DEPARTMENT OF BANKING AND INSURANCE
DIVISION OF INSURANCE
Actuarial Requirements for Flexible-Factor Policy Forms
Proposed Amendments: N.J.A.C. 11:4-47
Authorized by: Karen L. Suter, Commissioner, Department of Banking and Insurance.
Authority: N.J.S.A. 17:1-8.1, 17:1-15e, 17B:25-18, 17B:25-19, 17B:27-25, 17B:28-5 and 17B:30-1 et seq.
Proposal Number: PRN-2001-260.
Submit comments by August 1, 2001 to:
FAX: (609) 292-0896
Effective February 5, 1996, the Department of Banking and Insurance ("Department") adopted rules at N.J.A.C. 11:4-47 setting forth standards for actuarial reports and memoranda developed in connection with flexible factor life insurance forms that are required to be filed by the Commissioner for issue and delivery in this State (see 28 N.J.R. 1215(a)).
The Department is now proposing several, mainly "housekeeping," amendments to these rules that are intended to facilitate approval of these forms and improve compliance with Department standards. The proposed amendments include the following:
At N.J.A.C. 11:4-47.2, definitions of "experience factors" and "flexible factors" are being added to more clearly identify those forms to which the subchapter applies. Additionally, the definition of "tiered factors" is being deleted for consistency with recent revisions made to N.J.A.C. 11:4-48, Unfair Discrimination. On March 20, 2000, N.J.A.C. 11:4-48.5, which contained requirements related to life insurance policy forms that use tiered factors, was deleted.
N.J.A.C. 11:4-47.3, which contains general requirements for all forms subject to this subchapter, is being amended by adding a provision requiring all forms to specify the experience factors upon which changes to the flexible factors could be based. This change, which codifies the Department's current requirement, is being made to ensure full and accurate disclosure to policyowners of the factors monitored by insurers in determining future changes in costs and benefits. Recently, lawsuits have been filed against some insurers whose forms did not adequately specify the experience factors.
Several language amendments are being made at N.J.A.C. 11:4-47.4 to clarify the Department's filing requirements related to pricing assumptions. Some of the revisions clarify the actuarial documentation requirements. Some changes (for example, the revision at N.J.A.C. 11:4-47.4(j) reducing the 60-day notice period to 30 days of any adjustments in flexible factors) will provide more flexibility to insurers and benefit policyholders. Some changes (for example, the revision at N.J.A.C. 11:4-47.4(l)2iii) require insurers to provide more complete information with their submissions.
N.J.A.C. 11:4-47.5(a) is being amended to clarify the Department's requirements for actuarial certifications related to nonforfeiture benefits. Also, N.J.A.C. 11:4-47.5(a)1 and 2 are being added to set forth nonforfeiture compliance requirements for different types of term insurance riders.
N.J.A.C. 11:4-47.5(c)2 is being amended to clarify the Department's requirements regarding disclosure statements for whole life insurance plans so that policyowners will be provided with a more accurate description of their coverage and costs.
N.J.A.C. 11:4-47.5(g) is being deleted and a new subsection added to clarify the Department's actuarial certification requirements regarding form exemptions from guaranteed nonforfeiture benefits pursuant to N.J.S.A. 17B:25-19.
Insurers affected by these proposed amendments should be favorably impacted in that the changes made will enable them to more readily comply with the Department's forms approval requirements. Policyowners will likewise be favorably impacted because insurer forms in some cases will be required to reflect more accurately the costs and benefits of the contract .
These proposed amendments will have a favorable economic impact on both insurers and policyowners. By codifying Department form approval requirements, insurers will be able to market their products more readily. Insurers will not incur any additional administrative costs in complying with these amendments because any different or additional forms required to be submitted to the Department will be completed by existing staff. Also, forms that contain a ore comprehensive description of a policy's costs and benefits will enable prospective policyowners to make a more informed product purchase.
Federal Standards Statement
A Federal standards analysis is not required because these proposed amendments clarify form submission requirements, and are not subject to any Federal standards or requirements.
The Department does not anticipate that these proposed amendments will result in the generation or loss of jobs.
Agriculture Industry Impact
These proposed amendments have no impact on the agriculture industry.
Regulatory Flexibility Statement
A regulatory flexibility analysis is not required because the insurers to whom these proposed amendments apply do not employ fewer than 100 full-time employees, and therefore are not "small businesses" as that term is defined in the Regulatory Flexibility Act at N.J.S.A. 52:14B-16 et seq.
Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):
SUBCHAPTER 47. ACTUARIAL REQUIREMENTS FOR FLEXIBLE-FACTOR POLICY FORMS
The following words and terms, when used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.
. . .
"Experience factors" means factors of future anticipated or emerging experience upon which changes to flexible factors could be based.
"Flexible factors" means premiums, premium factors (interest, mortality, expenses) or benefits (death benefits, cash or loan values) that the insurer reserves the right to modify on the basis of future anticipated or emerging experience.
. . .
["Tiered factors" means accumulation account factors (such as interest rates, cost of insurance or mortality charges, and expense charges) which vary by a policy amount (such as accumulation account value, cash surrender value, face value, or net amount at risk), or which differ for various components (tiers) of a policy amount. Factors which vary by policy duration shall not be considered tiered factors, but may be considered persistency bonuses.]
11:4-47.3 General requirements
(a) No form to which this subchapter applies may be delivered or issued for delivery in this State unless submitted to the Commissioner for review and filed by the Commissioner pursuant to all applicable law, including, but not limited to, N.J.A.C. 11:4-40.
(b) All forms to which this subchapter applies shall specify the experience factors upon which changes to flexible factors could be based.
11:4-47.4 Pricing assumptions--actuarial certification
(a) Each form submitted for filing shall be accompanied by a certification from a qualified actuary that the insurer has prepared an actuarial memorandum which specifies the formulas [utilized] used in calculating [premiums or] initial flexible factors[. The] and that the actuarial memorandum shall be available for review by the Department upon request. The certifications and the actuarial memorandum shall be signed by a qualified actuary who shall indicate his or her professional qualifications and his or her relationship to the insurer (for example, company officer, consultant, etc.).
1. For purposes of (a) above, "formula" means the methodology used to set the [premiums or] flexible factors. When asset shares or profit margins are used, the memorandum shall describe the method of calculating profits (that is, the accounting basis) and shall state the internal rate of return or other profit target. If the pricing target varies by pricing cell, the target shall be listed for a representative sample of pricing cells.
2. [For policies to which N.J.A.C. 11:4-45 applies, the] The memorandum shall address the manner in which the cost of coverage is distributed among various factors (interest crediting rates, cost of insurance charges, expense charges, etc.), and the distribution of these factors over age and duration.
(b) The actuarial memorandum shall specify the projected assumptions as to investment earnings, mortality, persistency, and expense on which the initial [premium or factor scale is] flexible factors are based, together with comparable assumptions for [maximum] guaranteed [premiums or] factors set forth in the policy. The assumptions shall be set forth in sufficient detail to permit the Department to determine the profit factors implicit in the initial premium or factor tables. Assumptions that shall be indicated include, but are not limited to, reserve basis, if the pricing method includes profit; required surplus contributions treated as reserves; Federal income tax, if pricing is on an after-tax basis; and premium per unit of insurance, for flexible premium policies (that is, any policy where the policyholder may unilaterally change premium or choose not to pay premium).
1. (No change.)
2. The profit factor(s) implicit in the initial [premium or factor tables] flexible factors also shall be included. The profit factor may be expressed as either a rate of return, a present value of profits, or explicit margins associated within the [premium or] flexible factors.
(c) The actuarial memorandum shall include tables of all standard and preferred risk premiums or factors on both the initially intended non-guaranteed basis and the guaranteed basis. These tables are not required to include figures for substandard or rated policies.
1. - 2. (No change.)
3. Minimum guarantee premiums, [for policies to which N.J.A.C. 11:4-45 applies, or] critical values for tiered factors, persistency bonuses, or similar information shall be included.
4. (No change.)
(d) [The insurer shall provide the Department with] Each form submitted for filing shall be accompanied by a statement of the intended conditions under which [premiums or] flexible factors may be adjusted and the method by which these adjustments will be accomplished. This statement shall be construed as a statement of intention rather than a "guarantee" as to the insurer's future actions. The statement shall include the following:
1. [A detailed] An explanation of the [pricing] methodology used to determine[:
i. Initial premiums or premium] initial flexible factors[;] and
[ii. The necessity and the] The amount of future adjustments to these [premiums or premium] flexible factors[;] . This explanation shall:
i. Identify the type(s) of profit measures; used to determine the initial flexible factors and the value(s) of these measures, and
ii. include either:
(1) A statement that the methodology used to determine the amount of changes to flexible factors is the same as that used to determine the initial flexible factors, or
(2) A description of and rationale for any differences in these methodologies.
2. A detailed description [as to how] of the effect of current pricing assumptions and revised pricing assumptions [shall be incorporated into the pricing methodology used to determine the necessity and] on the amount of future adjustments to [premiums or premium] flexible factors[; and] . If this description does not indicate that current assumptions will be incorporated up to the point of the changes and revised assumptions afterward, the description shall demonstrate how the procedures described do not distribute prior profits or recoup past losses.
[3. A detailed explanation of the magnitude of indicated changes (either as an amount or as a percentage) to current premiums or premium factors arising from the repricing of the form that would result in the implementation of these changes.]
(e) [All premium and factor formulas shall be approved by the insurer's board of directors, executive committee of the board, or an officer duly authorized by the board.] All flexible factor formulas, initial flexible factors and changes to flexible factors shall be approved by the insurer's board of directors, an executive committee of the board of directors, or a company officer (identified by name and title) duly authorized by the board of directors for this purpose. Each form submitted for filing shall be accompanied by either a statement or certification to this effect that identifies the source of such approval.
(f) The insurer shall indicate in its form submission that pricing assumptions for in-force policies will be reviewed whenever the [premiums or] flexible factors for comparable new issues are changed, but in no event more often than once every policy year nor less often than once every five policy years. This review shall not be required during any period that [premiums or] flexible factors are subject to an initial guarantee period.
(g) [The actuarial memorandum shall contain a certification from the actuary] Each form submitted for filing shall be accompanied by a certification from a qualified actuary that the assumptions are reasonable, and in the actuary's judgment, self-supporting and that the assumptions do not unfairly discriminate between new issues and in-force policies.
(h) In the case of non-participating policies, [the insurer shall certify in the submission] and with respect to the specific experience factors that apply to each flexible factor, each form submitted for filing shall be accompanied by a certification that future adjustments in [premiums or] flexible factors will not be such as to distribute prior profits or to recoup past losses and that [the] changes will be based solely on future expectations as to [investment earnings, mortality, persistency, and expenses.] the applicable experience factors. If the applicable experience factors differ among flexible factors, the certification shall so indicate. The experience factors shall be consistent with those stated in the policy forms.
(i) In the case of participating policies, [the insurer shall certify in the submission] and with respect to the specific experience factors that apply to each flexible factor, each form submitted for filing shall be accompanied by a certification that future adjustments in [premiums or] flexible factors, other than dividends, will not be such as to distribute prior profits or to recoup past losses, and that [the] changes will be based [solely] on future expectations as to [investment earnings, mortality, persistency, and expenses.] the applicable experience factors. If the applicable experience factors differ among flexible factors, the certification shall so indicate. The experience factors shall be consistent with those stated in the policy forms.
(j) Any adjustments in flexible factors [or premiums] made after the filing of the form, including changes in a non-guaranteed interest, shall be filed with the Department at least  30 days prior to implementation. The insurer may utilize the new premiums or factors provided the Commissioner has not disapproved such changes within the  30- day period.
1. (No change.)
[2. For purposes of (j) above, "flexible factor" includes all factors which are redetermined on the basis of future experience (that is, current costs of insurance rates, interest rates and expenses charges for forms to which N.J.A.C. 11:4-45 applies, and current premiums for indeterminate premium forms).]
[3.] 2. Notification to the Department of any flexible factor [or premium] change shall include the following information, without limitation:
i. - v. (No change.)
vi. [A certification that an actuarial memorandum has been prepared, and is available for review by the Department upon request, which shall include: a certification by qualified actuary that the change does not increase the profit factor or, if changed, includes an explanation of the manner and reasons by which the profit factor is changed; specifies that the change does not unfairly discriminate between existing policies and new issues; and which otherwise satisfies the requirements set forth in (k) below; and] Certifications from a qualified actuary that:
(1) An actuarial memorandum has been prepared with respect to the change(s);
(2) This memorandum is available for review by the Department upon request;
(3) The change(s) does (do) not increase the profit factor or, if increased, includes an explanation of the manner and reasons by which the profit factor is increased;
(4) The change(s) does (do) not unfairly discriminate between existing policies and new issues; and
(5) The change(s) otherwise satisfy(ies) the requirements set forth in (k) below.
vii. (No change.)
(k) The actuarial memorandum required pursuant to [(j)3vi] (j)2vi above shall contain a certification from the qualified actuary who prepared it that adjustments are such to retain or reduce the profit factor that was inherent in the rate formulas at issue. If, in the actuary's judgment, the profit factor for in-force policies should be increased, the actuarial memorandum shall provide all justifications for that increase.
1. The Commissioner shall disapprove changes in [premiums or other] flexible factors which increase the profit factor for in-force business if he or she determines that the actuarial assumptions on which such change is based are unreasonable, not self-supporting, discriminate unfairly between new issues and in-force business, or are otherwise contrary to law.
2. Adjustment in [premiums or] flexible factors which increase profits (before consideration of dividends) shall be acceptable if the Commissioner determines that future dividends will also be adjusted so that profit to the insurer, after dividends, is the same as was inherent in the rate formulas and anticipated dividends at issue.
(l) The Commissioner shall waive the requirement that the insurer provide  30 days' advance notice of changes [in] to interest rates as set forth in (j) above, provided that [the insurer include as part of its initial submission a statement of methodology for deriving the rate. The insurer shall provide 60 days' advance notice when the methodology is changed.] the insurer specifically requests such a waiver, the insurer includes as part of its initial submission a statement of methodology for deriving the rate, and interest rates and/or investment earnings, as appropriate, are the sole experience factors upon which changes to the rate can be based. The insurer shall provide 30 days' advance notice when the methodology, including any changes to the assumed spread between the market (index) rate or earned rate on all or a segment of the insurer's portfolio and/or any provisions and/or assumptions as to investment expenses, allowances for asset risks and/or allowances for default risks, is changed. The methodology shall tie the credited rate to a market (index) rate or earned rate on all or a segment of the insurer's portfolio, and the spread between this rate and the credited rate shall be fixed with a variation of no more than 25 basis points from the formula rate. Any interest rate methodology submitted pursuant to this subsection shall include, but not be limited to, the following:
1. (No change.)
2. If the formula involves the insurer's "earned rate," the following information:
i. - ii. (No change.)
iii. An indication of whether the earned rate is net or gross of investment expenses [, as well as a description of any provision for investment expenses implicit in the earned rate;] and/or allowances for asset/default risks, as well as a description of and specifics as to any provisions and/or assumptions for investment expenses, allowances for asset risks and/or allowances for default risks.
iv. (No change.)
3. - 4. (No change.)
(m) (No change.)
11:4-47.5 Nonforfeiture benefits--actuarial memorandum
(a) Each form submitted for filing shall be accompanied by [a certification, signed by a qualified actuary, that the nonforfeiture benefits provided under the form are in compliance with N.J.S.A. 17B:25-19, and that an actuarial memorandum has been prepared and signed by a qualified actuary which demonstrates that such benefits are provided in compliance with N.J.S.A. 17B:25-19. The Actuarial memorandum shall be available for review by the Department upon request.] certifications by a qualified actuary that the nonforfeiture benefits provided under the form(s) are in compliance with N.J.S.A. 17B:25-19, and that an actuarial memorandum has been prepared and signed by a qualified actuary which demonstrates such compliance. This memorandum shall be available for review by the Department upon request, and a qualified actuary shall so certify. These certifications shall be provided regardless of whether or not the insurer is asserting that the form(s) submitted for filing are exempt from providing guaranteed nonforfeiture benefits as described in N.J.S.A. 17B:25-19.
1. Nonforfeiture compliance for term insurance riders that create a "target" death benefit based upon the combined coverage provided by the base policy form and rider shall be based upon the total coverage provided by the base plan/rider combination.
2. All other term insurance riders shall be tested for nonforfeiture compliance as if they provide stand-alone term insurance coverage.
(b) (No change.)
(c) For policies where cash values are determined retrospectively as an accumulation of gross premiums less expense charges, with interest increments and mortality decrements, the excess of expense charges in the first policy year over renewal expense charges may not be greater than the maximum initial expense allowance as set forth in N.J.S.A. 17B:25-19h(i) and a qualified actuary shall so certify. For purposes of determining the maximum initial expense allowance, the insurer at its option may adopt the method described in either (c)1 or 2 below. [The certification accompanying each form submitted for filing shall specify which method has been used.] Each form submitted for filing shall be accompanied by a certification from a qualified actuary that specifies which method has been used.
1. (No change.)
2. The plan of insurance may be assumed to be whole life, subject to the following conditions:
i. A disclosure statement shall be provided to the prospective policyowner at the time of application and shall be printed prominently (that is, on or in close proximity to the initial schedule page and in bolder or larger type) on the schedule page of the policy form for any policy for which the initial premium is lower than that premium which, when paid in level amounts at the initial frequency, would provide coverage to the earlier of policy maturity or age 100, assuming indefinite continuation of initial interest, mortality and expense factors. For policies having either a minimum guarantee provision or a minimum premium test provision effective for a period of 11 or more years after issue (16 or more years for last survivor policies), the initial premium shall be deemed to be the stipulated minimum premium. The disclosure statement shall [state] be substantially similar in form and content to the following:
Assuming current (note: insurers to include listing of interest, mortality and expense factors, as such factors are described in the form) continue indefinitely and a premium equal to the initial premium (or minimum premium, if applicable) is paid (insert premium mode selected by owner), this policy will provide coverage for xx years; based on guaranteed (note: Insurers to include listing of interest, mortality and expense factors, as such factors are described in the form), this policy will provide coverage for yy years. Other policy forms designed specifically to provide term insurance may offer similar benefits for such periods at a lower cost or with higher cash surrender values. You should consider whether this policy or such alternative policy is right for you.
ii. The specimen disclosure statement(s) submitted with the form shall specify or clearly reference the premiums assumed and shall specify the lengths of coverage provided based upon the current and guaranteed assumptions.
[ii] iii. Regardless of initial premium, no disclosure statement shall be required for last survivor policies with a face amount greater than or equal to $500,000 or to variable contracts (that is, those which are issued pursuant to N.J.S.A. 17B:28-1 et seq. and delivered or issued for delivery in this State).
(d) - (f) (No change.)
[(g) Any insurer asserting that the form submitted for filing is not subject to N.J.S.A. 17B:25-19 shall file a certification signed by a qualified actuary with the form submission that:
1. Sets forth in detail the basis upon which the insurer determined that the particular form is not subject to N.J.S.A. 17B:25-19; and
2. States that an actuarial memorandum has been prepared and signed by a qualified actuary which demonstrates that the form is exempt from N.J.S.A. 17B:25-19. The actuarial memorandum shall be available for review by the Department upon request. This certification shall include:
i. A citation of the specific exemption from N.J.S.A. 17B:25-19 asserted by the insurer;
ii. An explanation as to why the insurer believes the exemption applies, and if the exemption cited is based upon the seventh bulleted item (the "de minimis" test) of N.J.S.A. 17B:25-19; and
iii. A statement as to which issue ages were tested to determine qualification for this exemption.]
(g) Each form submitted for filing, which the insurer asserts is exempt from providing guaranteed nonforfeiture benefits as described in N.J.S.A. 17B:25-19, shall be accompanied by a certification from a qualified actuary:
1. Stating that an actuarial memorandum has been prepared and signed by a qualified actuary which demonstrates that the form is exempt from providing guaranteed nonforfeiture benefits as described in N.J.S.A. 17B:25-19, which actuarial memorandum shall be available for review by the Department upon request; and
2. Stating the specific exemption from providing guaranteed nonforfeiture benefits as described in N.J.S.A. 17B:25-19 claimed by the insurer.