The proposed rule amendments are expected to have no significant impact on small business.
A copy of the full text of the rule amendments and fiscal estimate may be obtained free of charge on the internet at
www.doa.state.wi.us/gaming, by contacting the Division of Gaming at (608) 270-2555, or by visiting the Division of Gaming's office at the address listed below.
Contact Person
If you have any questions regarding the rule amendments, please contact:
Brian Whittow
Department of Administration – Division of Gaming
2005 W. Beltline Hwy., Suite 201
PO Box 8979
Madison, WI 53708-8979
Telephone: (608) 270-2555
Notice of Hearing
Insurance
NOTICE IS HEREBY GIVEN that pursuant to the authority granted under s.
601.41 (3), Stats., and the procedures set forth in under s.
227.18, Stats., OCI will hold a public hearing to consider the adoption of the attached proposed rulemaking order affecting ss.
Ins 2.80,
2.81, and Chapter
Ins 50, Wis. Adm. Code, relating to prescribing mortality tables and actuarial opinions, analysis and reports.
Hearing Information
Date: Monday August 2, 2004
Time: 10:30 a.m., or as soon thereafter
as the matter may be reached.
Place: OCI, 2nd Floor,
125 S. Webster Street, Madison, WI
Written comments or comments submitted through the Wisconsin Administrative Rule website at:
https://adminrules.wisconsin.gov on the proposed rule will be considered. The deadline for submitting comments is 4:00 p.m. on the 7
th day after the date for the hearing stated in this Notice of Hearing.
Written comments should be sent to:
Fred Nepple
Legal Unit - OCI Rule Comment for Rule 2.81
Office of the Commissioner of Insurance
PO Box 7873
Madison WI 53707-7873
Analysis
Explanation of the OCI's authority to promulgate the proposed rule:
The proposed rule is promulgated under the commissioner's statutory authority to prescribe valuation of liabilities, non-forfeiture values, and accounting standards and reporting for insurers. The rule is also promulgated under the commissioner's authority to prescribe actuarial reporting and analysis by life insurers.
Related Statutes or rules: The proposed rule amends or references existing rules prescribing valuation of liabilities, non-forfeiture values, and actuarial reporting and analysis under ss.
601.42,
623.02,
623.04,
623.06, and
632.43 and ss.
Ins 2.80 and ch.
50, Wis. Adm. Code.
5. The plain language analysis and summary of the proposed rule:
The proposed rule incorporates the National Association of Insurance Commissioners' (“NAIC") 2001 CSO Table into the current reserve and non-forfeiture valuation laws and rules. The rule would establish the new table as the minimum valuation standard for calculating reserves and nonforfeiture benefits for individual life insurance policies and extended term benefits issued after the effective date. The new table would be optional for newly issued policies until January 1, 2009 and mandatory after that date. The proposed rule also corrects references in the current rule establishing valuation standards (s.
Ins 2.80, Wis. Adm. Code). The primary statutes interpreted by the proposed rule are the Standard Valuation Law (s.
623.06) and the Standard Nonforfeiture Law (s.
632.43).
The proposed rule is based on the NAIC model recognition of the 2001 CSO mortality table for use in determining minimum reserve liabilities and nonforfeiture benefits regulation and the NAIC revised model actuarial opinion and memorandum regulation. The CSO mortality table is not included in the NAIC model but is published separately by the NAIC. Accordingly it is adopted by reference under s.
601.41 (3) (b), Stats.
The proposed rule also revises the requirements for life insurers (including fraternals) as regards required actuarial opinions and memoranda. The proposed rule requires all life insurers to perform asset adequacy testing every year. The current rule provides an exemption, or limited scope of compliance, from asset adequacy analysis for smaller companies meeting certain conditions. The proposed rule also prescribes standards for the commissioner's acceptance of actuarial opinions and reporting from companies based on the standards of their state of domicile. In addition, the proposed rule revises the required wording of the actuarial opinion, adds some additional requirements concerning the actuarial opinion and actuarial memorandum, and it creates a new requirement for the preparation of a summary of the actuarial memorandum called the “regulatory asset adequacy issues summary."
NAIC Financial Regulation Standards and Accreditation Committee voted to expose the revised NAIC Actuarial Opinion and Memorandum Regulation for comment for a two-year period, beginning January 1, 2003. The NAIC is seeking comment on whether the revised Model should be adopted as a mandatory requirement for accreditation of a state and may recommend that it be required as an accreditation standard effective in calendar year 2007.
The 2001 CSO mortality table changes are effective for policies issued on or after January 1, 2005. The revised actuarial opinion and memorandum requirements are effective for reporting requirements for calendar year 2005 and subsequent calendar years.
6. Summary of and preliminary comparison with any existing or proposed federal regulation that is intended to address the activities to be regulated by the proposed rule:
Not applicable. There is no such federal regulation.
7. Comparison of similar rules in adjacent states as found by OCI:
Iowa: Iowa has the current version of, and has not adopted the revised, NAIC model actuarial opinion and memorandum regulation. Iowa has adopted the NAIC model recognition of the 2001 CSO mortality table for use in determining minimum reserve liabilities and nonforfeiture benefits regulation.
Illinois: Illinois has the current version of, and has not adopted the revised, NAIC model actuarial opinion and memorandum regulation. Illinois has adopted the NAIC model recognition of the 2001 CSO mortality table for use in determining minimum reserve liabilities and nonforfeiture benefits regulation.
Minnesota: Minnesota has the current version of, and has not adopted the revised, NAIC model actuarial opinion and memorandum regulation. Minnesota has adopted the NAIC model recognition of the 2001 CSO mortality table for use in determining minimum reserve liabilities and nonforfeiture benefits regulation.
Michigan: Michigan has the current version of, and has not adopted the revised, NAIC model actuarial opinion and memorandum regulation. Michigan has not adopted the NAIC model recognition of the 2001 CSO mortality table for use in determining minimum reserve liabilities and nonforfeiture benefits regulation.
Indiana: Indiana has adopted the NAIC revised model actuarial opinion and memorandum regulation. Indiana has adopted the NAIC model recognition of the 2001 CSO mortality table for use in determining minimum reserve liabilities and nonforfeiture benefits regulation.
8. A summary of the factual data and analytical methodologies that OCI used in support of the proposed rule and how any related findings support the regulatory approach chosen for the proposed rule:
The American Academy of Actuaries report to the NAIC's Life and Health Actuarial Task Force states the basis for its recommendation for the new 2001 CSO mortality table (the basis for OCI's proposal of this rule authorizing the use of the 2001 CSO mortality table) as follows:
“The current statutory valuation standard, the 1980 CSO Table, is more than 20 years old. As is shown in this report, current mortality levels, represented by the 2001 Valuation Basic Table, are lower than the mortality levels underlying the 1980 CSO Table. The current valuation mortality standard produces reserves, excluding deficiency reserves, that overall are higher for the illustrated model office than those produced by the proposed 2001 CSO Table.
At the request of the LHATF, both the SOA and the Academy have worked to develop a proposed mortality table intended to replace the 1980 CSO Table in the current statutory valuation structure. While the Academy's Life Practice Council believes that a move to a valuation system that provides more actuarial flexibility and responsibility to set reserves that reflect individual company characteristics is desirable, we recognize that a new table is appropriate. The new table is more consistent with current experience and will result in reserves, excluding deficiency reserves, that overall are approximately 20 percent lower than those produced by the 1980 CSO Table.
The following analysis compares reserves calculated using the proposed ultimate 2001 CSO Table to those calculated using the ultimate 1980 CSO Table. Deficiency reserves were not considered. CRVM reserves for individual cells were weighted using a relatively simple model office (consisting of three plans, five ages, and both genders) based on industry business distributions obtained from LIMRA International. To produce a single number for comparison, the Academy Task Force assumed that sales levels increased at five percent per year and focused its analysis on results after 10 and 20 years.
Table 1
Comparison of Basic Reserves on the Proposed 2001 CSO Table to Basic Reserves on the 1980 CSO Table
(aggregated results)
After After
10 years
20 years
Overall 79.0% 82.4%
Gender
Male 76.5% 80.2%
Female 85.6% 87.7%
Plan
Whole Life 85.6% 86.9%
20 Year Level Premium Term 68.4% 68.7%
Level Premium to Zero UL 95.0% 98.8%
Age
25 80.9% 84.9%
35 74.8% 79.8%
45 78.7% 82.5%
55 79.8% 81.9%
65 81.2% 84.2%
This table shows that overall basic reserves are about 20 percent lower under the proposed 2001 CSO Table. The reduction is larger for males than for females, reflecting the larger reduction in mortality rates for males. Term insurance exhibits the largest reductions, followed by whole life. The level premium to zero UL plan shows the smallest reductions because reserves cannot be less than cash values and the cash value typically determines the reserve by the sixth to eighth duration under both the new and old tables. When the cash value determines the reserve, reserves are the same under both tables. The biggest reductions will be seen at age 35 while the smallest reductions will be seen at ages 25 and 65."
The proposed revisions to the actuarial opinion and memorandum requirements under ch.
50, Wis. Adm. Code, are based on the recommendations of the NAIC Life and Health Actuarial Task Force (“Task Force") which were adopted by the NAIC in 2001.
All life insurers are required to file an actuarial opinion with their annual financial statement. In 1991, the NAIC adopted the model actuarial opinion and memorandum regulation which, in essence, established a two-tier system for these opinions. Companies whose admitted assets exceed $500 million are required to conduct sufficient tests such that they can certify that their assets “make adequate provision" for their liabilities, i.e., their actuaries must perform an asset adequacy analysis. Under certain conditions, companies whose admitted assets fall below $500 million are exempt from this requirement, and need only certify that their reserves have been computed in accordance with the formulas specified in the law. The Task Force recommended removal of the exemptions, thereby requiring all companies to demonstrate the adequacy of their reserves. The Task Force was in agreement with the position expressed by the State Variations in Valuation Laws Task Force of the American Academy of Actuaries in its May 10, 1996, report.
The Task Force received the assistance of the Actuarial Standards Board, which developed revised standards of actuarial practice relative to this matter. They provide for the actuary to perform necessary testing based on the degree of risk inherent in the contracts sold. This ranges from very little (in some cases only intermittent testing is necessary) to cash flow modeling. This availability of a range of methods will allow each company to choose the one (or combination) which best fits its circumstances, thereby minimizing the expense each will incur in fulfilling this requirement.
The current actuarial opinion and memorandum rule requires all companies to file an actuarial opinion that the reserves 1) meet the requirements of the law of the state of domicile and 2) are at least as great, in the aggregate, as required by the state in which the filing is made. The Task Force recommended that each state provide for three options that may be used in lieu of simply requiring the “state of filing" opinion. In essence, the options permit a “state of domicile" opinion, but they require that certain financial standards be met or that financial information be provided so that the state of filing can make an informed decision as to whether the domestic state's reserve laws, reasonably meet the state of filings standards. The Task Force also recommended, based on experience with the current model regulation, revisions that include updated requirements for documentation of the various assumptions, economic scenarios, and product features incorporated into the asset adequacy analysis and a “Regulatory Asset Adequacy Issues Summary."
9. Any analysis and supporting documentation that OCI used in support of OCI's determination of the rule's effect on small businesses under s.
227.114:
OCI reviewed financial statements and other reports filed by life insurers and fraternal insurers and determined that none qualify as small businesses.
10. If these changes will have a significant fiscal effect on the private sector, the anticipated costs possibly incurred by private sector:
This rule is not expected to have a significant impact on the private sector. There are only a few insurance companies that are not already performing the analysis required by this rule. The few who are newly required to conduct cash flow analysis may incur initial costs of $2500 to $25000. In addition they may require specialized software for an initial cost of $15000. Many companies who are newly required to perform analysis will incur lower costs. Compliance in subsequent years is likely to range in cost from $2500 to $12000.
11. Effect on Small Business:
None
12. Agency contact person:
A copy of the full text of the proposed rule changes, analysis and fiscal estimate may be obtained from the WEB sites at:
Inger Williams, OCI Services Section
Phone:
(608) 264-8110
Email:
Inger.Williams@OCI.State.WI.US
Address:
125 South Webster St – 2
nd Floor
Madison WI 53702
Mail: PO Box 7873, Madison WI 53707-7873
13. Place where comments are to be submitted and deadline for submission:
The deadline for submitting comments is 4:00 p.m. on the 7th day after the date for the hearing stated in the Notice of Hearing.
Mailing address:
