Adoption of Actuarial Guidelines for Domestic Life Insurance Companies by the Bureau of Insurance, issued August 14, 1979

JAMES W. NEWMAN, JR.

MISSIONER OF INSURANCE

W. G. FLOURNOY

FIRST DEPUTY COMMISSIONER

BOX 1157

RICHMOND, VA. 2321

TELEPHONE (804) 786 -

STATE CORPORATION COMMISSION

BUREAU OF INSURANCE

August 14, 1979

Administrative

Letter_

1979-21

TO:

All Domestic Life Insurance Companies

FROM:

L. Gerald Roach LGR

Assistant Commissioner

Financial Condition Division

SUBJECT:

Adoption of Actuarial Guidelines by Bureau of Insurance

Senate Bill 801, which was enacted during the 197 9 session of the

Virginia General Assembly, amended the standard valuation and non-

forfeiture benefit laws applicable to life insurers transacting

business in Virginia.

This Act became effective as of July 1, 1979

and is applicable to life insurance and annuity contracts issued by

all companies licensed in Virginia, both domestic and foreign.

Senate

Bill 801 was substantially the same as the 1976 model valuation and

non-forfeiture law adopted by the National Association of Insurance

Commissioners at its December meeting in 1976.

In addition, effective June 30, 1978, the National Association of

Insurance Commissioners also adopted four actuarial, guidelines which

were intended to establish uniform interpretations of several provisions

of the 1976 model law.

The purpose of this letter, is to advise you

that the Bureau of Insurance has also adopted the National Association

of Insurance Commissioners' Actuarial Guidelines effective as of July 1,

1979.

As written, these guidelines interprete the provisions of the

1976 model law; therefore, please be advised that any references there-

in to prior years should be related to the July 1, 19 7 9 effective date

of our adoption of these guidelines.

Attached for your reference are

copies of the four actuarial guidelines

of Insurance Commissioners' Actuarial Guidelines effective as of July 1,

1979.

As written, these guidelines interprete the provisions of the

1976 model law; therefore, please be advised that any references there-

in to prior years should be related to the July 1, 19 7 9 effective date

of our adoption of these guidelines.

Attached for your reference are

copies of the four actuarial guidelines.

Actuarial Guideline I, Actuarial Guideline IV and Virginia Code Section

38.1-456(6) shall become operative with respect to policies and contracts

valued on the 1958 CSO Mortality Table issued on or after July 1, 1979 ,

unless a company elects to make them retroactively operative with respect

to such policies and contracts issued prior to July 1, 1979.

Actuarial Guideline II and Actuarial Guideline III shall become operative

with respect to all policies and contracts issued on or after July 1,

1979.

If you have any questions regarding the above, please do not hesitate to

call me or Mr. John Jones, Life Actuary at (804) 786-3635.

LGR/dl Attachments

______

1/79

FINANCIAL CONDITION EXAMINERS HANDBOOK

297

ACTUARIAL GUIDELINE I

INTERPRETATION OF THE STANDARD VALUATION LAW

WITH RESPECT TO THE VALUATION OF POLICIES WHOSE VALUATION

NET PREMIUMS EXCEED THE ACTUAL GROSS PREMIUM COLLECTED

1.

The purpose of this guideline (items 2 and 3 below) is to clarify the intent of the Standard Valuation

Law.

2.

The method of valuation promulgated by the model legislation adopted by the NAIC in December

1976 for the valuation of life insurance policies whose valuation net premiums exceed the actual gross

premiums collected is a change in method o f reserve calculation and not a change in reserve standards.

3.

For policies so valued the maximum permissible valuation interest rate and the applicable mortality

basis specified is that in effect at the date o f issue o f such policies

in December

1976 for the valuation of life insurance policies whose valuation net premiums exceed the actual gross

premiums collected is a change in method o f reserve calculation and not a change in reserve standards.

3.

For policies so valued the maximum permissible valuation interest rate and the applicable mortality

basis specified is that in effect at the date o f issue o f such policies.

ACTUARIAL GUIDELINE II

RESERVE REQUIREMENTS WITH RESPECT TO INTEREST RATE GUARANTEES

ON ACTIVE LIFE FUNDS HELD RELATIVE TO GROUP ANNUITY CONTRACTS

As part of the determination of the aggregate minimum group annuity reserves, a computation must be

made of minimum reserves for deposit administration group annuity funds with interest rate guarantees

including ail such funds pertaining to possible purchase o f group annuities whether such funds are held in a

separate account or in a general account, whether shown as premiums, advance premiums, auxiliary funds,

etc. and whether the liability is shown as Exhibit 8 or elsewhere. In making such computation, the

procedure and minimum standards described below shall be applicable for the December 31 calendar year

“y ” valuation giving recognition to the dates deposits were made. Where appropriate and with the approval

of the commissioner, recognition may be given to the extent and time o f application o f active life funds to

purchase annuities, expense assessments against the funds, and excess o f purchase price over minimum

reserves. In no event shall the reserve be less than the transfer value, if any, of the fund. Approximate

methods and averages may be employed with the approval o f the commissioner

al

of the commissioner, recognition may be given to the extent and time o f application o f active life funds to

purchase annuities, expense assessments against the funds, and excess o f purchase price over minimum

reserves. In no event shall the reserve be less than the transfer value, if any, of the fund. Approximate

methods and averages may be employed with the approval o f the commissioner.

To the extent that the application of these valuation procedures and standards would require a company to

establish aggregate minimum reserves for group annuities and related funds in excess o f reserves which it

would not otherwise hold if these valuation procedures and standards did not apply, such company shall set

up additional reserve liability shown in its general account or in a separate account, whether shown in

Exhibit 8 or elsewhere.

For funds received:

(1)

Prior to calendar year 1976, follow the procedure used at that time.

(2)

In calendar year 1976 or later, follow the minimum standards described below:

(a)

Contracts having no guaranteed interest rates in excess o f 6% on future contributions to be

received more than one year subsequent to the valuation date.

The minimum reserve shall be equal to the sum of the minimum reserves for funds attributable

to contributions received in each calendar year.

Where Vy - Minimum reserve for funds attributable to contributions received in calendar year y

Vy - [C y X (1 + igy)n ] / (1 + ip y )n

Cy - Portion o f guaranteed fund attributable to contributions received in calendar year y

igy - Interest rate guaranteed under the contract with respect to funds attributable to

contributions received in calendar year y

ipy - Lowest of:

(1)

The net new money rate credited by the company on group annuity funds

attributable to contributions received in calendar year y less .005; or

(2)

igy; or

Cy - Portion o f guaranteed fund attributable to contributions received in calendar year y

igy - Interest rate guaranteed under the contract with respect to funds attributable to

contributions received in calendar year y

ipy - Lowest of:

(1)

The net new money rate credited by the company on group annuity funds

attributable to contributions received in calendar year y less .005; or

(2)

igy; or

(3)

imy; where

imy - (i)

for calendar years y + 1 through y + 10, the values shown in the

table o f values o f imy distributed each year by the Central Office

o f the National Association of Insurance Commissioners;

(ii)

for calendar years y + 11 and later, .060.

n - Number o f guarantee years, and fractions thereof, remaining as of the December 31

valuation.

(b)

Contracts having guaranteed interest rates in excess o f 6% on future contributions to be

received more than one year subsequent to the valuation date.

The same procedures as set forth under (a) above shall be used except that the deduction under

(1) o f ipy shall be .01 instead o f .005 and imy for calendar years y + 1 through y + 10 shall be

reduced by .005.

Table o f Values o f imy

(Effective for the December 3 1 , 1977 Valuation)

Calendar Year y in Which

Contributions Were Received*

Value o f imy for Calendar

Years y + 1 Through y + 10

1976

.089

1977

.087

*Note: These factors were based upon gross new money rates for reporting annuity writing

companies less .01.

f .005 and imy for calendar years y + 1 through y + 10 shall be

reduced by .005.

Table o f Values o f imy

(Effective for the December 3 1 , 1977 Valuation)

Calendar Year y in Which

Contributions Were Received*

Value o f imy for Calendar

Years y + 1 Through y + 10

1976

.089

1977

.087

*Note: These factors were based upon gross new money rates for reporting annuity writing

companies less .01.

ACTUARIAL GUIDELINE III

INTERPRETATION OF MINIMUM CASH SURRENDER BENEFIT

UNDER STANDARD NONFORFEITURE LAW

FOR INDIVIDUAL DEFERRED ANNUITIES

Section 6 o f the model bill as written does not require that cash surrender benefits be paid; but where they

are paid, it requires that such cash surrender benefits grade into maturity value using an interest rate not

more than one percent higher than the rate specified in the contract for accumulating net considerations.

While this method will be suited for contracts having a sales load at issue, it may create a problem for

contracts having surrender charges for cash surrender.

For contracts providing cash surrender values, the cash surrender value at maturity shall be at least equal to

the minimum nonforfeiture amount at maturity as defined in section 4. For purposes of calculating cash

surrender values prior to maturity, the term “ maturity value” in the Standard Nonforfeiture Law for

Individual Deferred Annuities shall mean the cash surrender value at maturity.

ACTUARIAL GUIDELINE IV

ACTUARIAL INTERPRETATION REGARDING MINIMUM RESERVES

FOR CERTAIN FORMS OF TERM LIFE INSURANCE

Scope

Th is interpretation recommended by the NAIC Technical Task Force to Review Valuation and

Nonforfeiture Value Regulation deals only with term life insurance without cash values which the owner

has the unilateral right to maintain in force until its stated expiry date, subject only to the payment o f

required premiums which vary (generally increasing on a per $1000 basis) during the term of the policy and

under which premium rates are guaranteed to the stated final expiry

uation and

Nonforfeiture Value Regulation deals only with term life insurance without cash values which the owner

has the unilateral right to maintain in force until its stated expiry date, subject only to the payment o f

required premiums which vary (generally increasing on a per $1000 basis) during the term of the policy and

under which premium rates are guaranteed to the stated final expiry. This interpretation applies only to

such term plans valued on the 1958 CSO Mortality Table for the current term period.

Ten-year renewable term, five-year renewable term and one-year renewable term to a stated age with

generally increasing premiums are titles commonly given to such policies, but this interpretation concerns

itself with the actual coverage provided and is not controlled by the name given the coverage.

Background Information

Historically, reserves on one-year renewable term policies have consisted o f a basic reserve for the current

term period of one-half the cost of insurance for the current term period, plus a deficiency reserve, if any.

The application of the commissioners reserve valuation method to determine basic reserves and deficiency

reserves for such policies is subject to varying interpretations as noted in Walter O. Menge’s paper,

“ Commissioners Reserve Valuation Method” written at the time of construction of the Standard Valuation

Law.

. .. the adaptation of the commissioners reserve valuation method to fit policies for which the

gross premium varies from year to year becomes a problem of generalization which, from a

purely theoretical viewpoint, has an infinite number of possible solutions, some of which are

practical and others o f which are impractical. 1

and

ten at the time of construction of the Standard Valuation

Law.

. .. the adaptation of the commissioners reserve valuation method to fit policies for which the

gross premium varies from year to year becomes a problem of generalization which, from a

purely theoretical viewpoint, has an infinite number of possible solutions, some of which are

practical and others o f which are impractical. 1

and

For these reasons, it seems desirable not to formulate at this time any fixed rules for the

valuation of these unusual types o f policies and riders. The second paragraph of section 4 of the

Standard Valuation Law does not define the method o f valuation of such contracts but requires

that the method used, whatever it may be, must be consistent with that employed for uniform

premium policies providing uniform insurance benefits, thus leaving open the possibility o f a

choice of several consistent methods.2

Acceptable Approaches

Two approaches to “ consistent” reserves are suggested. The unitary policy approach considers such policies

as variable premium policies up to the mandatory expiry date. Under this approach the valuation net

premiums are a uniform percentage o f gross premiums with the percentage fixed at issue date. If

appropriate deficiency reserves are held, this approach has great appeal. However, it is susceptible to

manipulation and illogical results. Reserves according to this approach should be acceptable only if the

company can demonstrate that actual reserves, including deficiency reserves, for all renewable term business

valued using this approach are o f the same general magnitude as would occur using an approved method as

defined below.

The other approach is to hold policy reserves for only the current period of years (not necessarily equal to

the renewal period) during which the required premium per $1000 remains level, including deficiency

reserves if appropriate

y reserves, for all renewable term business

valued using this approach are o f the same general magnitude as would occur using an approved method as

defined below.

The other approach is to hold policy reserves for only the current period of years (not necessarily equal to

the renewal period) during which the required premium per $1000 remains level, including deficiency

reserves if appropriate. Additional reserves are established where net premiums, calculated on a basis which

reflects current mortality, exceed gross premiums for future periods o f level premiums. Although not

speaking directly to valuation problems in this instance, the Hooker Committee report said:

The question was raised whether a policy providing term insurance for several years,

automatically followed by permanent insurance, should be considered as two separate policies

for the purpose of the Act. In the Committee’s opinion, the respective portions may be treated

separately if the portion providing permanent insurance takes the Company’s regular rate at the

then attained age. The rated age provision in the law appears to cover this point. However, the

Committee draws a distinction between policies providing purely term insurance followed by

permanent insurance at the company’s published rate at the attained age o f conversion, the

policies providing for an initial premium such that the increased premium at a subsequent

duration differs from that for a new policy at the attained age. The latter case obviously

constitutes a single policy to which the formula should be applied at the outset.3

The second sentence of the above quotation lends support to the approach of separating successive periods

of level premiums.

Under this interpretation, an approved method is any method which produces reserves greater than or equal

to the sum of policy reserves, including deficiency reserves, for the current period of level premiums

calculated on

ich the formula should be applied at the outset.3

The second sentence of the above quotation lends support to the approach of separating successive periods

of level premiums.

Under this interpretation, an approved method is any method which produces reserves greater than or equal

to the sum of policy reserves, including deficiency reserves, for the current period of level premiums

calculated on. the basis of the applicable mortality and interest standards and reserve method specified in

the Standard Valuation Law plus additional reserves calculated according to the following basis applied

uniformly to all such policies.

The present value of the excess o f test premiums for future periods of level premiums for which

gross premiums are guaranteed over the respective gross premiums, such test premiums and

present values being calculated on the mortality table attached to this interpretation and

interest.

In case a future gross premium exceeds the test premium, the excess shall be considered zero and not a

negative amount. This is in accordance with the principle of anticipating no future profits but providing for

all future losses.

Reinsured Business

If reinsurance is assumed under an agreement in which the reinsurer reserves the right to raise premiums to

a level at least as great as the net valuation premiums, the reinsurer is not required to establish deficiency

reserves or additional reserves, and the ceding company is not permitted to take credit for such reserves on

the portion of the business which is reinsured.

If a reinsurance agreement guarantees future reinsurance premiums, the reinsurer should establish

deficiency reserves and additional reserves as required by this interpretation for the period for which

reinsurance premiums are guaranteed, and the ceding company may take credit for such reserves against its

deficiency and additional reserves on the portion o f the business which is reinsured to the extent permitted

by law

uarantees future reinsurance premiums, the reinsurer should establish

deficiency reserves and additional reserves as required by this interpretation for the period for which

reinsurance premiums are guaranteed, and the ceding company may take credit for such reserves against its

deficiency and additional reserves on the portion o f the business which is reinsured to the extent permitted

by law.

Adequacy o f Reserves

Although the above alternative is acceptable as meeting the intent o f the Standard Valuation Law, this does

not in any way relieve the certifying actuary o f the insurance company from exercising his own best

judgment with respect to the appropriate reserves. In particular, the actuary should consider term contracts

of this nature when he states his opinion that aggregate reserves “ make a good and sufficient provision for

all unmaturity obligations of the company guaranteed under the terms of its policies” and “ include

provision for ail actuarial reserves and related statement items which ought to be established.” 4

References

1.

The Record. American Institute o f Actuaries, Vol. XXXV , 1946, p. 270.

2.

Ibid., P. 300.

3.

1947 NAIC Proceedings. 257.

4.

Instructions for Completing NAIC Life and Health Annual Statement Blank, 1976, p. 1.

MORTALITY RATES

The basic source of the rates is the modem CSO (27 Transactions of the Society of Actuaries 624). These

rates are age nearest birthday (ANB) rates, and age last birthday (ALB) rates were obtained by the same

process as was used to obtain the 1958 CSO (ALB) rates. Beginning with the age 71 rates, these rates were

interpolated into the 1958 CSO such that ages 75 and up are 1958 CSO rates

TY RATES

The basic source of the rates is the modem CSO (27 Transactions of the Society of Actuaries 624). These

rates are age nearest birthday (ANB) rates, and age last birthday (ALB) rates were obtained by the same

process as was used to obtain the 1958 CSO (ALB) rates. Beginning with the age 71 rates, these rates were

interpolated into the 1958 CSO such that ages 75 and up are 1958 CSO rates.

The resulting qx values were then individually subjected to a maximum of the 1958 CSO rates for males

and the 1958 CSO rates set back six years for females (six-year setback according to the methods described

in 11 Transactions of the Society of Actuaries 1060, for the three-year setback.)

Male

Female

ANB

ALB

ANB

ALB

0

0.00498

0.0032443

0.00498

0.0032443

1

0.00150

0.0014700

0.00150

0.0014700

2

0.00144

0.0014001

0.00138

0.0013500

3

0.00136

0.0013300

0.00132

0.0012900

4

0.00130

0.0012701

0.00126

0.0012350

5

0.00124

0.0012151

0.00121

0.0011850

6

0.00119

0.0011701

0.00116

0.0011400

7

0.00115

0.0011349

0.00112

0.0011050

8

0.00112

0.0011150

0.00109

0.0010850

9

0.00111

0.0011100

0.00108

0.0010800

10

0.00111

0.0011150

0.00108

0.0010850

11

0.00112

0.0011350

0.00109

0.0010950

12

0.00115

0.0011751

0.00110

0.0011050

13

0.00120

0.0012349

0.00111

0.0011150

14

0.00127

0.0013100

0.00112

0.0013000

15

0.00135

0.0013899

0.00114

0.0011500

16

0.00143

0.0014699

0.00117

0.0011900

17

0.00151

0.0015550

0.00121

0.0012350

18

0.00160

0.0016400

0.00126

0.0012900

19

0.00168

0.0017149

0.00132

0.0013550

20

0.00175

0.0017850

0.00139

0.0014250

21

0.00182

0.0018449

0.00146

0.0015000

22

0.00186

0.0018749

0.00154

0.0015800

23

0.00189

0.0019000

0.00162

0.0016549

24

0.00191

0.0019199

0.00169

0.0017150

25

0.00193

0.0019450

0.00174

0.0017649

26

0.00196

0.0019750

0.00179

0.0018100

27

0.00199

0.0020099

0.00183

0.0018449

28

0.00203

0.0020549

0.00186

0.0018749

29

0.00208

0.0021049

0.00189

0.0019000

30

0.00212

0.0021350

0.00191

0.0019199

31

0.00215

0.0021699

0.00193

0.0019450

32

0.00219

0.0022099

0.00196

0.0019750

33

0.00223

0.0022601

0.00199

0.0020099

34

0.00

49

24

0.00191

0.0019199

0.00169

0.0017150

25

0.00193

0.0019450

0.00174

0.0017649

26

0.00196

0.0019750

0.00179

0.0018100

27

0.00199

0.0020099

0.00183

0.0018449

28

0.00203

0.0020549

0.00186

0.0018749

29

0.00208

0.0021049

0.00189

0.0019000

30

0.00212

0.0021350

0.00191

0.0019199

31

0.00215

0.0021699

0.00193

0.0019450

32

0.00219

0.0022099

0.00196

0.0019750

33

0.00223

0.0022601

0.00199

0.0020099

34

0.00229

0.0023299

0.00203

0.0020549

35

0.00237

0.0024199

0.00208

0.0021049

36

0.00247

0.0025300

0.00213

0.0021600

37

0.00259

0.0026699

0.00219

0.0022199

38

0.00275

0.0028448

0.00225

0.0022850

39

0.00294

0.0030449

0.00232

0.0023600

40

0.00315

0.0032698

0.00240

0.0024549

41

0.00339

0.0035198

0.00251

0.0025750

42

0.00365

0.0037947

0.00264

0.0027199

43

0.00394

0.0040996

0.00280

0.0029049

44

0.00426

0.0044296

0.00301

0.0031297

45

0.00460

0.0047896

0.00325

0.0033898

46

0.00498

0.0051945

0.00353

0.0036848

47

0.00541

0.0056394

0.00384

0.0040048

48

0.00587

0.0061293

0.00417

0.0043496

49

0.00639

0.0066740

0.00453

0.0047245

50

0.00696

0.0072789

0.00492

0.0051345

51

0.00760

0.0079487

0.00535

0.0055894

52

0.00830

0.0086833

0.00583

0.0060941

53

0.00907

0.0094931

0.00636

0.0066541

54

0.00992

0.0103777

0.00695

0.0072739

55

0.01084

0.0113373

0.00760

0.0079586

56

0.01184

0.0123718

0.00832

0.0087133

57

0.01291

0.0134813

0.00911

0.0095330

58

0.01406

0.0146954

0.00996

0.0104227

59

0.01534

0.0160594

0.01089

0.0113922

60

0.01679

0.0176229

0.01190

0.0124467

61

0.01847

0.0194410

0.01300

0.0136010

62

0.02043

0.0215483

0.01421

0.0148703

63

0.02269

0.0239454

0.01554

0.0162642

64

0.02523

0.0265873

0.01700

0.0177882

65

0.02798

0.0294192

0.01859

0.0194568

66

0.03090

0.0323913

0.02034

0.0212802

67

0.03393

0.0354581

0.02224

0.0232634

68

0.03704

0.0386344

0.02431

0.0254260

69

0.04029

0.0419942

0.02657

0.0277884

70

0.04377

0.0456324

0.02904

0.0303751

71

0.04889

0.0509783

0.03175

0.0332207

72

0.05454

0.0568096

0.03474

0.0363609

73

0.06056

0.0629801

0.03804

0.0398247

74

0.06684

0.0694158

0.04168

0.0436032

75

0.07337

0.0761643

0.04561

0.0476512

76

0.07918

0.08

3090

0.0323913

0.02034

0.0212802

67

0.03393

0.0354581

0.02224

0.0232634

68

0.03704

0.0386344

0.02431

0.0254260

69

0.04029

0.0419942

0.02657

0.0277884

70

0.04377

0.0456324

0.02904

0.0303751

71

0.04889

0.0509783

0.03175

0.0332207

72

0.05454

0.0568096

0.03474

0.0363609

73

0.06056

0.0629801

0.03804

0.0398247

74

0.06684

0.0694158

0.04168

0.0436032

75

0.07337

0.0761643

0.04561

0.0476512

76

0.07918

0.0823059

0.04979

0.0519144

77

0.08570

0.0892151

0.05415

0.0563373

78

0.09306

0.0969267

0.05865

0.0608855

79

0.10119

0.1053509

0.06326

0.0656105

80

0.10998

0.1143924

0.06812

0.0706525

81

0.11935

0.1239481

0.07337

0.0761643

82

0.12917

0.1339226

0.07918

0.0823059

83

0.13938

0.1442973

0.08570

0.0892151

84

0.15001

0.1551241

0.09306

0.0969267

85

0.16114

0.1664679

0.10119

0.1053509

86

0.17282

0.1783921

0.10998

0.1143924

87

0.18513

0.1910205

0.11935

0.1239481

88

0.19825

0.2045732

0.12917

0.1339226

89

0.21246

0.2193681

0.13938

0.1442973

90

0.22814

0.2358223

0.15001

0.1551241

91

0.24577

0.2544375

0.16114

0.1664679

92

0.26593

0.2758218

0.17282

0.1783921

93

0.28930

0.3006685

0.18513

0.1910205

94

0.31666

0.3306957

0.19825

0.2045732

95

0.35124

0.3706446

0.21246

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