806 KAR 6:100. Actuarial opinion and memorandum.

806 KAR 6:100. Actuarial opinion and memorandum.

RELATES TO: KRS 304.3-240, 304.6-070, 304.6-150, 304.6-155, 304.6-171, 304.6-180

STATUTORY AUTHORITY: KRS 304.2-110, 304.6-171

NECESSITY, FUNCTION, AND CONFORMITY: KRS 304.6-171 requires every life insurance company doing business in this state to annually submit the opinion of a qualified actuary as to whether the reserves and related actuarial items held in support of the policies and contracts specified by the executive director are computed appropriately. KRS 304.6-171 requires the executive director to define, by administrative regulation, the specifics of the actuarial opinion and to broaden the scope of the opinion if necessary. This administrative regulation is necessary for the executive director to determine whether reserves and related actuarial items are computed appropriately, are based on assumptions which satisfy contractual provisions, are consistent with prior reported amounts, and comply with the applicable laws of this state.

Section 1. Definitions. (1) "Actuarial opinion" means:

(a) With respect to Section 6, 7, or 8 of this administrative regulation, the opinion of an appointed actuary regarding the adequacy of the reserves and related actuarial items based on an asset adequacy test in accordance with Section 6 of this administrative regulation and with presently accepted actuarial standards; or

(b) With respect to Section 5 of this administrative regulation, the opinion of an appointed actuary regarding the calculation of reserves and related items, in accordance with Section 5 of this administrative regulation and with those presently accepted actuarial standards which specifically relate to this opinion.

(2) "Actuarial Standards Board" means the board established by the American Academy of Actuaries to develop and promulgate standards of actuarial practice.

(3) "Annual statement" means that statement required by KRS 304.3-240.

(4) "Appointed actuary" means a qualified actuary who is appointed or retained to prepare and provide the statement of actuarial opinion and supporting memorandum required by this administrative regulation; either directly or by the authority of the board of directors through an executive officer of the company.

(5) "Asset adequacy analysis" means an analysis that conforms to presently accepted actuarial standards and methods of analysis as promulgated by the Actuarial Standards Board and this administrative regulation and which forms the basis of the statement of actuarial opinion in accordance with Section 6 of this administrative regulation.

(6) “Executive Director" is defined by KRS 304.1-050.

(7) "Company" means a life insurance company; fraternal benefit society doing business in this state; or a life insurance company or fraternal benefit society which is authorized to reinsure life insurance, annuities, or accident and health insurance business.

(8) "Noninvestment grade bond" means a bond that is designated as a class 3, 4, 5, or 6 by the National Association of Insurance Commissioners Securities Valuation Office.

(9) "Qualified actuary" means any individual who is qualified to sign a statement of actuarial opinion for a life and health insurance company annual statement and who meets the qualifications of Section 2 of this administrative regulation.

(10) "Specified reserve" means assets held in support of reserves which are the subject for specific analysis pursuant to Section 8(3) of this administrative regulation.

Section 2. Actuarial Qualifications. In order to be considered a qualified expert for the purposes of this administrative regulation, a person shall:

(1) Be a member in good standing of the American Academy of Actuaries;

(2) Be qualified to sign a statement of actuarial opinion for a life and health insurance company annual statement in accordance with the qualification standards for actuaries established by the American Academy of Actuaries for actuaries signing such statements;

(3) Be familiar with the valuation requirements applicable to life and health insurance companies;

(4) Not been found by the executive director, or if so found has subsequently been reinstated as a qualified actuary, following appropriate notice and hearing to have:

(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;

(d) Submitted to the executive director during the past five (5) years, pursuant to this administrative regulation, an actuarial opinion or memorandum that the executive director rejected because it did not comply with this administrative regulation or standards established by the Actuarial Standards Board; 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

(5) Not have failed to notify the executive director of any action taken by any executive director of any other state which action was based on a disqualification standard outlined in subsection (4) of this section.

Section 3. General Requirements. (1) The actuarial opinion shall:

(a) Be included on or attached to Page 1 of the annual statement for each year beginning with the year in which this administrative regulation becomes effective;

(b) Be entitled "Statement of Actuarial Opinion"; and

(c) Be the statement of an appointed actuary setting forth an opinion relating to reserves and related actuarial items held in support of policies and contracts;

(2) The executive director may accept the statement of actuarial opinion filed by a foreign or alien company with the insurance supervisory regulator of another state if the executive director determines that the opinion meets the requirements applicable to a company domiciled in this state.

(3) The executive director may grant an extension of the date for submission of the statement of actuarial opinion upon written request by the company.

(4) The company shall give the executive director timely written notice:

(a) In the event of the appointment or retention of an appointed actuary which notice shall state:

1. The name of the appointed actuary;

2. The title of the appointed actuary;

3. If the actuary is a consulting actuary, the name of the firm;

4. The manner of appointment or retention by the company of each appointed actuary; and

5. That the person appointed or retained by the company meets the requirements of a qualified actuary pursuant to Section 2 of this administrative regulation.

(b) In the event the actuary ceases to be appointed or retained as an appointed actuary or to meet the requirements of a qualified actuary; or

(c) In the event that any person appointed or retained as an appointed actuary replaces a previously appointed actuary, which notice shall state the reason for replacement.

(5) The actuarial opinion shall set forth an opinion relating to reserves and related actuarial items held in support of policies and contracts and be based on an asset adequacy analysis in accordance with Section 6 of this administrative regulation.

(6) Any company exempted pursuant to Section 4 of this administrative regulation from submitting a statement of actuarial opinion based on an asset adequacy analysis shall include on or attach to page 1 of the annual statement a statement of actuarial opinion rendered by an appointed actuary that does not include an asset adequacy analysis in accordance with Section 5 of this administrative regulation.

(7) If in the previous year a company provided a statement of actuarial opinion in accordance with Section 5 of this administrative regulation that does not include an asset adequacy analysis, and in the current year fails the exemption criteria of Section 4 of this administrative regulation to again provide an actuarial opinion that does not include an asset adequacy analysis, the statement of actuarial opinion in accordance with Section 6 of this administrative regulation which is based on an asset adequacy analysis shall not be required until August 1 following the date of the annual statement. In this instance, the company shall provide a statement of actuarial opinion in accordance with Section 5 of this administrative regulation noting the intent to subsequently provide a statement of actuarial opinion in accordance with Section 6 of this administrative regulation.

Section 4. Required Actuarial Opinion. (1) Every company doing business in this state shall annually submit the opinion of an appointed actuary as provided for by this administrative regulation.

(2) For the purposes of this administrative regulation, companies shall be classified as follows based on the admitted assets as of the end of the calendar year for which the actuarial opinion is applicable:

(a) Category A shall include a company whose admitted assets do not exceed $20 million;

(b) Category B shall include a company whose admitted assets exceed $20 million but do not exceed $100 million;

(d) Category D shall include a company whose admitted assets exceed $500 million.

(3) Any Category A company that, for any year beginning with the year in which this administrative regulation becomes effective, meets all of the following criteria shall be eligible for exemption from submission of a statement of actuarial opinion based on an asset adequacy analysis in accordance with Section 6 of this administrative regulation for the year in which these criteria are met. Each ratio in paragraphs (a), (b), and (c) of this subsection shall be calculated based on amounts as of the end of the calendar year for which the actuarial opinion is applicable.

(a) The ratio of the sum of capital and surplus to the sum of cash and invested assets is at least equal to one-tenth (.10);

(b) The ratio of the sum of the reserves and liabilities for annuities and deposits to the total admitted assets is less than three-tenths (.30);

(c) The ratio of the book value of the noninvestment grade bonds to the sum of capital and surplus is less than five-tenths (.50); and

(d) With respect to priority status:

1. The Examiner Team for the National Association of Insurance Commissioners has not designated the company as a first priority company in any of the two (2) calendar years preceding the calendar year for which the actuarial opinion is applicable;

2. The Examiner Team for the National Association of Insurance Commissioners has not designated the company as a second priority company in each of the two (2) calendar years preceding the calendar year for which the actuarial opinion is applicable; or

3. The company has resolved any first or second priority status established by the Examiner Team for the National Association of Insurance Commissioners to the satisfaction of the executive director of the state of domicile and the executive director has so notified the Chair of the Life and Health Actuarial Task Force and the Staff and Support Office of the National Association of Insurance Commissioners.

(4) Any Category B company that, for any year beginning with the year in which this administrative regulation becomes effective, meets all of the following criteria shall be eligible for exemption from submission of a statement of actuarial opinion based on an asset adequacy analysis in accordance with Section 6 of this administrative regulation for the year in which the criteria are met. Each ratio in paragraphs (a), (b), and (c) of this subsection shall be calculated based on amounts as of the end of the calendar year for which the actuarial opinion is applicable.

(a) The ratio of the sum of capital and surplus to the sum of cash and invested assets is at least equal to.07;

(b) The ratio of the sum of the reserves and liabilities for annuities and deposits to the total admitted assets is less than four-tenths (.40);

(c) The ratio of the book value of the noninvestment grade bonds to the sum of capital and surplus is less than five-tenths (.50); and

(d) With respect to priority status:

(5) Any Category A or Category B company that meets all of the criteria set forth in subsections (3) or (4) of this section is exempted from submission of a statement of actuarial opinion in accordance with Section 6 of this administrative regulation unless the executive director specifically indicates to the company that the exemption is not to be taken.

(6) Any Category A or Category B company that, for any year beginning with the year in which this administrative regulation becomes effective, is not exempted under subsections (3) or (4) of this section shall be required to submit a statement of actuarial opinion in accordance with Section 6 of this administrative regulation for the year for which it is not exempt.

(7) Any Category C company that, after submitting an opinion in accordance with Section 6 of this administrative regulation, meets all of the following criteria shall not be required, unless required in accordance with subsection (8) of this section, to submit a statement of actuarial opinion in accordance with Section 6 of this administrative regulation more frequently than every third year. Any Category C company which fails to meet all of the following criteria for any year shall submit a statement of actuarial opinion in accordance with Section 6 of this administrative regulation for that year. The ratios in paragraphs (a), (b), and (c) of this subsection shall be calculated based on amounts as of the end of the calendar year for which the actuarial opinion is applicable.

(a) The ratio of the sum of capital and surplus to the sum of cash and invested assets is at least equal to.05;

(b) The ratio of the sum of the reserves and liabilities for annuities and deposits to the total admitted assets is less than five-tenths (.50);

(c) The ratio of the book value of the noninvestment grade bonds to the sum of the capital and surplus is less than five-tenths (.50); and

(d) With respect to priority status:

3. The company has resolved the first or second priority status established by the Examiner Team for the National Association of Insurance commissioners to the satisfaction of the executive director of the state of domicile and the executive director has so notified the Chair of the Life and Health Actuarial Task Force and the Staff and Support Office of the National Association of Insurance Commissioners.

(8) Every Category D company shall submit a statement of actuarial opinion in accordance with Section 6 of this administrative regulation for each year beginning with the year in which this administrative regulation becomes effective.

(9) Every company exempted by this section from filing an actuarial opinion in accordance with Section 6 of this administrative regulation must file a statement of actuarial opinion in accordance with Section 5 of this administrative regulation except that the executive director may require any company otherwise exempt to submit a statement of actuarial opinion and to prepare a memorandum in support thereof in accordance with Sections 6 and 7 of this administrative regulation if, in the opinion of the executive director, an asset adequacy analysis is necessary with respect to the company.

Section 5. Statement of Actuarial Opinion Not Including an Asset Adequacy Analysis. (1) The statement of actuarial opinion required by this section shall contain an opening paragraph which shall:

(a) Identify the name and title of the appointed actuary;

(b) Identify the name of the consulting firm, if applicable;

(d) Identify the qualifications of the appointed actuary;

(e) Identify the manner in which the actuary was appointed or retained to render the actuarial opinion; and

(f) Include language identical or substantially similar to the following:

1. For a company actuary: "I, (name of actuary), am (title) of (name of company) and a member of the American Academy of Actuaries. I was appointed by, or by the authority of, the Board of Directors of said insurer to render this opinion as stated in the letter to the executive director dated (insert date). I meet the Academy qualification standards for rendering the opinion and am familiar with the valuation requirements applicable to life and health insurance companies."; or

2. For a consulting actuary: "I, (name and title of actuary), a member of the American Academy of Actuaries, am associated with the firm of (insert name of consulting firm). I have been appointed by, or by the authority of, the Board of Directors of (name of company) to render this opinion as stated in the letter to the executive director dated (insert date). I meet the Academy qualification standards for rendering the opinion and am familiar with the valuation requirements applicable to life and health insurance companies."

(2) The statement of actuarial opinion required by this section shall contain a regulatory authority paragraph which shall include language identical or substantially similar to the following: "Said company is exempt pursuant to administrative regulation (insert designation) of the Kentucky Office of Insurance from submitting a statement of actuarial opinion based on an asset adequacy analysis. This opinion, which is not based on an asset adequacy analysis, is rendered in accordance with Section 5 of the administrative regulation."

(3) The statement of actuarial opinion required by this section shall contain a scope paragraph which shall:

(a) Identify subjects on which the opinion is to be expressed;

(b) Describe the scope of the work of the appointed actuary;

1. Aggregate reserve and deposit funds for policies and contracts included in Exhibit 8 of the annual statement;

2. Aggregate reserve and deposit funds for policies and contracts included in Exhibit 9 of the annual statement;

3. Deposit funds, premiums, dividend and coupon accumulations, and supplementary contracts not involving life contingencies included in Exhibit 10 of the annual statement; and

4. Policy and contract claims - liability end of current year included in Exhibit 11, Part I of the annual statement.

(d) Include language identical or substantially similar to the following: "I have examined the actuarial assumptions and actuarial methods used in determining reserves and related actuarial items listed below, as shown in the annual statement of the company, as prepared for filing with state regulatory officials, as of December 31, (year).";

(e) If the appointed actuary has examined the underlying records, include language identical or substantially similar to the following: "My examination included such review of the actuarial assumptions and actuarial methods and of the underlying basic records and such tests of the actuarial calculations as I considered necessary."; and

(f) If the appointed actuary has not examined the underlying records, but has relied upon listings and summaries of policies in force prepared by the company or a third party, include language identical or substantially similar to the following:

1. "I have relied upon listings and summaries of policies and contracts and other liabilities in force prepared by (name and title of company officer certifying in force records) as certified in the attached statement. (See accompanying affidavit by a company officer.) In other respects my examination included review of the actuarial assumptions and actuarial methods and such tests of the actuarial calculations as I considered necessary."; or

2. "I have relied upon (name of accounting firm) for the substantial accuracy of the in force records inventory and information concerning other liabilities, as certified in the attached statement. In other respects my examination included review of the actuarial assumptions and actuarial methods and such tests of the actuarial calculations as I considered necessary."

(4) The statement of actuarial opinion required by this section shall contain an opinion paragraph which shall:

(a) Express the opinion of the appointed actuary that the amounts carried in the balance sheet on account of the actuarial items identified in subsection (3)(c) of this section:

1. Are computed in accordance with those presently accepted actuarial standards which specifically relate to the opinion required under this section;

2. Are based on actuarial assumptions which produce reserves at least as great as those required by any contract provision as to reserve basis and method, and are in accordance with all other contract provisions;

3. Meet the requirements of the insurance law and administrative regulations of the state of domicile and are at least as great as the minimum aggregate amounts required by the state in which this statement is filed;

4. Are computed on the basis of assumptions consistent with those used in computing the corresponding items in the annual statement of the preceding year-end with any exceptions as noted; and

5. Include provision for all actuarial reserves and related statement items which ought to be established; and

(b) Include language identical or substantially similar to the following: "The actuarial methods, considerations and analyses used in forming my opinion conform to the appropriate Compliance Guidelines as promulgated by the Actuarial Standards Board, which guidelines form the basis of this statement of opinion."

(5) The statement of actuarial opinion required by this section shall contain a concluding paragraph which shall:

(a) State that the opinion is being provided in accordance with Section 5 of this administrative regulation and does not include an opinion regarding the adequacy of reserves and related actuarial items when considered in light of the assets which support them;

(b) Confirm and document the eligibility for the company to provide an opinion as provided by this section by stating that:

1. The ratio of the sum of capital and surplus to the sum of cash and invested assets is (insert specific amount), which is equal to or is in excess of the applicable criterion based on the admitted assets of the company;

2. The ratio of the sum of the reserves and liabilities for annuities and deposits to the total admitted assets is (insert amount), which is less than the applicable criteria based on the admitted assets of the company;

3. The ratio of the book value of the noninvestment grade bonds to the sum of capital and surplus is (insert amount), which is less than the applicable criteria of five-tenths (.50);

4. To the best of the knowledge of the appointed actuary, with respect to priority status:

a. The Examiner Team of the National Association of Insurance Commissioners has not designated the company as a first priority company in any of the two (2) calendar years preceding the calendar year for which the actuarial opinion is applicable;

b. The Examiner Team of the National Association of Insurance Commissioners has not designated the company as a second priority company in each of the two (2) calendar years preceding the calendar year for which the actuarial opinion is applicable; or

c. The company has resolved the first or second priority status established by the Examiner Team of the National Association of Insurance Commissioners to the satisfaction of the executive director of the state of domicile; and

5. To the best of the knowledge of the appointed actuary, there is not a specific request from any commissioner requiring an asset adequacy analysis opinion; and

(6) The statement of actuarial opinion shall describe any change in actuarial assumptions from those previously employed by supplementing the language required by subsection (4)(b)4 of this section with the following language: "...with the exception of the change described on page ( ) of the annual statement (or in the preceding paragraph)." A change in actuarial assumptions shall not include the adoption for a new issue, a new claim, or other new liability of an actuarial assumption which differs from a corresponding assumption used for a prior new issue, new claim, or other new liability.

(7) If the appointed actuary is unable to form an opinion, the actuary shall refuse to issue a statement of actuarial opinion.

(8) If the opinion of the appointed actuary is adverse or qualified, the actuary shall issue an adverse or qualified actuarial opinion explicitly stating the reason for such opinion. This statement shall follow the scope paragraph and precede the opinion paragraph.

(9) If the appointed actuary does not express an opinion as to the accuracy and completeness of the listings and summaries of policies in force, there shall be attached to the opinion, the statement of a company officer or accounting firm who prepared such underlying data which shall:

(a) Include language identical or substantially similar to the following: "I (name of officer), (title) of (name and address of company or accounting firm), hereby affirm that the listings and summaries of policies and contracts in force as of December 31, (year), prepared for and submitted to (name of appointed actuary), were prepared under my direction and, to the best of my knowledge and belief, are substantially accurate and complete"; and

(b) Include the signature, address, and telephone number of the officer of the company or accounting firm.

Section 6. Statement of Actuarial Opinion Based on an Asset Adequacy Analysis. (1) The statement of actuarial opinion required by this section shall contain an opening paragraph which shall:

(a) Identify the name and title of the appointed actuary;

(b) Identify the name of the consulting firm, if applicable;

(d) Identify the qualifications of the appointed actuary;

(e) Identify the manner in which the actuary was appointed or retained to render the actuarial opinion; and

(f) Include language identical or substantially similar to the following:

(2) The statement of actuarial opinion required by this section shall contain a scope paragraph which shall:

(a) Identify the subjects on which an opinion is to be expressed;

(b) Describe the scope of the work of the appointed actuary;

(c) Include a tabulation delineating the reserves and related actuarial items which have been analyzed for asset adequacy and the method of analysis;

(d) Identify the reserves and related actuarial items covered by the opinion which have not been so analyzed; and

(e) Include language identical or substantially similar to the following: "I have examined the actuarial assumptions and actuarial methods used in determining reserves and related actuarial items listed below, as shown in the annual statement of the company, as prepared for filing with state regulatory officials, as of December 31, (year). Tabulated below are those reserves and related actuarial items which have been subjected to asset adequacy analysis."

(3) If the appointed actuary has relied on other experts to develop portions of the analysis, the statement of actuarial opinion required by this section shall contain a reliance paragraph which shall:

(a) Describe each area where the appointed actuary has deferred to another expert in developing data, procedures, or assumptions;

(b) Include a supporting statement from each expert to whom the appointed actuary has deferred in the form prescribed by subsection (8) of this section;

(c) If the appointed actuary has relied on other experts to develop certain portions of the analysis, include a statement identical or substantially similar to the following and contain a statement in the form prescribed by subsection (8) of this section:

1. "I have relied on (name), (title) for (e.g., anticipated cash flows from currently owned assets, including variations in cash flows according to economic scenarios) and, as certified in the attached statement,..."; or

2. "I have relied on personnel as cited in the supporting memorandum for certain critical aspects of the analysis in reference to the accompanying statement."

(d) If the appointed actuary has examined the underlying asset and liability records, include a statement identical or substantially similar to the following: "My examination included such review of the actuarial assumptions and actuarial methods and of the underlying basic asset and liability records and such tests of the actuarial calculations as I considered necessary."; and

(e) If the appointed actuary has not examined the underlying records, but has relied upon listings and summaries of policies in force or asset records prepared by the company or a third party, include a statement identical or substantially similar to the following and be accompanied by the form prescribed by subsection (8) of this section:

1. "I have relied upon listings and summaries (of policies and contracts, of asset records) prepared by (name and title of company officer certifying in-force records) as certified in the attached statement. In other respects my examination included such review of the actuarial assumptions and actuarial methods and such tests of the actuarial calculations as I considered necessary."; or

2. "I have relied upon (name of accounting firm) for the substantial accuracy of the in-force records inventory and information concerning other liabilities, as certified in the attached statement. In other respects my examination included review of the actuarial assumptions and actuarial methods and tests of the actuarial calculations as I considered necessary."

(4) The statement of actuarial opinion required by this section shall contain an opinion paragraph which shall:

(a) Express the opinion of the appointed actuary with respect to the adequacy of the supporting assets to mature the liabilities that reserves and related actuarial values concerning the identified statement items:

1. Are computed in accordance with presently accepted actuarial standards consistently applied and are fairly stated, in accordance with sound actuarial principles;

2. Are based on actuarial assumptions which produce reserves at least as great as those called for in any contract provision as to reserve basis and method, and are in accordance with all other contract provisions;

3. Meet the requirements of the insurance laws and regulations of the state of domicile and are at least as great as the minimum aggregate amounts required by the state in which this statement is filed;

4. Are computed on the basis of assumptions consistent with those used in computing the corresponding items in the annual statement of the preceding year-end with any exception noted; and

5. Include provision for all actuarial reserves and related statement items which ought to be established.

(b) Express an opinion as to the adequate provision for the anticipated cash flow by including language identical or substantially similar to the following: "The reserves and related items, when considered in light of the assets held by the company with respect to such reserves and related actuarial items including, but not limited to, the investment earnings on such assets, and the considerations anticipated to be received and retained under such policies and contracts, make adequate provision, according to presently accepted actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the company.";

(c) State that the actuarial methods, considerations and analyses used in forming the actuarial opinion conform to the appropriate Standards of Practice as promulgated by the Actuarial Standards Board, which standards form the basis of the statement of opinion;

(d) State whether or not there has been a material change from the applicable date of the annual statement to the date of the rendering of the actuarial opinion which should be considered in reviewing the opinion and include language identical or substantially similar to one (1) of the following:

1. "This opinion is updated annually as required by statute. To the best of my knowledge, there have been no material changes from the applicable date of the annual statement to the date of the rendering of this opinion which should be considered in reviewing this opinion."; or

2. "The following material change(s) which occurred between the date of the statement for which this opinion is applicable and the date of this opinion should be considered in reviewing this opinion: (describe the change or changes.)";

(e) Include a statement regarding unanticipated events which is identical or substantially similar to the following: "The impact of unanticipated events subsequent to the date of this opinion is beyond the scope of this opinion. The analysis of asset adequacy portion of this opinion should be viewed recognizing that the company's future experience may not follow all the assumptions used in the analysis"; and

(f) Contain the signature, address, and telephone number of the appointed actuary.

(5) A change in actuarial assumptions shall not include the adoption for a new issue, a new claim, or other new liability of an actuarial assumption which differs from a corresponding assumption used for a prior new issue, new claim, or other new liability.

(6) If the appointed actuary is unable to form an opinion, the actuary shall refuse to issue a statement of actuarial opinion.

(7) If the opinion of the appointed actuary is adverse or qualified, the actuary shall issue an adverse or qualified actuarial opinion explicitly stating the reason for such an opinion. This statement shall follow the scope paragraph and precede the opinion paragraph.

(8) If the appointed actuary does not express an opinion as to the accuracy and completeness of the listings and summaries of policies in force or asset oriented information, there shall be attached to the opinion, the statement of a company officer or accounting firm who prepared such underlying data which shall:

(a) Include language identical or substantially similar to the following:

1. "I (name of officer), (title), of (name of company or accounting firm), hereby affirm that the listings and summaries of policies and contracts in force as of December 31, (year), and other liabilities prepared for and submitted to (name of appointed actuary)were prepared under my direction and, to the best of my knowledge and belief, are substantially accurate and complete."; or

2. "I, (name of officer), (title) of (name of company, accounting firm, or security analyst), hereby affirm that the listings, summaries and analyses relating to data prepared for and submitted to (name of appointed actuary) in support of the asset-oriented aspects of the opinion were prepared under my direction and, to the best of my knowledge and belief, are substantially accurate and complete."; and

(b) Include the signature, address, and telephone number of the officer of the company, accounting firm, or security analyst, whichever is applicable.

(9) A company shall include additional paragraphs:

(a) If the appointed actuary considers it necessary to state a qualification of the opinion of the actuary;

(b) If the appointed actuary must disclose the method of aggregation for reserves of different products or lines of business for asset adequacy analysis;

(c) If the appointed actuary must disclose reliance upon any portion of the assets supporting the asset valuation reserve (AVR), interest maintenance reserve (IMR), or other mandatory or voluntary statement of reserves for asset adequacy analysis;

(d) If the appointed actuary must disclose an inconsistency in the method of analysis or basis of asset allocation used at the prior opinion date with that used for this opinion;

(e) If the appointed actuary must disclose whether additional reserves of the prior opinion date are released as of this opinion date, and the extent of the release; or

(f) If the appointed actuary chooses to briefly describe the assumptions which form the basis for the actuarial opinion.

Section 7. Description of Actuarial Memorandum Including an Asset Adequacy Analysis. (1) In accordance with KRS 304.6-171, the appointed actuary shall prepare a memorandum to the company which shall describe the actuarial analysis accomplished in support of the actuarial opinion which is based on an asset adequacy analysis pursuant to Section 6 of this administrative regulation.

(2) The memorandum shall:

(a) Be made available to the executive director, upon request, for examination;

(b) Be returned to the company after an examination by the executive director; and

(3) The executive director may designate a qualified actuary to review the actuarial opinion and prepare a supporting memorandum, which reasonable and necessary expense of the independent review shall be paid by the company but shall be directed and controlled by the executive director, if:

(a) The executive director requests a memorandum and no such memorandum exists;

(b) The executive director finds that the analysis described in the memorandum fails to meet the standards of the Actuarial Standards Board; or

(c) The executive director finds that the analysis described in the memorandum fails to meet the standards of this administrative regulation.

(4) In preparing the memorandum, the appointed actuary may rely on, and include as a part of the actuarial memorandum, memoranda prepared and signed by another actuary who is qualified in accordance with Section 2 of this administrative regulation with respect to the subjects covered in the memorandum.

(5) If the appointed actuary relies on the memoranda of another qualified actuary pursuant to subsection (4) of this section, the appointed actuary shall state the subject matter upon which another expert opinion was relied.

(6) The reviewing actuary shall have the same status as an examiner for the purposes of obtaining data from the company and the work papers and documentation of the reviewing actuary shall be retained by the executive director.

(7) Any information provided by the company to the reviewing actuary and included in the work papers shall be considered as material provided by the company to the executive director and shall be kept confidential to the same extent as other material provided by the company to the executive director pursuant to KRS 304.6-171.

(8) The reviewing actuary shall not be an employee of a consulting firm involved with the preparation of any prior memorandum or opinion for the insurer pursuant to this administrative regulation for any one of the current year or the preceding three (3) years.

(9) When an actuarial opinion based on an asset adequacy analysis in accordance with Section 6 of this administrative regulation is provided, the memorandum shall demonstrate that the analysis has been done in accordance with the standards for asset adequacy referred to in this administrative regulation.

(10) The actuarial memorandum referred to in this section shall specify:

(a) For reserves:

1. Product descriptions including a market description, underwriting and any other aspect of a risk profile and the specific risks the appointed actuary deems significant;

2. Source of liability in force;

3. Reserve method and basis;

4. Investment reserves; and

5. Reinsurance arrangements.

(b) For assets:

1. Portfolio descriptions, including a risk profile disclosing the quality, distribution and types of assets;

2. Investment and disinvestment assumptions;

3. Source of asset data; and

4. Asset valuation bases.

1. Methodology;

2. Rationale for inclusion or exclusion of different blocks of business and how pertinent risks were analyzed;

3. Rationale for degree of rigor in analyzing different blocks of business;

4. Criteria for determining asset adequacy; and

5. Effect of federal income tax, reinsurance, and any other relevant factor.

(d) Summary of results; and

(e) Conclusion.

(11) The memorandum shall include a statement which indicates that the memorandum conforms to the appropriate Standards of Practice and which shall include language identical or substantially similar to the following: "Actuarial methods, considerations, and analyses used in the preparation of this memorandum conform to the appropriate standards of practice as promulgated by the Actuarial Standards Board, which standards form the basis for this memorandum."

Section 8. Additional Considerations for Analysis. (1) For the asset adequacy analysis for the statement of actuarial opinion provided in accordance with Section 6 of this administrative regulation, reserves and assets may be aggregated by either of the following methods:

(a) Aggregate the reserves and related actuarial items, and the supporting assets, for different products or lines of business, before analyzing the adequacy of the combined assets to mature the combined liabilities. The appointed actuary must be satisfied that the assets held in support of the reserves and related actuarial items so aggregated are managed in such a manner that the cash flows from the aggregated assets are available to help mature the liabilities from the blocks of business that have been aggregated; or

(b) Aggregate the results of asset adequacy analysis of one or more products or lines of business, the reserves for which prove through analysis to be redundant, with the results of one or more products or lines of business, the reserves for which prove through analysis to be deficient. The appointed actuary shall determine that the asset adequacy results for the various products or lines of business for which the results are so aggregated:

1. Are developed using consistent economic scenarios; or

2. Are subject to mutually independent risks, i.e., the likelihood of events impacting the adequacy of the assets supporting the redundant reserves is completely unrelated to the likelihood of events impacting the adequacy of the assets supporting the deficient reserves.

(2) In the event of any aggregation, the actuary shall disclose that such reserves were aggregated on the basis of either of the methods outlined in subsection (1)(a) or (b) of this section, and describe the aggregation in the supporting memorandum.

(3) The appointed actuary shall analyze only those assets held in support of the reserves which are the subject for specific analysis. A particular asset or portion of asset which supports a group of specified reserves cannot support any other group of specified reserves. An asset may be allocated over several groups of specified reserves. The annual statement value of the assets held in support of the reserves shall not exceed the annual statement value of the specified reserves, except as specified in subsection (4) of this section. If the method of asset allocation is not consistent from year to year, the extent of inconsistency shall be described in the supporting memorandum.

(4) An appropriate allocation of assets in the amount of the interest maintenance reserve (IMR), whether positive or negative, shall be used in any asset adequacy analysis. Analysis of risks regarding asset default may include an appropriate allocation of assets supporting the asset valuation reserve (AVR). AVR assets may not be applied for any other risks with respect to reserve adequacy. Analysis of these and other risks may include assets supporting other mandatory or voluntary reserves available to the extent not used for risk analysis and reserve support. The amount of the assets used for the AVR shall be disclosed in the Table of Reserves and Liabilities of the opinion and in the memorandum. The method used for selecting particular assets or allocated portions of assets shall be disclosed in the memorandum. The Table of Reserves and Liabilities is provided in Appendix A of this administrative regulation.

(5) For the purpose of performing the asset adequacy analysis required by this administrative regulation:

(a) The qualified actuary shall follow standards adopted by the Actuarial Standards Board; and

(b) The appointed actuary shall consider in the analysis the effect of at least the following interest rate scenarios:

1. Level with no deviation;

2. Uniformly increasing over ten (10) years at one-half (1/2) percent per year and then level;

3. Uniformly increasing at one (1) percent per year over five (5) years and then uniformly decreasing at one (1) percent per year to the original level at the end of ten (10) years and then level;

4. An immediate increase of three (3) percent and then level;

5. Uniformly decreasing over ten (10) years at one-half (1/2) percent per year and then level;

6. Uniformly decreasing at one (1) percent per year over five (5) years and then uniformly increasing at one (1) percent per year to the original level at the end of ten (10) years and then level; and

7. An immediate decrease of three (3) percent and then level.

(6) For the interest rate scenarios outlined in subsection (5) of this section and any other interest rate scenario, projected interest rates for a five (5) year Treasury Note need not be reduced beyond the point where the five (5) year Treasury Note yield would be at fifty (50) percent of its initial level.

(7) The beginning interest rates may be based on the following:

(a) The interest rates for new investments as of the valuation date similar to recent investments allocated to support the product being tested; or

(b) An outside index, such as Treasury yields, for assets of the appropriate length on a date close to the valuation date.

(8) The method used to determine the beginning yield curve and associated interest rates described in subsection (7) of this section shall be specifically defined. The beginning yield curve and associated interest rates shall be consistent for each interest rate scenario.

(9) The appointed actuary shall retain on file, for at least seven (7) years, sufficient documentation to determine:

(a) The procedures followed;

(b) The analyses performed;

(d) The results obtained.

Section 9. Liabilities to be Covered. (1) The statement of actuarial opinion shall apply to all in force business on the statement date regardless of when or where issued, including, but not limited to, the following:

(a) Reserves of Exhibits 8, 9, and 10 of the annual statement;

(b) Claim liabilities of Exhibit 11, Part I of the annual statement; and

(2) If the appointed actuary determines as the result of asset adequacy analysis that a reserve should be held in addition to the aggregate reserve held by the company and calculated in accordance with KRS 304.6-070, 304.6-150, 304.6-155, 304.6-171, and 304.6-180, the company shall establish the additional reserve.

(3) For years ending prior to December 31, 1998, the company may, in lieu of establishing the full amount of the additional reserve in the annual statement for that year, set up an additional reserve in an amount not less than the following:

(a) For December 31, 1997, the additional reserve divided by three (3);

(b) For December 31, 1998, two (2) times the additional reserve divided by three (3).

(4) Additional reserves established pursuant to subsection (2) or (3) of this section and deemed not necessary in subsequent years may be released. Any amounts released shall be disclosed in the actuarial opinion for the applicable year. The release of such reserves would not be deemed an adoption of a lower standard of valuation.

APPENDIX A TABLE OF RESERVES AND LIABILITIES
Asset Adequacy Tested Amounts	Reserves and Liabilities
Statement Item	Formula Reserves (1)	Additional Actuarial Reserves (a) (2)	Analysis Method (b)	Other Amount (3)	Total Amount (1)+(2)+(3) (4)
Exhibit 8 A Life Insurance
B Annuities
C Supplementary Contracts Involving Life Contingencies
D Accidental Death Benefit
E Disability - Active
F Disability - Disabled
G Miscellaneous
Total (Exhibit 8, Item 1, Page 3)
Exhibit 9 A Active Life Reserve
B Claim Reserve
Total (Exhibit 9, Item 2, Page 3)
Exhibit 10 1 Premiums and Other Deposit Funds
1.1 Policyholder Premiums (Page 3, Line 10.1)
1.2 Guaranteed Interest Contracts (Page 3, Line 10.2)
1.3 Other Contract Deposit Funds (Page 3, Line 10.3)
2 Supplementary Contracts Not Involving Life Contingencies (Page 3, Line 3)
3 Dividend and Coupon Accumulations (Page 3, Line 5)
Total Exhibit 10
Exhibit 11, Part 1 1 Life (Page 3, Line 4.1)
2 Health (Page 3, Line 4.2)
Total Exhibit 11, Part 1
Separate Accounts (Page 3, Line 27)