WSR 98-01-121

PROPOSED RULES

INSURANCE COMMISSIONER'S OFFICE

[Filed December 18, 1997, 11:58 a.m.]

Original Notice.

Preproposal statement of inquiry was filed as WSR 97-20-141.

Title of Rule: Annuity mortality table.

Purpose: The proposed rule making will permit insurers to use a mortality table recently adopted by the National Association of Insurance Commissioners (NAIC).

Other Identifying Information: Insurance Commissioner Matter No. 97-5.

Statutory Authority for Adoption: RCW 48.02.060.

Statute Being Implemented: RCW 48.02.060.

Summary: The proposed amendment to WAC 284-74-010 will permit insurers to use a mortality table recently adopted by the NAIC.

Reasons Supporting Proposal: WAC 284-74-010 was adopted in 1987 and has not been amended since that date, while mortality rates among persons purchasing annuities has changed significantly.

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

Name of Proponent: Insurance Commissioner Deborah Senn, governmental.

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

Explanation of Rule, its Purpose, and Anticipated Effects: The proposed amendment to WAC 284-74-010 will permit insurers to use a mortality table recently adopted by the National Association of Insurance Commissioners. WAC 284-74-010 was adopted in 1987 and has not been amended since that date; while mortality rates among persons purchasing annuities has changed. The rule is in response to a petition for adoption presented to the Insurance Commissioner by the American Council of Life Insurance (ACLI).

Proposal Changes the Following Existing Rules: The proposed rule amends WAC 284-74-010 to permit insurers to use a new mortality table.

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

Introduction: This report analyzes a proposal to amend rules to recognize revised annuity mortality tables for use in determining the minimum standard of valuation and reserve liabilities for annuity and pure endowment contracts. The changes are proposed as a result of improved life expectancies among annuitants. This evaluation is completed to demonstrate that the proposed changes are made to reflect current demographic conditions and are not overly burdensome on either the insurer or insured. An analysis of the economic impact on small businesses is also included as part of this evaluation.

Background: In December 1996, the National Association of Insurance Commissioners adopted a revised Model Rule for Recognizing Annuity Mortality Tables for Use in Determining Reserve Liabilities for Annuities. The purpose of revising this rule is to recognize new mortality tables, the Annuity 2000 Mortality Table and the 1994 Group Annuity Reserving Table (GAR), for use in determining the minimum standard of valuation for annuity and pure endowment contracts.

The expectation of life continues to increase and studies continue to show general mortality improvements among annuitants of 1% and 2% per year¹. One result of the improved mortality is that annuity reserves must be increased to adequately measure an insurer's liability to provide benefits over an annuitant's longer life expectancy. To provide a consistent basis for these higher reserves, the Society of Actuaries developed and recommended a new Annuity 2000 Mortality Table for valuing individual annuities and the 1994 Group Annuity Reserving Table for valuing group annuities.

Federal Law and Other State Law: The proposed rules do conflict with any other state and federal laws.

Industry Codes: The proposed rules would affect all insurers selling annuity contracts in the state of Washington. This would affect Life Insurance Companies (industry code #6311).

Probable Costs: The proposed rules potentially impose short-term costs on insurers and insureds by updating the mortality rates used to value annuity contracts and reserve liability. Insurers will be required to hold higher reserves for new annuity business to reflect the probability of annuitants living longer lives. It is believed that the valuation techniques currently in use are based on outdated mortality rates. The expectation of life continues to increase and studies continue to show general mortality improvements among annuitants of 1% and 2% per year. As actual mortality levels improve, they begin to erode the margins built into the mortality tables currently in use, making them inadequate for valuation purposes.

Although these modifications may impose short-term burdens, the purpose of the rule is to restore an overall balance between premiums, reserves and future annuity payments. To understand the balance of annuity income as a function of mortality rates, a whole life annuity formula for an annuitant issued at age forty is listed below in EQ #1. This formula does not take into consideration expenses (e.g. administrative, operations, commission, etc.).

[Open Style:Columns Off]

[Open Style:Columns On]

Using the relationships in the equations above, one observes that improvements in mortality would increase _kp₄₀. An increase in _kp₄₀ would lead to an increase in a₄₀. In order to maintain the contract value of Y while a₄₀ is increasing, x (the annuity payments) must decrease. It would seem that if annuity payments (x) are decreasing, an annuitant's benefits are decreasing; however, if a₄₀ realistically reflects improved life expectancies, the present value of all annuity payments received over a lifetime (Y) should remain the same. In order for the annuity contracts to be appropriately valued, a₄₀ must be based on appropriate mortality rates. If people are living longer than what is reflected in the mortality rate tables, annuitants will receive relatively more income from an annuity over a lifetime than what was originally expected (when the policy was issued). Although the annuitant comes out ahead in this situation, over the long run, it is essential that expectations and contract valuations are based on appropriate data because reserves are also determined as a function of mortality rates. If overall actual life expectancies are significantly higher than the life expectancy rates used for annuity valuation calculations, insurers may be holding insufficient amounts of reserves to pay future claims.

Probable Benefits: When new mortality tables are required for regulatory purposes, it is desirable to insurers that they also be available to increase a company's tax reserve deduction under Internal Revenue Code Section 807(d). This section provides that a company must use for tax purposes ". . . the most recent commissioner's standard tables prescribed by the NAIC which are permitted to be used in computing reserves for that type of contract under the insurance laws of at least twenty-six states when the contract was issued." While a new mortality table may be required for regulatory purposes after a few states have adopted it, the tables cannot be used for tax purposes until it is permitted under the laws of at least twenty-six states. By adopting this rule, insurers are a step closer to being able to take tax deductions on the revised reserves.

Small Business Impact: The proposed rule making does not impose a disproportionately higher economic burden on small businesses within the four-digit classification. There are no filing requirements associated with the proposed rules. The rules are updated to reflect current mortality rates of annuitants so that more appropriate standards for valuation and reserve liabilities can be used in a consistent manner. In addition, the adoption of new mortality tables will potentially assist small companies by permitting them to increase tax reserve deductions. Small businesses will not be required to change their business practices to comply with the proposed rules.

Mitigation: To allow for a transition period, the proposed tables have been introduced as an option until April 1, 1998. Any further mitigation would defeat the purpose of using improved mortality tables based on current data.

Industry Involvement: The commissioner received a petition for rule making from the American Council of Life Insurance on September 17, 1997. The petition requested that the commissioner adopt new individual and group annuity valuation mortality tables as rules. In response to this petition, a CR-101 was filed for the rules and businesses that would be affected by the proposed rules were invited to provide input to the commissioner's staff throughout the rule-writing process. The Preproposal Statement of Inquiry was filed for the rule on October 1, 1997.

Conclusion: The rules are proposed in response to a petition for rule making from the American Council of Life Insurance and recently adopted model regulation from the National Association of Insurance Commissioners. This proposal updates the rules relating to annuity reserves and tables in order to reflect current mortality rates. Although these rules may impose short-term costs on both insurers and insureds, the rules are needed to appropriately value annuities and determine annuity reserves.

¹Final Report 1994 Group Annuity Mortality Table and 1994 Group Annuity Reserving Table by the Society of Actuaries Group Annuity Valuation Table Task Force, May 1995, Pages 23-24.

A copy of the statement may be obtained by writing to Kacy Brandeberry, P.O. Box 40256, Olympia, WA 98504-0256, Internet e-mail KacyB@oic.wa.gov, FAX (360) 407-0351.

RCW 34.05.328 applies to this rule adoption.

Hearing Location: Conference Room Downstairs, RoweSix, Building 4, 4224 6th Avenue S.E., Lacey, WA, on February 3, 1998, at 9:00.

Assistance for Persons with Disabilities: Contact Steve Carlsberg, TDD (360) 664-3154.

Submit Written Comments to: Kacy Brandeberry, P.O. Box 40256, Olympia, WA 98504-0256, Internet e-mail KacyB@oic.wa.gov, FAX (360) 407-0351, by February 1, 1998.

Date of Intended Adoption: February 17, 1998.

Greg J. Scully

Chief Deputy Commissioner

AMENDATORY SECTION (Amending Order R 87-3, filed 2/18/87)

WAC 284-74-010 1983 Annuity tables. The purpose of this section is to recognize new mortality tables, the 1983 table "a" and the 1983 GAM table, for use in determining the minimum standard of valuation for annuity and pure endowment contracts, except as otherwise provided in WAC 284-74-020.

(1) The 1983 table "a" mortality table, which was developed by the society of actuaries committee to recommend a new mortality basis for individual annuity valuation and adopted as a recognized mortality table for annuities in June 1982 by the National Association of Insurance Commissioners (NAIC), and which is set forth in NAIC Proceedings, 1982 Vol. II, p. 454, is recognized and approved as an individual annuity mortality table for valuation and, at the option of the company, may be used for determining the minimum standard of valuation for any individual annuity or pure endowment contract issued ((or delivered in this state)) on or after July 10, 1982.

(2) The 1983 table "a" referred to in subsection (1) of this section is to be used for determining the minimum standard of valuation for any individual annuity or pure endowment contract issued ((or delivered in this state)) on or after January 1, 1988.

(3) The 1983 GAM mortality table, which was developed by the society of actuaries committee on annuities and adopted as a recognized mortality table for annuities in December 1983 by the NAIC, and which is set forth in NAIC Proceedings, 1984 Vol. I, pp. 414-415, and the 1983 table "a" mortality table referred to in subsection (1) of this section, are recognized and approved as group annuity mortality tables for valuation and, at the option of the company, either table may be used for purposes of valuation for any annuity or pure endowment purchased on or after July 10, 1982, under a group annuity or pure endowment contract.

(4) The 1983 GAM table referred to in subsection (3) of this section is to be used for determining the minimum standard of valuation for any annuity or pure endowment purchased on or after January 1, 1988 under a group annuity or pure endowment contract.

[Statutory Authority: RCW 48.02.060. 87-05-046 (Order R 87-3), 284-74-010, filed 2/18/87.]

NEW SECTION

WAC 284-74-020 Annuity 2000 and 1994 GAR tables. The purpose of this section is to recognize the following mortality tables for use in determining the minimum standard of valuation for annuity and pure endowment contracts: The annuity 2000 mortality table, and the 1994 group annuity reserving (1994 GAR) table.

(1) This section does not apply to an individual annuity or pure endowment contract, if the contract is based on life contingencies and is issued to fund periodic benefits arising from:

(a) Settlements of various forms of claims pertaining to court settlements or out of court settlements from tort actions;

(b) Settlements involving similar actions such as worker's compensation claims; or

(c) Settlements of long term disability claims where a temporary or life annuity has been used in lieu of continuing disability payments.

(2) The annuity 2000 mortality table, which was developed by the society of actuaries committee on life insurance research and adopted as a recognized mortality table for annuities in December 1996 by the National Association of Insurance Commissioners (NAIC), and which is set forth in Transactions, Society of Actuaries, Vol. XLVII (1995), p. 240, is recognized and approved as an individual annuity mortality table for valuation and shall be used for determining the minimum standard of valuation for any individual annuity or pure endowment contract issued on or after April 1, 1998. At the option of the company, the annuity 2000 mortality table may be used for determining the minimum standard of valuation for any individual annuity or pure endowment contract issued on or after January 1, 1998.

(3) The 1994 GAR table, which was developed by the society of actuaries group annuity valuation table task force and adopted as a recognized mortality table for annuities in December 1996 by the NAIC, and which is set forth in Transactions, Society of Actuaries, Vol. XLVII (1995), pp. 866 and 867, is recognized and approved as a group annuity mortality table for valuation and shall be used for determining the minimum standard of valuation for any annuity or pure endowment purchased on or after April 1, 1998, under a group annuity or pure endowment contract. At the option of the company, the 1994 GAR table may be used for determining the minimum standard of valuation for any annuity or pure endowment purchased on or after January 1, 1998, under a group annuity or pure endowment contract.

(4) In using the 1994 GAR table, the mortality rate for a person age x in year (1994 + n) is calculated as follows: