806 KAR 6:070. Valuation of life insurance and annuity reserves.

 

      RELATES TO: KRS 304.2-290, 304.6-130-304.6-180, 304.15-410

      STATUTORY AUTHORITY: 304.2-110, KRS 304.6-140

      NECESSITY, FUNCTION, AND CONFORMITY: EO 2004-731, signed July 9, 2004, created the Office of Insurance. KRS 304.2-110 authorizes the executive director to promulgate reasonable administrative regulations necessary for or as an aid to the effectuation of the Kentucky Insurance Code as defined in KRS 304.1-010. KRS 304.6-130 requires the executive director to annually value the reserve liabilities for all outstanding life insurance policies and annuity and pure endowment contracts, as shown in the National Association of Insurance Commissioners (NAIC) Life and Accident and Health Annual Statement Form whether or not itemized in Exhibit 5 of that statement. KRS 304.6-140 authorizes the executive director to promulgate administrative regulations approving any mortality table "adopted by the National Association of Insurance Commissioners after 1980" for use in determining the minimum standard for valuation of policies. This administrative regulation establishes the framework for valuation standards acceptable to the office, and sets out the conditions under which the actuary designated by the office will verify the valuation of a company's reserves without cost to the insurer.

 

      Section 1. Definitions. As used in this administrative regulation:

      (1) "1983 GAM Table" means that mortality table developed by the Society of Actuaries Committee on Annuities and adopted as a recognized mortality table for annuities in December, 1983 by the NAIC.

      (2) "1983 Table 'a'" means that mortality table 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 NAIC.

      (3) "Actuarial guidelines" mean a series of interpretive guidelines approved by the NAIC for inclusion in its Handbook for Financial Examiners.

      (4) "Annuity 2000 Mortality Table" means that mortality table developed by the Society of Actuaries Committee on Life Insurance Research. The Annuity 2000 Mortality Table is included in the report on pages 211-249 of Volume XLVII of the Transactions of the Society of Actuaries (1995).

      (5) "Executive Director" means the agency head of the Office of Insurance.

      (6) "Guaranteed interest contract" means a contract or contract provision in which the insurer accepts one (1) or more deposits, and on which it agrees to pay interest at one (1) or more specified rates for one (1) or more specified periods of time, but which does not involve the contingencies of mortality or morbidity.

      (7) "Life insurance policies, annuities, and pure endowment contracts" means any contracts, together with all riders or endorsements and all additional benefits related thereto, whether these additional benefits are provided by policy provision or supplementary contract. A provision whereby the insurer accepts deposits to provide future insurance, annuity, or pure endowment benefits ("funding agreement") is an additional benefit.

      (8) "NAIC" is defined in KRS 304.7-012(59).

      (9) "Office" means the Office of Insurance.

      (10) "Office Actuary" means the actuary of the office or an actuary employed by the office for the purpose of making or verifying a valuation.

      (11) "Qualified Actuary" means member in good standing of the American Academy of Actuaries who meets the requirements of Section 7, of this administrative regulation.

      (12) "Reserve comparison form" means a form:

      (a) Setting out three (3) year tabulations of extracts from a company’s valuation; and

      (b) Which is completed by plan, with subtotals by mortality table, interest assumption, and valuation method which corresponds to the line entries in Exhibit 5 of the current annual statement.

 

      Section 2. Filing Requirements for Domestic Insurers. (1) To facilitate the executive director’s evaluation of the valuation of reserves for life insurance policies, annuities, and pure endowment contracts made by a domestic insurer's actuary or consulting actuary, each insurer shall furnish the office actuary an affidavit, signed by the qualified actuary responsible for the valuation and setting out insurance amounts and reserves on all contracts by basis of valuation and a reserve comparison form.

      (2) Each domestic insurer shall maintain in corresponding order, with the necessary documentation, lists, tabulations, and working papers for policy contract obligations to be valued which shall be in readily accessible and auditable form at its home office.

 

      Section 3. Valuation Principles. (1) Extraterritoriality. The executive director may question or reject any valuation made by the insurance supervisory official of another state which does not appear to comply with the minimum standards as provided in KRS Chapter 304.6.

      (2) Nature of liabilities. Most of the liabilities covered by reserves for life insurance policies, annuities, and pure endowment contracts shall be generated by recognition of obligations to provide future sums of money, which are guaranteed in these contracts, and the standards of valuation set out in KRS 304.6-140 through 304.6-180, are set out in "prospective" terms. If these methods are not possible to apply directly, "retrospective" methods, using accumulations at appropriate rates of interest shall be acceptable; however, a company using these methods shall be prepared to demonstrate that these methods actually result in sufficient amounts to fund any obligations set out in its contracts as guarantees of future performance. Obligations which arise from known past events shall be valued retrospectively.

 

      Section 4. Specific Requirements. (1) Interest assumptions. KRS 304.6-145(4) refers to two (2) specific bond yield averages, which underlie the referenced interest rates specified in KRS 304.6-145. The Moody's Corporate Bond Yield Averages referenced are those for the period ending July 1 for each calendar year shown. These were:

Calendar Year

Average over period ending July 1 of a:

12-month period

36-month period

1979

9.49%

8.92%

1980

11.51

9.89

1981

13.71

11.57

1982

15.70

13.64

1983

13.39

14.26

A table of current statutory calendar year interest rates shall be required each year. Copies of the most recent table may be obtained from the office.

      (2) The actuarial guidelines shall be used as published unless specifically prohibited by statute.

      (3) Mortality tables.

  (a) Except as provided in paragraphs (b) and (c) of this subsection, the 1983 Table "a" is recognized and approved as an individual annuity mortality table for valuation and, at the option of the company, may be used for purposes of determining the minimum standard of valuation for any individual annuity or pure endowment contract issued on or after July 1, 1976.

      (b) Except as provided in paragraph (c) of this subsection, either the 1983 Table "a" or the Annuity 2000 Mortality Table shall be used for determining the minimum standard of valuation for any individual annuity or pure endowment contract issued on or after January 1, 1985.

      (c) Except as provided in paragraph (d) of this subsection, the Annuity 2000 Mortality Table shall be used for determining the minimum standard of valuation for any individual annuity or pure endowment contract issued on or after January 1, 2005.

      (d) The 1983 Table "a" without projection shall be used for determining the minimum standards of valuation for an individual annuity or pure endowment contract issued on or after January 1, 2005, solely when the contract is based on life contingencies and is issued to fund periodic benefits arising from:

      1. Settlements of various forms of claims pertaining to court settlements or out of court settlements from tort actions;

      2. Settlements involving similar actions such as worker’s compensation claims; or

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

      (e) Except as provided in paragraph (f) of this subsection, the 1983 GAM Table and the 1983 Table "a" shall be recognized and approved as group annuity mortality tables for valuation and, at the option of the company, any one of these tables may be used for purposes of valuation for any annuity or pure endowment purchased on or after July 1, 1976, under a group annuity or pure endowment contract.

      (f) The 1983 GAM Table shall be used for determining the minimum standard of valuation for any annuity or pure endowment purchased on or after January 1, 1985, under a group annuity or pure endowment contract. The executive director shall give consideration to the approval of other tables of mortality which produce lower reserves in any special case, if the request for approval is accompanied by an actuarial report, signed by the qualified actuary, of the reasons for the request. If possible, the report should include an estimate of the degree of protection against insolvency provided as margin in the proposed table.

      (4) Changes of method (domestic insurers). The effects of changes in the methods of valuing life contracts shall be reported in "Exhibit 5A" of the annual statement in the year in which the change first takes place. "Exhibit 5A" shall show the old and the new method of valuation, and the increase or decrease in the actuarial reserve due to the change. If adopting a method that produces an increase in the reserve, the company shall notify the office. However, if a change will produce a reserve that will be less than the amount under the old method, the company shall have the prior approval of the executive director.

 

      Section 5. Cost of Noncompliance. (1) If the material is not available as outlined above, the additional burden of cost for additional time required by the staff of the Office of Insurance, or its actuary, shall be borne by the life insurance company as provided for in KRS 304.2-290. A special examination may be ordered by the executive director, providing for a written report to him together with a time and expense billing to the company so examined.

      (2) If a detail audit of reserves reveals that an error was made in the filed annual statement and in the certificate issued by the office, the executive director may order the withdrawal of certification and reissuance of certificates and copies, and require a refiled NAIC annual statement on a significant error, or request the company to file a corrective action plan prior to the next filed NAIC statement form when the resultant error is not significant.

 

      Section 6. Severability. If any provision of this administrative regulation or the application of any provision is held to be invalid, the remainder of this administrative regulation and the application of any other provision to other persons or circumstances shall not be affected.

 

      Section 7. Qualified Actuary Requirements. (1) In order to be considered a qualified actuary, a person shall be familiar with the valuation requirements applicable to life and health insurance companies.

      (2) The actuary shall not meet the requirements of a qualified actuary if that person has:

      (a) Violated any provision of, or any obligation imposed by, any law in the course of his or her dealings as a qualified actuary;

      (b) Been found guilty of fraudulent or dishonest practices;

      (c) Demonstrated incompetence, lack of cooperation, or untrustworthiness to act as a qualified actuary;

      (d) Submitted an actuarial opinion or memorandum that was rejected because it did not comply with the Kentucky Insurance Code, KRS Chapter 304, or standards established by the Actuarial Standards Board during the past five (5) years; or

      (e) Resigned or been removed as an actuary within the past five (5) years as a result of an act or omission indicated in any adverse report on examination or as a result of the failure to adhere to generally acceptable actuarial standards; and

      (f) Failed to notify the executive director of any adverse action taken against the actuary pursuant to paragraphs (a) through (e) of this subsection by any insurance regulatory official of any other state.

 

      Section 8. Incorporation by Reference. (1) The following material is incorporated by reference:

      (a) "1983 Table ‘a’ (1983)";

      (b) "1983 GAM Table (1983)"; and

      (c) "Annuity 2000 Mortality Table (2000)".

      (2) This material may be inspected, copied, or obtained, subject to applicable copyright law, at the Kentucky Office of Insurance, 215 West Main Street, Frankfort, Kentucky 40601, Monday through Friday, 8 a.m. to 4:30 p.m. This material is also available on the Web site at: http://doi.ppr.ky.gov/kentucky/. (11 Ky.R. 679; eff. 11-13-84; 31 Ky.R. 853; 907; 1148; eff. 1-4-05.)