Principle-Based Reserving

NY-ADR

12/30/20 N.Y. St. Reg. DFS-52-20-00001-P
NEW YORK STATE REGISTER
VOLUME XLII, ISSUE 52
December 30, 2020
RULE MAKING ACTIVITIES
DEPARTMENT OF FINANCIAL SERVICES
PROPOSED RULE MAKING
NO HEARING(S) SCHEDULED
 
I.D No. DFS-52-20-00001-P
Principle-Based Reserving
PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:
Proposed Action:
Amendment of Part 103 (Regulation 213) of Title 11 NYCRR.
Statutory authority:
Financial Services Law, sections 202, 302; Insurance Law, sections 301, 308, 4217 and 4517
Subject:
Principle-Based Reserving.
Purpose:
To prescribe minimum principle-based valuation standards.
Text of proposed rule:
The title of section 103.3, (a) and (b) are amended as follows:
§ 103.3 Superintendent’s authority to require [reserve] adjustments from the valuation manual.
(a) The superintendent may require a life insurance company to change an assumption or method that in the superintendent’s opinion is necessary to comply with the requirements of the valuation manual or Insurance Law section 4217(g), and the life insurance company shall adjust the reserves as required by the superintendent. Pursuant to Insurance Law section 308, the superintendent may request information from a life insurance company in addition to the information specified in the valuation manual. The superintendent may take other disciplinary action as permitted by the Insurance Law, Financial Services Law, and any other applicable laws and regulations.
(b) For purposes of this Part, valuation manual shall have the meaning set forth in Insurance Law section 4217(g)(5).1
Section 103.5(a) is amended as follows:
(a) Scope.
(1) This section applies to the following, whether group or individual, including both life contingent and term certain only contracts, directly written or assumed through reinsurance[, with the exception of benefits arising from variable annuities]:
(i) immediate annuity contracts issued on or after January 1, 2019;
(ii) deferred income annuity contracts issued on or after January 1, 2019;
(iii) structured settlements in payout or deferred status issued on or after January 1, 2019;
(iv) fixed payout annuities resulting from the exercise of settlement options or annuitizations of host contracts [issued], for which the fixed payout annuities commence on or after January 1, 2019;
(v) supplementary contracts, excluding contracts with no scheduled payments (such as retained asset accounts and settlements at interest), issued on or after January 1, 2019;
(vi) fixed income payment streams attributable to guaranteed living benefits associated with deferred annuity and variable annuity contracts [issued], for which the fixed income payment streams commence on or after January 1, 2019, once the contract funds are exhausted; and
(vii) certificates with premium determination dates on or after January 1, 2019, under non-variable group annuity and pure endowment contracts purchased under a retirement plan or plan of deferred compensation, established or maintained by an employer, including a partnership or sole proprietorship, or by an employee organization, or by both, other than a plan providing individual retirement accounts or individual retirement annuity contracts under Internal Revenue Code section 408.
Section 103.5(c)(3)(i)(b)(1) is amended as follows:
(1) is the Daily Valuation Rate defined by Section 3.C.5 of VM-22 of the valuation manual[, where the quarterly valuation rate, denoted by Iq, is] less the amount determined in accordance with clause (a)(2) of this subparagraph for the calendar quarter preceding the business day immediately preceding the premium determination date;
The title of section 103.6 is amended as follows:
Valuation of variable annuity and hybrid annuity reserves.
Section 103.6(a)(1)(iii) is amended, (iv) is renumbered as (v), and a new (iv) is added as follows:
(iii) individual and group annuity contracts with guarantees similar in nature to GMDBs, VAGLBs, or any combination thereof; [and]
(iv) hybrid annuities; and
(v) all other insurance policies or annuity contracts that contain guarantees similar in nature to GMDBs or VAGLBs, even if the insurer does not offer the mutual funds or variable funds to which these guarantees relate, where there is no other explicit reserve requirement. If an insurer offers such a guarantee as part of an insurance policy or annuity contract that has an explicit reserve requirement and that guarantee does not currently have an explicit reserve requirement, then the minimum reserve held for the insurance policy or annuity contract shall equal the sum of:
(a) the reserve for the guarantee where for purposes of the reserve calculation, the guarantee is treated as a separate contract; and
(b) the reserve for the underlying insurance policy or annuity contract determined according to the explicit reserve requirement.
Section 103.6(b) is amended to read as follows:
(b) Effective dates and minimum valuation standards.
(1) This section is effective for all valuations on or after [January 1] December 31, 2020, regardless of when the insurance policies and annuity contracts were issued.
(2) For those insurers that do not elect to apply the optional phase-in methodology of paragraph (3)(i)(b) of this subdivision and for all valuations after the phase-in period if elected, the minimum aggregate reserve shall be the greater of:
(i) the sum of:
(a) the minimum reserve calculated in accordance with the methodology and assumptions prescribed by subdivision (d) of this section for insurance policies and annuity contracts issued prior to January 1, 2020; and
(b) the minimum reserve calculated in accordance with the methodology and assumptions prescribed by subdivision (e) of this section for insurance policies and annuity contracts issued on or after January 1, 2020; or
(ii) the minimum reserve calculated in accordance with the methodology and assumptions prescribed by the valuation manual prior to reflecting any reinsurance ceded.
(3) Minimum valuation standards during the phase-in period for those insurers that elect to apply the optional phase-in methodology prescribed by subparagraph (i)(b) of this paragraph.
(i) For insurance policies and annuity contracts issued prior to January 1, 2020:
[(i)] (a) The minimum reserve shall be the greater of:
[(a)] (1) the minimum reserve calculated in accordance with the methodology and assumptions prescribed by subdivision (d) of this section; and
[(b)] (2) the minimum reserve calculated in accordance with the methodology and assumptions prescribed by the valuation manual prior to reflecting any reinsurance ceded.
[(ii)] (b) At the insurer’s election, any positive amount equal to the excess of the [sum of the] aggregate minimum reserves determined in accordance with [subparagraph (i)(a) of this paragraph] clause (a) of this subparagraph over [the greater of] the aggregate minimum reserves determined in accordance with the 2017 Actuarial Guideline XLIII [and the aggregate minimum reserves determined in accordance with the valuation manual] may be established [over a three-year period beginning on January 1, 2020] as follows. To comply with the requirements of this paragraph, such excess reserve amount shall be calculated each year and established in the following manner:
[(a)] (1) [one-third] one-fifth of the excess reserve amount shall be established by December 31, 2020;
[(b)] (2) [two-thirds] two-fifths of the excess reserve amount shall be established by December 31, 2021; [and]
(3) three-fifths of the excess reserve amount shall be established by December 31, 2022;
(4) four-fifths of the excess reserve amount shall be established by December 31, 2023; and
[(c)] (5) the entire minimum reserve determined in accordance with [subparagraph (i) of this paragraph] clause (a) of this subparagraph shall be established by December 31, [2022] 2024.
[(3)] (ii) The minimum reserve for insurance policies and annuity contracts issued on or after January 1, 2020 shall be the greater of:
[(i)] (a) the minimum reserve calculated in accordance with the methodology and assumptions prescribed by subdivision (e) of this section; and
[(ii)] (b) the minimum reserve calculated in accordance with the methodology and assumptions prescribed by the valuation manual prior to reflecting any reinsurance ceded.
Section 103.6(c)(5) through (13) are renumbered as section 103.6(c)(6) through (14) and a new section 103.6(c)(5) is added as follows:
(5) Actuarial Guideline XXXV means the “Actuarial Guideline XXXV – The Application of the Commissioners Annuity Reserve Method to Equity Indexed Annuities” published in the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual as adopted by Part 83 (Insurance Regulation 172) of this Title.
Section 103.6(c)(14) through (19) are renumbered as section 103.6(c)(16) through (21) and a new section 103.6(c)(15) is added as follows:
(15) Hybrid annuity means an annuity contract with an investment option where the rate of return is based on an index, such as the S&P 500, and for which such return may be less than zero.
Section 103.6(d)(1)(iv) and (v) are amended and a new section 103.6(d)(1)(vi) is added as follows:
(iv) the discount rate as defined by section A3.1(B)(2) of the 2017 Actuarial Guideline XLIII shall equal the series of one-year U.S. Treasury forward rates implied by the U.S. Treasury yield curve as of the valuation date plus 150 basis points. Forward rates beyond 30 years shall equal the thirtieth year forward rate; [and]
(v) for all guaranteed living benefits that are in the money, the lapse rates prescribed by section A3.3(C)(3) of the 2017 Actuarial Guideline XLIII shall be 3 percent per annum for each projection interval where the benefit is less than 20 percent in the money, and 1.5 percent per annum for each projection interval where the benefit is 20 percent or more in the money[.]; and
(vi) for hybrid annuities, the amounts determined in section A3.3(B)(1) and A3.3(B)(2)(a) of the 2017 Actuarial Guideline XLIII shall be determined by applying Part 99 (Insurance Regulation 151) of this Title and Actuarial Guideline XXXV. Section A.3.3(B)(2) of the 2017 Actuarial Guideline XLIII shall only be calculated for those hybrid annuity contracts with guaranteed living benefits or guaranteed death benefits.
Section 103.6(e)(1) is amended as follows:
(1) The minimum reserve for each contract is the greater of the standard scenario reserve, the cash surrender value, and the option value floor. The option value floor shall not apply to those contracts reserved for in accordance with the alternative methodology prescribed by VM-21 of the valuation manual.
Section 103.6(e)(2)(i) is amended as follows:
(i) for annuity contracts without any guaranteed benefits, the standard scenario reserve shall be determined by applying [section 99.9 of] Part 99 (Insurance Regulation 151) of this Title and Actuarial Guideline XXXV, as applicable;
Section 103.6(e)(2)(ii)(a) is amended as follows:
(a) is the amount determined by applying Part 99 (Insurance Regulation 151) of this Title and Actuarial Guideline XXXV, as applicable, to the annuity contract disregarding any GMDBs or VAGLBs;
Text of proposed rule and any required statements and analyses may be obtained from:
Amanda Fenwick, New York State Department of Financial Services, One Commerce Plaza, Albany, New York 12257, (518) 474-7929, email: Amanda.Fenwick@dfs.ny.gov
Data, views or arguments may be submitted to:
Same as above.
Public comment will be received until:
60 days after publication of this notice.
This rule was not under consideration at the time this agency submitted its Regulatory Agenda for publication in the Register.
Regulatory Impact Statement
1. Statutory authority: Financial Services Law Sections 202 and 302 and Insurance Law Sections 301, 308, 4217, and 4517.
Financial Services Law Section 202 establishes the office of the Superintendent of Financial Services (“Superintendent”). Financial Services Law Section 302 and Insurance Law Section 301, in material part, authorize the Superintendent to effectuate any power accorded to the Superintendent by the Financial Services Law, Insurance Law, or any other law, and to prescribe regulations interpreting the Insurance Law.
Insurance Law Section 308 authorizes the Superintendent to request special reports from authorized insurers and authorized officers thereof regarding their transactions, condition, or any matter connected therewith.
Insurance Law Section 4217 sets forth rules for the valuation of insurance policies and contracts. Insurance Law Section 4217(d) provides that reserves for all individual and group accident and health insurance policies must reflect a sound value placed on the liabilities of such policies and permits the Superintendent to issue, by regulation, guidelines for the application of reserve valuation provisions for such policies. Insurance Law Section 4217(g) requires authorized life insurance companies and fraternal benefit societies (collectively, “life insurers”) to use principle-based reserving (“PBR”) for certain individual and group life insurance policies and annuity contracts upon the Superintendent’s approval of the National Association of Insurance Commissioners’ (“NAIC’s”) valuation manual (the “Manual”), subject to the Superintendent’s adopting any amendment to the Manual by regulation.
Insurance Law Section 4517 makes Insurance Law Section 4217 applicable to the valuation of life insurance and annuity certificates issued by fraternal benefit societies.
2. Legislative objectives: Insurance Law Section 4217 sets forth rules for the valuation of insurance policies and contracts. In December 2018, Governor Andrew M. Cuomo signed into law a bill that added a new Insurance Law Section 4217(g) to allow PBR for certain individual and group life insurance policies and annuity contracts beginning in 2019.
This amendment accords with the public policy objectives that the Legislature sought to advance in Insurance Law Section 4217(g) when it adopted PBR for life insurers by clarifying, and making certain adjustments to, the regulation and prescribing additional minimum standards for valuing statutory reserves that in the Superintendent’s opinion are necessary to comply with the Manual adopted by the Superintendent and with Insurance Law Section 4217(g).
3. Needs and benefits: The Department of Financial Services (“DFS”) adopted its first amendment to 11 NYCRR 103 in February 2020 to conform to the 2009 revisions to the NAIC’s model Standard Valuation Law and comply with the NAIC’s accreditation standards.
This proposed amendment clarifies, and makes certain adjustments to, the regulation and prescribes additional minimum standards for valuing statutory reserves that in the Superintendent’s opinion are necessary to comply with the Manual to best serve the policyholders of New York State by ensuring that the minimum standards for valuing statutory reserves are set at a level appropriate for the payment of future claims.
4. Costs: The amendment may impose compliance costs on life insurers because a life insurer must adjust its reserves as the Superintendent deems necessary to comply with the amendment, including new minimum valuation requirements.
DFS also may incur costs to implement this amendment, because DFS will need to monitor reserves to ensure conformance with this amendment, the Manual, and Insurance Law Section 4217(g). However, any additional costs incurred should be minimal and DFS should be able to absorb the costs in its ordinary budget.
This amendment does not impose compliance costs on any local government.
5. Local government mandates: This amendment does not impose any program, service, duty, or responsibility upon a county, city, town, village, school district, fire district, or other special district.
6.Paperwork: This amendment imposes reporting requirements, including the VM-31 PBR Actuarial Report, related to the insurance policies and contracts subject to the minimum valuation standards prescribed by this amendment.
7. Duplication: This amendment does not duplicate, overlap, or conflict with any existing state or federal rules or other legal requirements.
8. Alternatives: A significant alternative considered by DFS was to maintain the current valuation requirements prescribed by the first amendment to the regulation as the minimum valuation standards. However, as discussed with the life insurance industry, the Superintendent has determined that this amendment is necessary to best serve the policyholders of New York State by ensuring that the minimum standards for valuing statutory reserves are set at a level appropriate for the payment of future claims.
9.Federal standards: The rule does not exceed any minimum standards of the federal government for the same or similar subject areas.
10. Compliance schedule: A life insurer must comply with the rule upon publication of the Notice of Adoption in the State Register.
Regulatory Flexibility Analysis
1. Effect of the rule: SAPA section 102(8) defines a small business to mean “any business which is resident in this State, independently owned and operated, and employs one hundred or less individuals.” The amendment affects life insurance companies and fraternal benefit societies (collectively, “life insurers”). There may be life insurers affected by the amendment that may be small businesses.
The amendment does not affect local governments because the regulation does not apply to any local government.
2. Compliance requirements: Insurance Regulation 213 currently imposes reporting requirements related to insurance policies and contracts that are subject to the minimum valuation standards prescribed by the regulation. This amendment to the regulation prescribes additional minimum standards for valuing statutory reserves, and thus may impose additional reporting requirements, including the VM-31 PBR Actuarial Report.
No local government will have to undertake any reporting, recordkeeping, or other affirmative acts to comply with the amendment because the regulation does not apply to any local government.
3. Professional services: A life insurer, including one that is a small business, may need to retain professional services, such as actuaries, to comply with the amendment.
No local government will need professional services to comply with the amendment because the regulation does not apply to any local government.
4. Compliance costs: The amendment may impose compliance costs on life insurers, including any life insurer that is a small business, because a life insurer must adjust its reserves as the Superintendent of Financial Services deems necessary to comply with the amendment, including new minimum valuation requirements.
No local government will incur any costs to comply with the amendment because the regulation does not apply to any local government.
5. Economic and technological feasibility: Life insurers, including any that is a small business, should not incur any economic or technological impact as a result of the amendment.
The regulation does not apply to any local government; therefore, no local government should experience any economic or technological impact as a result of the amendment.
6. Minimizing adverse impact: The amendment uniformly affects all life insurers, including any that is a small business. The rule should not have an adverse impact on any life insurer that is a small business.
No local government should be adversely impacted by the amendment because the regulation does not apply to any local government.
7. Small business and local government participation: The Department of Financial Services (“Department”) complied with SAPA section 202-b(6) by posting the proposed rule on its website for informal outreach and notifying trade organizations that represent the interests of small businesses that the proposed rule had been posted. The Department also will comply with SAPA section 202-b(6) by publishing the proposed amendment in the State Register and posting the proposed amendment on its website again.
Rural Area Flexibility Analysis
1. Types and estimated numbers of rural areas: Life insurance companies and fraternal benefit societies (collectively, “life insurers”) affected by this rule operate in every county in this state, including rural areas as defined by State Administrative Procedure Act section 102(10).
2. Reporting, recordkeeping and other compliance requirements; and professional services: Insurance Regulation 213 currently imposes reporting requirements, including the VM-31 PBR Actuarial Report, related to insurance policies and contracts that are subject to the minimum valuation standards prescribed by the regulation. This amendment to the regulation prescribes additional minimum standards for valuing statutory reserves. Therefore, a life insurer in a rural area may need to retain professional services, such as actuaries, to comply with this rule.
3. Costs: The amendment may impose compliance costs on life insurers, including any life insurer located in a rural area, because a life insurer must adjust its reserves as the Superintendent of Financial Services deems necessary to comply with the amendment, including new minimum valuation requirements.
4. Minimizing adverse impact: This rule uniformly affects life insurers that are located in both rural and non-rural areas of New York State. The rule should not have an adverse impact on rural areas.
5. Rural area participation: Life insurers in rural areas will have an opportunity to participate in the rule making process when the notice of proposed rulemaking is published in the State Register and posted on the Department of Financial Services’ website.
Job Impact Statement
This amendment should not adversely impact jobs or employment opportunities in New York State.
In February 2020, the Department of Financial Services adopted an amendment to 11 NYCRR 103 to conform to the 2009 revisions to the National Association of Insurance Commissioners’ (“NAIC’s”) Standard Valuation Law and comply with the NAIC’s accreditation standards. This amendment makes certain clarifications and adjustments to the present regulation, and prescribes additional minimum standards for valuing statutory reserves that in the Superintendent’s opinion are necessary to comply with the Manual.
This amendment may create new jobs or employment opportunities because life insurance companies and fraternal benefit societies may need to hire additional personnel, such as actuaries, to comply with the regulation.