association of Insurance Commissioners (NAIC) adopted a model regulation on the valuation of life insurance policies. This model regulation is also known as "Triple X." The purpose of the model regulation is to provide a better method of ensuring adequate and realistic reserves for life insurance policies. Reserves are the funds set aside by the insurer for payment of claims.

The model regulation includes: Tables of select mortality factors and rules for their use; rules concerning a minimum standard for valuation of plans with nonlevel premiums or benefits; and rules concerning a minimum standard for the valuation of plans with secondary guarantees.

The proposed rule implements the model regulation and includes additional provisions for disclosure, and a rewording of terms for clarity and consistency to more closely tie the regulation to the underlying intent and wording of Washington law.

Is the rule required by federal law or federal regulation? No. Federal law or regulation does not require this rule.

What industry is affected by the proposed rule? The industry code that would be affected by the proposed rule is #6311, Life Insurance Companies.

List the specific parts of the proposed rule that may impose a cost to business: Modifying the existing reserve standards, WAC 284-74-340.

What will be the compliance costs for industries affected? See above. Carriers estimate the costs of modifying reserve standards at anywhere from no additional costs, to $15,000 (considered minimal by industry standards). It is important to note that if the company is currently offering life insurance policies in a state that has already adopted a version of the NAIC Triple X Model, the reserve modifications would have already been made. Therefore, no additional costs would be incurred. The model regulation is being adopted by an ever-increasing number of states. Domiciled companies would be at a competitive disadvantage with nondomiciled companies if the rule were not implemented in Washington.

The underlying basis for this regulation is to ensure that life insurers maintain adequate reserves for life insurance policies. While some companies may face initial compliance costs, the regulation will ensure that the industry has adequate funds to pay claims. This will save taxpayer money in the reduction of possible insolvencies over time.

What percentage of the industries in the four-digit standard industrial classification will be affected by the rule? The proposed rule would affect 100% of the life insurance companies that offer life insurance plans subject to regulation by the insurance commissioner.

Will the rule impose a disproportionately higher economic burden on small businesses within the four-digit classification? No. The proposed rule will not impose a disproportionately higher economic burden on smaller companies. If anything, the rule will place a slightly higher proportional cost on the larger businesses which offer a wider variety of life insurance plans.

Can mitigation be used to reduce the economic impact of the rule on small businesses and still meet the objectives of the proposed rule? The rule does not include any mitigatory tactics to reduce the already minimal anticipated costs to small business. The commissioner encourages any suggestions that can accomplish the goals in a more cost-efficient manner and encourages dialogue with all carriers.

What steps will the commissioner take to reduce the costs of the rule on small businesses? See above.

Which mitigation techniques have been considered and incorporated into the proposed rule? The rule making itself stems from a desire to create more effective and fairer reserve standards. It is a result of industry request to create uniform reserve requirements and will allow for simpler administration for life insurers.

Which mitigation techniques were considered for incorporation into the proposed rule but were rejected, and why? No mitigation techniques were considered for incorporation, and then rejected.

Briefly describe the reporting, recordkeeping, and other compliance requirements of the proposed rule: There are no new reporting or record-keeping requirements as a result of this rule.

List the kinds of professional services that a small business is likely to need in order to comply with the reporting, recordkeeping, and other compliance requirements of the proposed rule: A small business is not likely to need any additional professional services because of the proposed rule. There will be a shift in reserve requirements but it is expected that life insurers can do this with current personnel in the ordinary course of business. The commissioner will seek to provide whatever technical assistance is necessary to enable the smaller companies to understand and implement the rule.

Analyze the cost of compliance including, specifically:

Cost of equipment: There is no anticipated additional cost of equipment.

Cost of supplies: There is no anticipated additional cost of supplies.

Cost of labor: There is no additional labor costs anticipated as a result of the rule.

Cost of increased administration: Changing reserve standards, estimated by respondents to our economic questionnaire, as anywhere from no additional costs to approximately $15,000.

Compare the cost of compliance for small business with the cost of compliance for the largest business in the same four-digit classification: The cost of compliance should be proportional for small businesses. There should be no proportional differences in costs of equipment, supplies, labor, or administration. Larger companies with more life insurance plans may have slightly higher costs for administration.

Have businesses that will be affected been asked what the economic impact will be? Yes, a questionnaire regarding the economic impact aspects of the rule was sent to a cross-section of life insurance companies that provide life insurance in the state of Washington. Comments were received from each, and are reflected in this report.

How did the commissioner involve small business in the development of the proposed rule? See above. The drafters will discuss the proposed rules with any industry representatives or interested parties, including representatives of small businesses, as the rule-making process continues.

How and when were affected small businesses advised of the proposed rule? The CR-101 for this rule was filed on July 23, 1999. It was mailed to interested parties and all life insurers. It was also posted on the commissioner's website.

A copy of the statement may be obtained by writing to Kacy Brandeberry, P.O. Box 40255, Olympia, WA 98504-0255, e-mail Kacyb@oic.wa.gov, phone (360) 664-3784, fax (360) 664-2782.

RCW 34.05.328 applies to this rule adoption. The proposed rules are rules "other than a procedural or interpretive rule that (a) adopts substantive provisions of law pursuant to delegated legislative authority, the violation of which subjects a violator of such rule to a penalty or sanction; (b) establishes, alters, or revokes any qualification or standard for the issuance, suspension, or revocation or a license or permit; or (c) adopts a new, or makes significant amendments to, a policy or regulatory program."

Hearing Location: General Administration Building, 1st Floor Auditorium, 11th and Columbia, Olympia, Washington, on March 8, 2000, at 10:00.

Assistance for Persons with Disabilities: Contact Lori Villaflores by March 6, 2000, TDD (360) 407-0409.

Submit Written Comments to: Kacy Brandeberry, P.O. Box 40255, Olympia, WA 98504-0255, e-mail Kacyb@oic.wa.gov, fax (360) 664-2782, by March 7, 2000.

Date of Intended Adoption: March 9, 2000.

February 2, 2000

Robert Harkins

Chief Deputy Commissioner

OTS-3764.2


NEW SECTION
WAC 284-74-300
Purpose.

(1) The purpose of this regulation, WAC 284-74-300 through 284-74-380 is to provide:

(a) Tables of select mortality factors and rules for their use;

(b) Rules concerning a minimum standard for the valuation of plans with nonlevel premiums or benefits; and

(c) Rules concerning a minimum standard for the valuation of plans with secondary guarantees.

(2) The method for calculating reserves defined in this regulation will constitute the commissioner's reserve valuation method for policies to which this regulation is applicable.

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NEW SECTION
WAC 284-74-310
Authority.

This regulation is issued under the authority of RCW 48.02.060(3), 48.12.030(3), 48.74.040(1), 48.74.080 and 48.74.030 (1)(a)(iii).

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NEW SECTION
WAC 284-74-320
Applicability.

This regulation shall apply to all life insurance policies, with or without nonforfeiture values, issued on or after the operative date of this regulation, subject to the following exceptions and conditions.

(1)(a) This regulation shall not apply to any individual life insurance policy issued on or after the operative date of this regulation if the policy is issued in accordance with and as a result of the exercise of a reentry provision contained in the original life insurance policy of the same or greater face amount, issued before the operative date of this regulation, that guarantees the premium rates of the new policy. This regulation also shall not apply to subsequent policies issued as a result of the exercise of such a provision, or a derivation of the provision, in the new policy.

(b) This regulation shall not apply to any universal life insurance policy that meets all the following requirements:

(i) The secondary guarantee period, if any, is five years or less;

(ii) The specified premium for the secondary guarantee period is not less than the net level reserve premium for the secondary guarantee period based on the 1980 CSO valuation tables as defined in WAC 284-74-330(6) and the applicable valuation interest rate; and

(iii) The initial surrender charge is not less than one hundred percent of the first year annualized specified premium for the secondary guarantee period.

(c) This regulation shall not apply to any variable life insurance policy that provides for life insurance, the amount or duration of which varies according to the investment experience of any separate account or accounts.

(d) This regulation shall not apply to any variable universal life insurance policy that provides for life insurance, the amount or duration of which varies according to the investment experience of any separate account or accounts.

(e) This regulation shall not apply to a group life insurance certificate unless the certificate provides for a stated or implied schedule of maximum gross premiums required in order to continue coverage in force for a period in excess of one year.

(2)(a) Calculation of the minium valuation standard for policies with gross premiums subject to a nonlevel guaranteed maximum or with benefits subject to a nonlevel guaranteed minimum (other than universal life policies), or both, shall be in accordance with the provisions of WAC 284-74-350.

(b) Calculation of the minimum valuation standard for flexible premium and fixed premium universal life insurance policies, that contain provisions resulting in the ability of a policyholder to keep a policy in force over a secondary guarantee period, shall be in accordance with the provisions of WAC 284-74-360.

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NEW SECTION
WAC 284-74-330
Definitions.

For purposes of this regulation:

(1) "Basic reserves" means reserves calculated in accordance with RCW 48.74.040(1).

(2) "Contract segmentation method" means the method of dividing the period from issue to mandatory expiration of a policy into successive segments, with the length of each segment being defined as the period from the end of the prior segment (from policy inception, for the first segment) to the end of the latest policy year as determined below. All calculations are made using the 1980 CSO valuation tables, as defined in subsection (6) of this section (or any other valuation mortality table adopted by the National Association of Insurance Commissioners (NAIC) after the operative date of this regulation and promulgated by regulation by the commissioner for this purpose), and, if elected for the plan, the optional minimum mortality standard for deficiency reserves stipulated in WAC 284-74-340(2).

The length of a particular contract segment shall be set equal to the minimum of the value t for which Gt is greater than Rt (if Gt never exceeds Rt the segment length is deemed to be the number of years from the beginning of the segment to the mandatory expiration date of the policy), where Gt and Rt are defined as follows:


GPx+k+t
Gt=
GPx+k+t-1
where:
x = original issue age;
k = the number of years from the date of issue to the beginning of the segment;
t = 1, 2, ...; t is reset to 1 at the beginning of each segment;
GPx+k+t-1 = Guaranteed maximum gross premium per thousand of face amount for year t of the segment, ignoring policy fees only if level for the premium paying period of the policy.
qx+k+t

,


qx+k+t-1

Rt= However, Rt may be increased or decreased by one percent in any policy year, at the company's option, but Rt shall not be less than one;
where:

x, k and t are as defined above, and

qx+k+t-1 = valuation mortality rate for deficiency reserves in policy year k+t but using the mortality of WAC 284-74-340 (2)(b) if WAC 284-74-340 (2)(c) is elected for deficiency reserves.

However, if GPx+k+t is greater than 0 and GPx+k+t-1 is equal to 0, Gt shall be deemed to be 1000. If GPx+k+t and GPx+k+t-1 are both equal to 0, Gt shall be deemed to be 0.

(3) "Deficiency reserves" means the excess, if greater than zero, of

(a) Minimum reserves calculated in accordance with RCW 48.74.070 over

(b) Basic reserves.

(4) "Guaranteed maximum gross premiums" means the premiums guaranteed and determined at issue that the actual gross premiums under a policy of life insurance cannot exceed.

(5) "Maximum valuation interest rates" means the interest rates defined in RCW 48.74.030(3) that are to be used in determining the minimum standard for the valuation of life insurance policies.

(6) "1980 CSO valuation tables" means the commissioners 1980 standard ordinary mortality table (1980 CSO table) without ten-year select mortality factors, incorporated into the 1980 amendments to the NAIC model standard valuation law, and variations of the 1980 CSO table approved by the NAIC, such as the smoker and nonsmoker versions approved in December 1983.

(7) "Scheduled gross premium" means the smallest illustrated gross premium at issue for other than universal life insurance policies. For universal life insurance policies, scheduled gross premium means the smallest specified premium described in WAC 284-74-360 (1)(c), if any, or else the minimum premium described in WAC 284-74-360 (1)(d).

(8)(a) "Segmented reserves" means reserves, calculated using segments produced by the contract segmentation method, equal to the present value of all future guaranteed benefits less the present value of all future net premiums to the mandatory expiration of a policy, where the net premiums within each segment are a uniform percentage of the respective guaranteed maximum gross premiums within the segment. The uniform percentage for each segment is such that, at the beginning of the segment, the present value of the net premiums within the segment equals:

(i) The present value of the death benefits within the segment, plus

(ii) The present value of any unusual guaranteed cash value (see WAC 284-74-350(4)) occurring at the end of the segment, less

(iii) Any unusual guaranteed cash value occurring at the start of the segment, plus

(iv) For the first segment only, the excess of the item (A) over item (B), as follows:

(A) A net level annual premium equal to the present value, at the date of issue, of the benefits provided for in the first segment after the first policy year, divided by the present value, at the date of issue, of an annuity of one per year payable on the first and each subsequent anniversary within the first segment on which a premium falls due. However, the net level annual premium shall not exceed the net level annual premium on the nineteen-year premium whole life plan of insurance of the same renewal year equivalent level amount at an age one year higher than the age at issue of the policy.

(B) A net one year term premium for the benefits provided for in the first policy year.

(b) The length of each segment is determined by the contract segmentation method, as defined in this section.

(c) The interest rates used in the present value calculations for any policy may not exceed the maximum valuation interest rate, determined with a guarantee duration equal to the sum of the lengths of all segments of the policy.

(d) For both basic reserves and deficiency reserves computed by the segmented method, present values shall include future benefits and net premiums in the current segment and in all subsequent segments.

(9) "Tabular cost of insurance" means the net single premium at the beginning of a policy year for one-year term insurance in the amount of the guaranteed death benefit in that policy year.

(10) "Ten-year select mortality factors" means the select factors adopted with the 1980 amendments to the NAIC standard valuation law.

(11)(a) "Unitary reserves" means the present value of all future guaranteed benefits less the present value of all future modified net premiums, where:

(i) Guaranteed benefits and modified net premiums are considered to the mandatory expiration of the policy; and

(ii) Modified net premiums are a uniform percentage of the respective guaranteed maximum gross premiums, where the uniform percentage is such that, at issue, the present value of the net premiums equals the present value of all death benefits and pure endowments, plus the excess of item (A) over item (B), as follows:

(A) A net level annual premium equal to the present value, at the date of issue, of the benefits provided for after the first policy year, divided by the present value, at the date of issue, of an annuity of one per year payable on the first and each subsequent anniversary of the policy on which a premium falls due. However, the net level annual premium shall not exceed the net level annual premium on the nineteen-year premium whole life plan of insurance of the same renewal year equivalent level amount at an age one year higher than the age at issue of the policy.

(B) A net one year term premium for the benefits provided for in the first policy year.

(b) The interest rates used in the present value calculations for any policy may not exceed the maximum valuation interest rate, determined with a guarantee duration equal to the length from issue to the mandatory expiration of the policy.

(12) "Universal life insurance policy" means any individual life insurance policy under the provisions of which separately identified interest credits (other than in connection with dividend accumulations, premium deposit funds, or other supplementary accounts) and mortality or expense charges are made to the policy.

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NEW SECTION
WAC 284-74-340
General calculation requirements for basic reserves and premium deficiency reserves.

(1) At the election of the company for any one or more specified plans of life insurance, the minimum valuation standard of mortality under RCW 48.74.030(1) for basic reserves may be calculated using the 1980 CSO mortality table with select mortality factors (or any other valuation mortality table adopted by the NAIC after the operative date of this regulation and promulgated by regulation by the commissioner for this purpose). If select mortality factors are elected, they may be:

(a) The ten-year select mortality factors incorporated into the 1980 amendments to the NAIC standard valuation law;

(b) The select mortality factors in WAC 284-74-380; or

(c) Any other table of select mortality factors adopted by the NAIC after the operative date of this regulation and promulgated by regulation by the commissioner for the purpose of calculating basic reserves.

(2) Deficiency reserves, if any, are calculated under RCW 48.74.070 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 the minimum valuation standards of mortality under RCW 48.74.030(1) and rate of interest under RCW 48.74.030(3), and replacing the net premium by the gross premium in each contract year the actual gross premium is less than the corresponding net premium. The gross premiums shall be the maximum gross premiums guaranteed on the valuation date.

The quantity A and the corresponding net premiums used in the determination of quantity A shall be based upon the minimum valuation standard of mortality under subsection (1) of this section for basic reserves: Provided, That at the election of the company for any one or more specified plans of life insurance, the quantity A and the corresponding net premiums used in the determination of the quantity A may be based upon the 1980 CSO mortality table with select mortality factors (or any other valuation mortality table adopted by the NAIC after the operative date of this regulation and promulgated by regulation by the commissioner). If select mortality factors are elected, they may be:

(a) The ten-year select mortality factors incorporated into the 1980 amendments to the NAIC standard valuation law;

(b) The select mortality factors in WAC 284-74-380;

(c) Subject to the conditions in subsection (3) of this section, X percent of the select mortality factors in WAC 284-74-380; or

(d) Any other table of select mortality factors adopted by the NAIC after the operative date of this regulation and promulgated by regulation by the commissioner for the purpose of calculating deficiency reserves.

(3) If X percent of the select mortality factors in WAC 284-74-380 is elected under subsection (2)(c) of this section, then that election is subject to the following conditions:

(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 twenty percent;

(c) X shall not decrease in any successive policy years;

(d) Using the valuation interest rate for basic reserves, subparagraph (i) is greater than or equal to subparagraph (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;

(e) The mortality rates resulting from the application of X are at least as great as anticipated mortality experience, without recognition of mortality improvement beyond the valuation date, in each of the first five years after the valuation date;

(f) The appointed actuary shall increase X at any valuation date where it is necessary to continue to meet all the requirements of this subsection (3);

(g) 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 this subsection (3); and

(h) 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.

(i) If X is less than one hundred percent at any duration for any policy, the following requirements shall be met:

(i) The appointed actuary shall annually prepare an actuarial opinion and memorandum in conformance with the requirements of WAC 284-07-380 through 284-07-400; and

(ii) The appointed actuary shall annually opine for all policies subject to this regulation as to whether the mortality rates resulting from the application of X meet the requirements of this subsection (3). This opinion shall be included with or attached to the company's annual statement, and shall disclose the lowest X factor used for any policy on the valuation date. 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.

(4) 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 ten years, the appropriate ten-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.

(5) In determining basic reserves or deficiency reserves, guaranteed maximum gross premiums without policy fees may be used where the calculation involves the guaranteed maximum gross premium but only if the policy fee is specified in the policy and is a level dollar amount for the entire premium paying period of the policy. In determining deficiency reserves, policy fees may be included in guaranteed maximum gross premiums, even if not included in the actual calculation of basic reserves.

(6) Reserves for policies under which the insurer has changed its guarantees after issue with respect to gross premiums, benefits, charges, or credits, with the new guarantees effective for more than one year after the date of the change, shall be the greatest of the following:

(a) Reserves calculated ignoring the change;

(b) Reserves assuming the guarantee was made at issue; and

(c) Reserves assuming that the policy was issued on the date of the guarantee.

(7) The commissioner 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 the operative date of this regulation. 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 WAC 284-07-380 and 284-07-400.

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NEW SECTION
WAC 284-74-350
Calculation of minimum valuation standard for policies with nonlevel guaranteed maximum gross premiums or nonlevel guaranteed minimum benefits (other than universal life policies).

(1) 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 select mortality factors. At the option of the insurer, in calculating segmented reserves and net premiums, either of the adjustments described in (a) or (b) of this subsection may be made:

(a) 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.

(b) 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.

(2)(a) The deficiency reserve at any duration shall be calculated:

(i) On a unitary basis if the corresponding basic reserve determined by subsection (1) of this section is unitary;

(ii) On a segmented basis if the corresponding basic reserve determined by subsection (1) of this section is segmented; or

(iii) On the segmented basis if the corresponding basic reserve determined by subsection (1) of this section is equal to both the segmented reserve and the unitary reserve.

(b) This subsection shall apply to any policy for which the guaranteed maximum gross premium or actual 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 WAC 284-074-340(2)) and rate of interest.

(c) 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 WAC 284-74-340(2).

(d) For deficiency reserves determined on a segmented basis, the quantity A is determined using segment lengths equal to those determined for segmented basic reserves.

(3) 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 midterminal reserves are used. The tabular cost of insurance shall use the same valuation mortality table and interest rates as those used for the calculation of the segmented reserves. However, if select mortality factors are used, they shall be the ten-year select mortality factors incorporated into the 1980 amendments to 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 policy owner 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.

(4)(a) 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.

(b) 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:

(i) 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:

(A) The date of the next unusual guaranteed cash surrender value, if any, that is scheduled after the valuation date; or

(B) The mandatory expiration date of the policy; and

(ii) 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

(iii) The net to gross ratio is equal to item (A) divided by item (B) as follows:

(A) 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.

(B) The present value, at the beginning of the n year period, of the scheduled gross premiums payable during the n year period.

(c) 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:

(i) One hundred ten percent of the scheduled gross premium for that year;

(ii) One hundred ten percent 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

(iii) Five percent of the first policy year surrender charge, if any.

(5) At the option of the company, the following approach for reserves on yearly renewal term reinsurance may be used:

(a) Calculate the valuation net premium for each future policy year as the tabular cost of insurance for that future year.

(b) Basic reserves shall never be less than the tabular cost of insurance for the appropriate period, as defined in subsection (3) of this section.

(c) For each policy year, calculate the excess, if greater than zero, of the valuation net premium over the respective guaranteed maximum gross premium.

(d) 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 (c) of this subsection.

(e) For purposes of this subsection, the calculations use the maximum valuation interest rate and the 1980 CSO mortality table with or without ten-year select mortality factors, or any other table adopted after the operative date of this regulation by the NAIC and promulgated by regulation by the commissioner for this purpose.

(f) A reinsurance agreement shall be considered yearly renewable term reinsurance for purposes of this subsection if only the mortality risk is reinsured.

(g) 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.

(6) At the option of the company, the following approach for reserves for attained-age-based yearly renewable term life insurance policies may be used:

(a) Calculate the valuation net premium for each future policy year as the tabular cost of insurance for that future year.

(b) Basic reserves shall never be less than the tabular cost of insurance for the appropriate period, as defined in subsection (3) of this section.

(c) For each policy year, calculate the excess, if greater than zero, of the valuation net premium over the respective guaranteed maximum gross premium.

(d) 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 (c) of this subsection.

(e) 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 operative date of this regulation by the NAIC and promulgated by regulation by the commissioner for this purpose.

(f) A policy shall be considered an attained-age-based yearly renewable term life insurance policy for purposes of this subsection if:

(i) 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

(ii) 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.

(g) For policies that become attained-age-based yearly renewable term policies after an initial period of coverage, the approach of this subsection may be used after the initial period if:

(i) The initial period is constant for all insureds of the same sex, risk class and plan of insurance; or

(ii) The initial period runs to a common attained age for all insureds of the same sex, risk class and plan of insurance; and

(iii) After the initial period of coverage, the policy meets the conditions of (f) of this subsection.

(h) If this election is made, this approach shall be applied in determining reserves for all attained-age-based yearly renewable term life insurance policies issued on or after the operative date of this regulation.

(7) Unitary basic reserves and unitary deficiency reserves need not be calculated for a policy if the following conditions are met:

(a) 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 ten 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;

(b) The guaranteed maximum gross premiums in all n-year periods are not less than the corresponding net premiums based upon the 1980 CSO mortality table with or without the ten-year select mortality factors; and

(c) There are no cash surrender values in any policy year.

(8) 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:

(a) At issue, the insured is age twenty-four or younger;

(b) Until the insured reaches the end of the juvenile period, which shall occur at or before age twenty-five, the gross premiums and death benefits are level, and there are no cash surrender values; and

(c) 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.

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NEW SECTION
WAC 284-74-360
Calculation of minimum valuation standard for flexible premium and fixed premium universal life insurance policies that contain provisions resulting in the ability of a policy owner to keep a policy in force over a secondary guarantee period.

(1)(a) Policies with a secondary guarantee include:

(i) A policy with a guarantee that the policy will remain in force at the original schedule of benefits over a specified period of time, subject only to the payment of specified premiums;

(ii) A policy in which the minimum premium at any duration is less than the corresponding one year valuation premium, calculated using 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 operative date of this regulation by the NAIC and promulgated by regulation by the commissioner for this purpose; or

(iii) A policy with any combination of (a)(i) and (ii) of this subsection.

(b) Secondary guarantee period is the period for which the policy is guaranteed to remain in force subject only to a secondary guarantee. When a policy contains more than one secondary guarantee, the minimum reserve shall be the greatest of the respective minimum reserves at that valuation date of each unexpired secondary guarantee, ignoring all other secondary guarantees. Secondary guarantees that are unilaterally changed by the insurer after issue shall be considered to have been made at issue. Reserves described in subsections (2) and (3) of this section shall be recalculated from issue to reflect these changes.

(c) Specified premiums mean the premiums specified by the insurer, the payment of which guarantees that the policy will remain in force at the original schedule of benefits, but which otherwise would be insufficient to keep the policy in force in the absence of the guarantee if maximum mortality and expense charges and minimum interest credits were made and any applicable surrender charges were assessed.

(d) For purposes of this section, the minimum premium for any policy year is the premium that, when paid into a policy with a zero account value at the beginning of the policy year, produces a zero account value at the end of the policy year. The minimum premium calculation shall use the policy cost factors (including mortality charges, loads and expense charges) and the interest crediting rate, which are all guaranteed at issue.

(e) The one-year valuation premium means the net one-year premium based upon the original schedule of benefits for a given policy year. The one-year valuation premiums for all policy years are calculated at issue. The select mortality factors defined in WAC 284-74-340 (2)(b), (c) and (d) may not be used to calculate the one-year valuation premiums.

(f) The one-year valuation premium should reflect the frequency of fund processing, as well as the distribution of deaths assumption employed in the calculation of the monthly mortality charges to the fund.

(2) Basic reserves for the secondary guarantees shall be the segmented reserves for the secondary guarantee period. In calculating the segments and the segmented reserves, the gross premiums shall be set equal to the specified premiums, if any, or otherwise to the minimum premiums, that keep the policy in force and the segments will be determined according to the contract segmentation method as defined in WAC 284-74-330(2).

(3) Deficiency reserves, if any, for the secondary guarantees shall be calculated for the secondary guarantee period in the same manner as described in WAC 284-74-350(2) with gross premiums set equal to the specified premiums, if any, or otherwise to the minimum premiums that keep the policy in force.

(4) The minimum reserves during the secondary guarantee period are the greater of:

(a) The basic reserves for the secondary guarantee plus the deficiency reserve, if any, for the secondary guarantees; or

(b) The minimum reserves required by other statutory provisions, rules or regulations governing universal life plans.

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NEW SECTION
WAC 284-74-370
Operative date.

On or after the effective date of this regulation, the company to whose policies this regulation applies may elect January 1, 2000, as its operative date. If the company makes no such election, this regulation shall become operative on its effective date.

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NEW SECTION
WAC 284-74-380
Select mortality factors.

This section contains the tables of select mortality factors to which WAC 284-74-340 (1)(b), (2)(b) and (c) refer. The factors in this section are percentages to be applied to the 1980 CSO valuation tables.

The six tables of select mortality factors contained herein include:

(1) Male composite;

(2) Male nonsmoker;

(3) Male smoker;

(4) Female composite;

(5) Female nonsmoker; and

(6) Female smoker.

The same factors apply to both age last birthday and age nearest birthday mortality tables.

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Washington State Code Reviser's Office