To provide direction as to the application of Rule 69O-164.020, F.A.C., to various product designs.

DEPARTMENT OF FINANCIAL SERVICES
OIR – Insurance Regulation

RULE NO: RULE TITLE
69O-164.030: Application of Rule 69O-164.020, F.A.C., to Various Product Designs.
PURPOSE AND EFFECT: To provide direction as to the application of Rule 69O-164.020, F.A.C., to various product designs.
SUMMARY: The Rule establishes reserving requirements.
SUMMARY OF STATEMENT OF ESTIMATED REGULATORY COSTS: No Statement of Estimated Regulatory Cost was prepared.
Any person who wishes to provide information regarding a statement of estimated regulatory costs, or provide a proposal for a lower cost regulatory alternative must do so in writing within 21 days of this notice.
SPECIFIC AUTHORITY: 624.308(1), 625.121 FS.
LAW IMPLEMENTED: 624.307(1), 625.121 FS.
IF REQUESTED WITHIN 21 DAYS OF THE DATE OF THIS NOTICE, A HEARING WILL BE HELD AT THE DATE, TIME AND PLACE SHOWN BELOW:
DATE AND TIME: August 20, 2007, 9:30 a.m.
PLACE: Room 142, Larson Building, 200 East Gaines Street, Tallahassee, Florida
Pursuant to the provisions of the Americans with Disabilities Act, any person requiring special accommodations to participate in this workshop/meeting is asked to advise the agency at least 5 days before the workshop/meeting by contacting: Kerry Krantz, Office of Insurance Regulation, E-mail [e-mail]. If you are hearing or speech impaired, please contact the agency using the Florida Relay Service, [phone] (TDD) or [phone] (Voice).
THE PERSON TO BE CONTACTED REGARDING THE PROPOSED RULE IS: Kerry Krantz, Office of Insurance Regulation, E-mail [e-mail]

THE FULL TEXT OF THE PROPOSED RULE IS:

69O-164.030 Application of Rule 69O-164.020, F.A.C., to Various Product Designs.

(1) No change.

(2) Application. The list below specifies reserving approaches which the Office regards as being most consistent with the letter and spirit of Rule 69O-164.020, F.A.C. However, the specified reserving approaches should be modified as needed to comply with the intent of this rule that similar reserves be established for policy designs that contain similar guarantees.

(a) through (h) No change.

(i) A universal life policy guarantees the coverage to remain in force as long as the accumulation of premiums paid satisfies the secondary guarantee requirement.

1. For policies and certificates issued prior to July 1, 2005, and for policies and certificates issued on or after January 1, 2011:

a. through i. No change.

2. For policies and certificates issued on or after July 1, 2005, and prior to January 1, 2007:

a. through i. No change.

3. For policies and certificates issued on or after January 1, 2007, and prior to January 1, 2011:

a. First, the minimum gross premiums (determined at issue) that will satisfy the secondary guarantee requirement must be derived.

b. Second, for purposes of applying paragraphs (7)(b) and (7)(c) of Rule 69O-164.020, F.A.C., the “specified premiums” are the minimum gross premiums derived in sub-subparagraph a.

(I) Consistent with Rule 69O-164.020, F.A.C., the remaining sub-subparagraphs in this rule should be calculated on a segmented basis, using the segments that Rule 69O-164.020, F.A.C., defines for the product. Therefore, in the remaining sub-subparagraphs, the term “fully fund the guarantee” should be interpreted to mean fully funding the guarantee to the end of each possible segment. The term “remainder of the secondary guarantee period” should be interpreted to mean the remainder of each possible segment. The total reserve should equal the greatest of all possible segmented reserves.

(II) Additionally, for purposes of applying paragraphs (7)(b) and (c) of Rule 69O-164.020, F.A.C., a lapse rate of no more than 2% per year for the first 5 years, followed by no more than 1% per year to the policy anniversary specified in the following table based on issue age, and 0% per year thereafter may be used. If the duration in the table is less than 5, then a lapse rate of no more than 2% per year may be used through that duration, and 0% per year thereafter.

                Issue Age              Duration

                0-50                         30th Policy Anniversary

                51-60                       Policy Anniversary Age 80

                61-70                       20th Policy Anniversary

                71-89                       Policy Anniversary Age 90

                90 and over           No Lapse

c. Third, a determination should be made of the amount of actual premium payments in excess of the minimum gross premiums. For policies utilizing shadow accounts, this will be the amount of the shadow account. For policies with no shadow accounts but which specify cumulative premium requirements, this excess will be the amount of the cumulative premiums paid in excess of the cumulative premium requirements; the cumulative premium payments and requirements should include any interest credited under the secondary guarantee (with interest credited at the rate specified under the secondary guarantee).

d. Fourth, as of the valuation date for the policy being valued, for policies utilizing shadow accounts, determine the minimum amount of shadow account required to fully fund the guarantee. For policies with no shadow accounts but which specify cumulative premium requirements, determine the amount of the cumulative premiums paid in excess of the cumulative premium requirements that would result in no future premium requirements to fully fund the guarantee; the cumulative premium payments and requirements should include any interest credited under the secondary guarantee (with interest credited at the rate specified under the secondary guarantee). For any policy for which the secondary guarantee cannot be fully funded in advance, solve for the minimum sum of any possible excess funding (either the amount in the shadow account or excess cumulative premium payments depending on the product design) and the present value of future premiums (using the maximum allowable valuation interest rate and the minimum mortality standards allowable for calculating basic reserves) that would fully fund the guarantee. The amount determined above for this sub-subparagraph is to then be divided by one minus a seven percent premium load allowance (0.93). The result from sub-subparagraph c. should be divided by this number, with the resulting ratio capped at 1. The ratio is intended to measure the level of prefunding for a secondary guarantee which is used to establish reserves. Assumptions within the numerator and denominator of the ratio therefore must be consistent in order to appropriately reflect the level of prefunding. The denominator is allowed to be inconsistent only by the amount of the premium load allowance as defined in this sub-subparagraph. As used here, “assumptions” include any factor or value, whether assumed or known, which is used to calculate the numerator or denominator of the ratio.

e. Fifth, compute the net single premium on the valuation date for the coverage provided by the secondary guarantee for the remainder of the secondary guarantee period, using any valuation table and select factors authorized in paragraph (5)(a) of Rule 69O-164.020, F.A.C. For purposes of calculating the net single premium, a lapse rate subject to the same criteria as the lapse rate used in applying paragraph b. above may be used.

f. Sixth, the “net amount of additional premiums” is determined by multiplying the ratio from sub-subparagraph d. by the difference between the net single premium from sub-subparagraph e. and the basic and deficiency reserve, if any, computed in sub-subparagraph b.

g. Seventh, a “reduced deficiency reserve” should be computed by multiplying the deficiency reserve, if any, by one minus the ratio from sub-subparagraph d., but not less than zero. This “reduced deficiency reserve” is the deficiency reserve to be used for purposes of subparagraph (7)(d)1. of Rule 69O-164.020, F.A.C.

h. Eighth, the actual reserve used for purposes of subparagraph (7)(d)1. of Rule 69O-164.020, F.A.C., is the lesser of: (1) the net single premium from sub-subparagraph e., and (2) the amount of the excess from sub-subparagraph f., plus the basic reserve and the deficiency reserve, if any, computed in sub-subparagraph b.

(I) Reduce this result by the applicable policy surrender charges, i.e., the account value less the cash surrender value.

(II) Multiply the applicable policy surrender charge by the ratio of the net level premium for the secondary guarantee period divided by the net level premium for whole life insurance.

(III) Calculate both net premiums using the maximum allowable valuation interest rate and the minimum mortality standards allowable for calculating basic reserves. However, if no future premiums are required to support the guarantee period being valued, there is no reduction for surrender charges.

(IV) Multiply this surrender charge by the ratio of the net level premium for the secondary guarantee period divided by the net level premium for whole life insurance. Calculate both net premiums using the maximum allowable valuation interest rate and the minimum mortality standards allowable for calculating basic reserves.

(V) If the resulting amount is less than the sum of the basic and deficiency reserve from sub-subparagraph b., then the basic and deficiency reserves to be used for the purposes of subparagraph (7)(d)1. of Rule 69O-164.020, F.A.C., are those calculated in sub-subparagraph b., and no further calculation is required.

i. Ninth, an “increased basic reserve” should be computed by subtracting the “reduced deficiency reserve” in sub-subparagraph g. from the reserve computed in sub-subparagraph h. This “increased basic reserve” is the basic reserve to be used for purposes of subparagraph 69O-164.020(7)(d)1., F.A.C.

j. Business reserved pursuant to Section 8C, must be supported by an asset adequacy analysis specific to this business.

(I) This asset adequacy analysis must be performed pursuant to the requirements of Section 625.121(3), F.S.

(II) Reserves required by Section 8C plus any additional reserves required by the asset adequacy analysis shall be the minimum reserves for this business.

(3) No change.

Specific Authority 624.308(1), 625.121(5) FS. Law Implemented 624.307(1), 625.121(5) FS. History–New 5-4-06, Amended _________.

NAME OF PERSON ORIGINATING PROPOSED RULE: Al Willis, Director, Life and Health Financial Oversight, Office of Insurance Regulation
NAME OF SUPERVISOR OR PERSON WHO APPROVED THE PROPOSED RULE: Al Willis, Director, Life and Health Financial Oversight, Office of Insurance Regulation
DATE PROPOSED RULE APPROVED BY AGENCY HEAD: May 15, 2007
DATE NOTICE OF PROPOSED RULE DEVELOPMENT PUBLISHED IN FAW: May 11, 2007