Life Actuarial (A) Task Force/ Health Actuarial (B) Task Force

Attachment Eleven

Life Actuarial (A) Task Force

11/30-12/1/17

Life Actuarial (A) Task Force/ Health Actuarial (B) Task Force

Amendment Proposal Form*

1. Identify yourself, your affiliation and a very brief description (title) of the issue.

Brian Bayerle, ACLI – Update the Valuation Manual for the treatment of riders

2. Identify the document, including the date if the document is “released for comment,” and the location in the document where the amendment is proposed:

Valuation Manual August 29, 2016, with non-substantive changes through year-end 2016: Section II – Reserve Requirements, VM-20 Section 2.A, VM-20 Section 3

3. Show what changes are needed by providing a red-line version of the original verbiage with deletions and identify the verbiage to be deleted, inserted or changed by providing a red-line (turn on “track changes” in Word®) version of the verbiage. (You may do this through an attachment.)

See attached.

4. State the reason for the proposed amendment? (You may do this through an attachment.)

The APF provides more clarity to the treatment of riders for the model reserve in the “Reserve Requirements” section of the Valuation Manual. Additionally, it clarifies the treatment of term life insurance riders when valued separately from the base contract in VM-20 Sections 2 and 3, which currently seems to contradict the “Reserve Requirements” section.

* This form is not intended for minor corrections, such as formatting, grammar, cross–references or spelling. Those types of changes do not require action by the entire group and may be submitted via letter or email to the NAIC staff support person for the NAIC group where the document originated.

NAIC Staff Comments:

Dates: Received / Reviewed by Staff / Distributed / Considered
Notes: 2017-70

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Introduction

RIDERS AND SUPPLEMENTAL BENEFITS

A. If a rider or supplemental benefit is attached to a health insurance product, annuity product, deposit-type contract or credit life or disability product it may be valued with the base contract unless there are specific requirements applicable to that contract which require separate requirements for the rider or supplemental benefit.

B. If a rider or supplemental benefit to one of the above types of products a life insurance contract policy possesses any of the following attributes, the rider or supplemental benefit shall be included with the base policy for the deterministic and stochastic exclusion tests if applicable, and all cash flows associated with the rider or supplemental benefit must be included in the calculation of the modeled reserve for the base policy. These conditions do not apply to Guaranteed Insurability, Accidental Death or Disability Benefits, Convertibility, or Disability Waiver of Premium Benefits.has a separately identified premium or charge, then the following apply:

1. The rider or supplemental benefit does not have a separately identified premium or charge;

2. The rider or supplemental benefit premium, charge, value, or benefits are determined by reference to the base policy features or performance; or

3. The base policy value or benefits are determined by reference to the rider or supplemental benefit features or performance.

C. If a term life insurance rider on the named insured[s] on the base life insurance policy does not meet the conditions of paragraph B above, then the term life insurance rider shall be separated from the base policy for the deterministic and stochastic exclusion tests and the calculation of the modeled reserve.

D. For all other riders or supplemental benefits on life insurance contracts policies not addressed in paragraphs B and C above, the riders or supplemental benefits may be included with the base policy for the deterministic and stochastic exclusion tests if applicable. If elected to be included with the base policy for the deterministic and stochastic exclusion tests, all cash flows associated with the riders and or supplemental benefits must be included in the calculation of the modeled reserve for the base policy. If elected not to be included with the base policy for the deterministic and stochastic exclusion tests, all cash flows associated with the riders and supplemental benefits may at the company’s option either be included in the calculation of the modeled reserve for the base policy or modeled separately.

If the company is not performing the deterministic and stochastic exclusion tests, then for any riders or supplemental benefits on life insurance policies not addressed in paragraphs B and C above, the cash flows associated with the riders or supplemental benefits may at the company’s option either be included in the calculation of the modeled reserve for the base policy or modeled separately.

For supplemental benefits, e.g., Disability Waiver of Premium, Accidental Death Benefits, Convertibility or Guaranteed Insurability, the reserves may be computed separate from the base contract following the reserves requirements for that benefit;

2. For term life insurance riders on persons other than the named insured[s] on the base policy, the reserve may be computed separate from the base policy following the reserve requirements for that benefit;

3. For term life insurance riders on the named insured[s] on the base policy, the reserve shall be valued as part of the base policy;

4. For riders that enhance or modify the terms of the base contract, e.g., a secondary guarantee rider or a cash value enhancement rider, the reserve shall be valued as part of the base policy; and

5. For any riders not addressed by paragraphs 1.b through 1.d above, the reserve shall be valued as part of the base policy.

B. If a rider or supplemental benefit does not have a separately identified premium or charge, all cash flows associated with the rider or supplemental benefit must be included in the calculation of the reserve for the base policy. For example, reserves for a universal life policy with an accelerated benefit for long-term care (LTC) must include cash flows from the LTC benefit in determining minimum reserves in compliance with VM-20. A separate reserve is not determined for the rider or supplemental benefit.

VM-20

Section 2: Minimum Reserve

All policies subject to these requirements shall be included in one of the product groups defined by paragraphs 1 – 3 below. The company may elect to exclude one or more groups of policies from the stochastic reserve calculation and/or the deterministic reserve calculation. When excluding a group of policies from a reserve calculation, the company must document that the applicable exclusion test defined in Section 6 is passed for that group of policies.

When valuing term life insurance riders separate from the base policy pursuant to Section II, the reserve requirements for term policies are applicable. When valuing term life insurance riders together with the base policy pursuant to Section II, the reserve requirements for the base policy including the comparison of the reserve components are applicable, except that the term life insurance rider net premium reserve calculation may follow either the requirements for term policies or the requirements for the base policy; both net premium reserves would be considered part of the product minimum net premium reserve for the policy for purposes of comparison with the modeled reserve. Additionally, the Section 6.B.1.b prohibition against term insurance policies using the deterministic exclusion test will not apply when the term life insurance rider is valued with a base policy that would otherwise be permitted to use the deterministic exclusion test.

The minimum reserve for each product group is defined by paragraphs 1 – 3, and the total minimum reserve equals the sum of 1, 2 and 3 below, defined as:

1. Term Policies— All term policies are to be included in b. unless the company has elected to exclude a group of policies from the stochastic reserve calculation and has applied the stochastic exclusion test defined in Section 6, passed the test and documented the results.

Section 3: Net Premium Reserve

A. Applicability

1. The NPR for each term policy and for each ULSG policy must be determined pursuant to Section 3.

Guidance Note: When valuing term riders pursuant to Section II, the reserve requirements for term policies are applicable.

2. Except for policies subject to Section 3.A.1, the NPR shall be determined pursuant to applicable methods in VM-A and VM-C for the basic reserve. The mortality tables to be used are those defined in Section 3.C.1 and in VM-M Section 1.H.

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