2024 Edition Final - Valuation Manual

Valuation Manual

Jan. 1, 2024 Edition

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VALUATION MANUAL

NAIC Adoptions through August 16, 2023

The National Association of Insurance Commissioners (NAIC) initially adopted the Valuation Manual on

Dec. 2, 2012, with subsequent adoptions of amendments on June 18, 2015; Nov. 22, 2015; April 6, 2016;

Aug. 29, 2016; Aug. 9, 2017; Aug. 7, 2018; Sept. 10, 2018; Aug. 6, 2019; Aug. 14, 2020; Aug. 17, 2021;

Aug. 13, 2022, and Aug. 16, 2023.

JPMorgan Chase Bank, N.A. (“J.P. Morgan”) is the source of certain data for this

Valuation Manual. The data was obtained from sources believed to be reliable, but J.P.

Morgan does not warrant its completeness or accuracy. The Valuation Manual is not

sponsored, endorsed, sold or promoted by J.P. Morgan, and J.P. Morgan makes no

representation regarding the advisability of trading in or use of such Valuation Manual.

The data is used with permission and may not be copied, used or distributed without J.P.

Morgan’s prior written approval. J.P. Morgan makes no express or implied warranties

and hereby expressly disclaims all warranties of merchantability or fitness for a particular

purpose or use with respect to the data and the Valuation Manual. All warranties and

representations of any kind with regard to the data and/or the Valuation Manual are

disclaimed, including any implied warranties of merchantability, quality, accuracy, fitness

for a particular purpose and/or against infringement and/or warranties as to any results

to be obtained by and/or from the Valuation Manual without limiting any of the foregoing,

in no event shall J.P. Morgan have any liability for any special, punitive, direct, indirect,

or consequential damages, including loss of principal and/or lost profits, even if notified

of the possibility of such damages.

Table of Contents

I. Introduction .................................................................................................................................... 1

Authority and Applicability .............................................................................................................. 1

Background ...................................................................................................................................... 1

Description of the Valuation Manual ............................................................................................... 2

Operative Date of the Valuation Manual ......................................................................................... 2

PBR Review and Updating Process ................................................................................................. 2

Process for Updating the Valuation Manual .................................................................................... 2

Overview of Reserve Concepts ........................................................................................................ 5

Corporate Governance Requirements for Principle-Based Reserves ............................................... 6

II. Reserve Requirements ................................................................................................................... 7

Life Insurance Products .................................................................................................................... 7

Annuity Products .............................................................................................................................. 8

Deposit-Type Contracts .................................................................................................................... 9

Health Insurance Products ................................................................................................................ 9

Credit Life and Disability Products .................................................................................................. 9

Riders and Supplemental Benefits.................................................................................................. 10

Claim Reserves ............................................................................................................................... 10

III. Actuarial Opinion and Report Requirements ........................................................................... 11

IV. Experience Reporting Requirements .......................................................................................... 11

V. Valuation Manual Minimum Standards ..................................................................................... 11

VM-01: Definitions for Terms in Requirements

......................................................................... 01-1

VM-02: Minimum Nonforfeiture Mortality and Interest ............................................................ 02-1

VM-20: Requirements for Principle-Based Reserves for Life Products ..................................... 20-1

VM-21: Requirements for Principle-Based Reserves for Variable Annuities ............................ 21-1

VM-22: Statutory Maximum Valuation Interest Rates for Income Annuities ........................... 22-1

VM-25: Health Insurance Reserves Minimum Reserve Requirements ...................................... 25-1

VM-26: Credit Life and Disability Reserve Requirements ......................................................... 26-1

VM-30: Actuarial Opinion and Memorandum Requirements .................................................... 30-1

VM-31: PBR Actuarial Report Requirements for Business Subject to a Principle-Based

Valuation ....................................................................................................................... 31-1

VM-50: Experience Reporting Requirements ............................................................................. 50-1

VM-51: Experience Reporting Formats ...................................................................................... 51-1

VM-A: Appendix A – Requirements ......................................................................................... A-1

VM-C: Appendix C – Actuarial Guidelines ................................................................................ C-1

VM-G: Appendix G – Corporate Governance Guidance for Principle-Based Reserves ............ G-1

VM-M: Appendix M – Mortality Tables ..................................................................................... M-1

Introduction

I. Introduction

Authority and Applicability

The Valuation Manual (VM) sets forth the minimum reserve and related requirements for jurisdictions

where the Standard Valuation Law (#820), as amended by the National Association of Insurance

Commissioners (NAIC) in 2009, or legislation including substantially similar terms and provisions has been

enacted by jurisdictions, and this Valuation Manual is operative. The reserve requirements in the Valuation

Manual satisfy the minimum valuation requirements of Model #820.

Requirements in the Valuation Manual are applicable to life insurance, accident and health (A&H)

insurance, and deposit-type contracts as provided in the Valuation Manual. These contracts include the

definition provided by Statement of Statutory Accounting Principles (SSAP) No. 50—Classifications of

Insurance or Managed Care Contracts as found in the NAIC Accounting Practices and Procedures Manual

(AP&P Manual). Annuity contracts are, therefore, included within the terminology “life insurance

contracts” unless specifically indicated otherwise in this Valuation Manual.

Minimum reserve requirements are provided in this Valuation Manual for contracts issued on or after the

Valuation Manual operative date of Jan. 1, 2017. Other requirements are applicable as provided pursuant

to the Model #820 and this Valuation Manual.

Background

As insurance products have increased in their complexity, and as companies have developed new and

innovative product designs that change their risk profile, the need to develop new valuation methodologies

or revisions to existing requirements to address these changes has led to the development of the Valuation

Manual. In addition, the Valuation Manual addresses the need to develop a valuation standard that enhances

uniformity among the principle-based valuation requirements across states and insurance departments.

Finally, the Valuation Manual defines a process to facilitate future changes in valuation requirements on a

more uniform, timely and efficient basis.

The goals of the NAIC in developing the Valuation Manual are:

1. To consolidate into one document the minimum reserve requirements for life insurance,

A&H insurance and deposit-type contracts pursuant to Model #820, including those

products subject to principle-based valuation requirements and those not subject to

principle-based valuation requirements.

2. To promote uniformity among states’ valuation requirements.

3. To provide for an efficient, consistent and timely process to update valuation requirements

as the need arises.

4. To mandate and facilitate the specific reporting requirements of experience data.

5. To enhance industry compliance with the 2009 Model #820 and subsequent revisions, as

adopted in various states.

Introduction

Description of the Valuation Manual

The Valuation Manual contains five sections that provide requirements covered in Authority and

Applicability above, and that discuss principles and concepts underlying these requirements.

1. Section I is an introductory section that includes the general concepts underlying the

reserve requirements in the Valuation Manual.

2. Section II summarizes the minimum reserve requirements that apply to a product or type

of product, including which products or categories of products are subject to principle-

based valuation requirements and documentation. As minimum reserve requirements are

developed for various products or categories of products, those requirements will be

incorporated into this section. The applicability of the minimum reserve requirements to

particular products will be clarified in the appropriate subsection. For example, the

minimum reserve requirements that apply to a life insurance product will be identified in

the subsection addressing life insurance reserve requirements.

3. Section III sets forth the requirements for the actuarial opinion and memorandum and the

principle-based report.

4. Section IV sets forth the experience reporting requirements.

5. Section V contains Valuation Manual minimum standards. These standards contain the

specific requirements that are referenced in Sections II–IV.

Operative Date of the Valuation Manual

The requirements in the Valuation Manual become operative pursuant to Section 11 of Model #820.

PBR Review and Updating Process

A well-conceived and designed principle-based reserve (PBR) review and updating process is needed to

ensure ongoing evaluation of the effectiveness of the PBR methodology, including prescribed assumptions

defined in this Valuation Manual. This process will involve and provide ongoing feedback to state insurance

regulators and interested parties for the purpose of updating, improving, enhancing and modifying the PBR

requirements. These changes are necessary due to, for example, making adjustments as appropriate to

margins for conservatism, future improvements in cash-flow modeling techniques, future development of

new policy benefits and guarantees, future changes in assumptions due to emerging experience, improved

methods to assess risk, etc.

A key element of the PBR review and updating process is to provide support for state insurance regulators

regarding the necessary expertise, resources, data and tools to effectively review PBR models and reporting

required in the Valuation Manual for products subject to PBR requirements.

Goals for the PBR review and updating process include achieving consistency in regulatory requirements

among states, as well as assessing and making changes as appropriate.

Process for Updating the Valuation Manual

A. Task Force Procedures

The NAIC is responsible for the process of updating the Valuation Manual. The Life Actuarial (A)

Task Force is primarily charged with maintenance of the Valuation Manual for adoption by the

NAIC Plenary. The Life Actuarial (A) Task Force will coordinate with the Health Actuarial (B)

Task Force, the Statutory Accounting Principles (E) Working Group and other NAIC groups as

necessary when considering changes. The Health Actuarial (B) Task Force will be charged

Introduction

primarily with developing and maintaining the health insurance sections of the Valuation Manual,

with approval by the Health Insurance and Managed Care (B) Committee. However, all changes to

the Valuation Manual, including changes with respect to health insurance, must also be reviewed

by the Life Actuarial (A) Task Force as gatekeeper under this process. As provided under Section

11C of Model #820, any change to the Valuation Manual ultimately requires adoption by the NAIC

by an affirmative vote representing: 1) at least three-fourths of the members of the NAIC voting,

but not less than a majority of the total membership; and 2) members of the NAIC representing

jurisdictions totaling more than 75% of the relevant direct premiums written.

Guidance Note: To maximize the efficiency of the NAIC process and to promote consistency

among amendments to the Valuation Manual, it was determined a single gatekeeper would work

best. The Life Actuarial (A) Task Force was chosen as it was most directly involved in the

Valuation Manual’s development. The Life Actuarial (A) Task Force’s review of the Health

Actuarial (B) Task Force’s amendments shall not focus on health-related content.

Information and issues with respect to amendment of the Valuation Manual can be presented to the

Life Actuarial (A) Task Force/Health Actuarial (B) Task Force in a variety of ways. Issues can be

recommended or forwarded from other NAIC working groups or task forces, or from interested

parties. In order for an issue or proposed change to the Valuation Manual to be placed on a Pending

List, the recommending party shall submit an amendment proposal form. An amendment form

should be submitted 20 days prior to the next scheduled Life Actuarial (A) Task Force/Health

Actuarial (B) Task Force meeting to be placed on the agenda for that meeting.

The Life Actuarial (A) Task Force/Health Actuarial (B) Task Force can move an item on the

Pending List to either the Rejected List or to the Active List. Any disposition of items will occur

in an open meeting. Items moved to the Active List will be categorized as substantive, non-

substantive or an update to a table.

1. Substantive Items

Substantive changes to the Valuation Manual are proposed amendments to the Valuation

Manual that would change or alter the meaning, application or interpretation of a provision.

All changes to the Valuation Manual (or to templates prescribed for use by the Valuation

Manual) will be considered substantive, unless specifically identified as either a non-

substantive item or an update to a table by simple majority vote of the Life Actuarial (A)

Task Force/Health Actuarial (B) Task Force. Any item placed on the Active List as

substantive will be exposed by the Life Actuarial (A) Task Force/Health Actuarial (B) Task

Force for a public comment period commensurate with the length of the draft and the

complexities of the issue, but for no less than 21 days. The comment period will be deemed

to have begun when the draft has been placed on the appropriate public NAIC web page.

The Life Actuarial (A) Task Force/Health Actuarial (B) Task Force will hold at least one

open meeting (in person or via conference call) to consider comments before holding a

final vote on any substantive items. Subsequent exposures of substantive items will be for

a minimum of seven days. Meeting notices for Life Actuarial (A) Task Force/Health

Actuarial (B) Task Force meetings will indicate if a vote is anticipated on any substantive

items. Adoption of all changes at the Life Actuarial (A) Task Force/Health Actuarial (B)

Task Force will be by simple majority.

2. Non-substantive Items

Non-substantive changes to the Valuation Manual are changes that primarily pertain to

technical revisions, such as changes to titles, words, definitions, procedures, grammar

corrections, reference errors, making individual sections of the Valuation Manual

consistent with each other, etc., that are necessary in order to clarify an intent that has

Introduction

already been thoroughly documented either in the NAIC Proceedings, the Valuation

Manual or other NAIC guidance. The Life Actuarial (A) Task Force/Health Actuarial (B)

Task Force must adopt the change with an affirmative vote of a simple majority of the Life

Actuarial (A) Task Force/Health Actuarial (B) Task Force membership voting. Meeting

notices for Life Actuarial (A) Task Force/Health Actuarial (B) Task Force meetings will

indicate if a vote is anticipated on any non-substantive items. Non-substantive items will

be exposed for public comment with a period of time commensurate with the complexity

of the change.

3. Updates to Designated Tables

Certain designated tables related to asset spreads, default costs and valuation interest rates

contained in the Valuation Manual are intended to be updated routinely, as they provide

current reference data integral to calculations. These tables have a prescribed process

involving limited judgment for routine updates. Updates to these tables in accordance with

this process are not considered to be an amendment of the Valuation Manual itself, and

they are not subject to the requirements of Section 11C of Model #820 for the amendment

of the Valuation Manual. These routine updates will not require exposure or adoption by

the Life Actuarial (A) Task Force/Health Actuarial (B) Task Force. Public notification of

the updated tables will be distributed to Task Force members, interested state insurance

regulators and interested parties by NAIC staff immediately following completion of the

update.

Any changes to the process for updating these tables will be considered a substantive

change and will be subject to the typical procedure for Valuation Manual amendments.

4. Waiver of Task Force Procedure

If the Life Actuarial (A) Task Force/Health Actuarial (B) Task Force determines that a

waiver of the above procedures is necessary to expeditiously consider modification of the

Valuation Manual in order to advance a valid regulatory purpose, it may, upon a three-

fourths majority vote of its members present and voting, modify the above procedures.

However, in no event will substantive items be considered for adoption without a 14-day

public comment period.

5. Coordination with the Statutory Accounting Principles (E) Working Group

Proposed changes to the Valuation Manual must be consistent with existing model laws,

including Model #820, and, to the extent determinable, with models in development. To

the extent that proposed changes to the Valuation Manual could have an impact on

accounting and reporting guidance and other requirements as referenced by the

AP&P Manual, proposed changes must be reviewed by the Statutory Accounting Principles

(E) Working Group for consistency with the AP&P Manual, including as to

implementation dates. The Life Actuarial (A) Task Force or its support staff will prepare a

summary recommendation that will include as appropriate an analysis of the impact of

proposed changes.

If the Statutory Accounting Principles (E) Working Group reaches the conclusion that the

proposed changes to the Valuation Manual are inconsistent with the authoritative guidance

in the AP&P Manual, the Life Actuarial (A) Task Force will work with the Statutory

Accounting Principles (E) Working Group to resolve such inconsistencies.

B. Committee Procedures

Introduction

The Life Insurance and Annuities (A) Committee or the Health Insurance and Managed Care (B)

Committee will consider any Valuation Manual amendments (whether substantive or non-

substantive) as a separate agenda item at any regularly scheduled meeting. Amendments to the life

and annuity sections of the Valuation Manual must first be approved by Life Actuarial (A) Task

Force, which, as gatekeeper under this process, shall then review and prepare for consideration by

the Life Insurance and Annuities (A) Committee any changes to the life and annuity sections of the

Valuation Manual. Amendments to the health insurance sections of the Valuation Manual must

first be approved by the Health Actuarial (B) Task Force and Life Actuarial (A) Task Force, which,

as gatekeeper under this process, shall then review and prepare for the Health Insurance and

Managed Care (B) Committee’s consideration any changes to the health insurance sections of the

Valuation Manual. No additional exposure period is required for review by the Life Actuarial (A)

Task Force. Updates to tables will be reported to the appropriate committee but will not require a

separate vote. In order to allow for additional input, the Life Insurance and Annuities (A)

Committee and the Health Insurance and Managed Care (B) Committee generally will not vote on

adoption of any substantive items unless 14 days have elapsed since adoption by the Life Actuarial

(A) Task Force. Adoption of all changes by the Life Insurance and Annuities (A) Committee and

the Health Insurance and Managed Care (B) Committee will be by simple majority.

C. Executive (EX) Committee and Plenary Procedures

The NAIC Executive (EX) Committee and Plenary generally will consider Valuation Manual

amendments at the national meeting following adoption by the appropriate committee. To allow

sufficient time to implement substantive items, final action by the Executive (EX) Committee and

Plenary on substantive items will generally be taken at the Summer National Meeting. The voting

requirements for adoption at the Executive (EX) Committee and Plenary are as set out in Section

11C of Model #820. Unless otherwise specified, all Valuation Manual amendments shall be

effective Jan. 1 following adoption by the NAIC.

Overview of Reserve Concepts

Reserve requirements prescribed in the Valuation Manual are intended to support a statutory objective of

conservative valuation to provide protection to policyholders and promote solvency of companies against

adverse fluctuations in financial condition or operating results pursuant to requirements of Model #820.

A principle-based valuation is a reserve valuation that uses one or more methods, or one or more

assumptions, determined by the insurer pursuant to requirements of Model #820 and the Valuation Manual.

This is in contrast to valuation approaches that use only prescribed assumptions and methods. Although a

reserve valuation may involve a method or assumption determined by the insurer, such valuation is a

principle-based valuation only as specified in the Valuation Manual for a product or category of products.

A principle-based valuation must reflect risks that are:

1. Associated with the policies or contracts being valued, or their supporting assets.

2. Determined to be capable of materially affecting the reserve.

Risks not to be included in reserves are those of a general business nature, those that are not associated with

the policies or contracts being valued, or those that are best viewed from the company perspective as

opposed to the policy or contract perspective. These risks may involve the need for a liability separate from

the reserve or may be provided for in capital and surplus.

Because no list can be comprehensive and applicable to all types of products, this section of the Valuation

Manual provides examples of the general approach to the determination of the meaning of “associated with

the policies or contracts” while recognizing that each relevant section of the Valuation Manual will deal

with this issue from the perspective of the products subject to that section. Examples of risks to be included

Introduction

in a principle-based valuation include risks associated with policyholder behavior, such as lapse and

utilization risk; mortality risk; interest rate risk; asset default risk; separate account fund performance; and

the risk related to the performance of indices for contractual guarantees.

Corporate Governance Requirements for Principle-Based Reserves

The requirements found in VM Appendix G – Corporate Governance Guidance for Principle-Based

Reserves (VM-G) provide corporate governance requirements applicable to policies or contracts subject to

a principle-based valuation as specified in this Valuation Manual.

Reserve Requirements

II. Reserve Requirements

This section provides the minimum reserve requirements by type of product, as set forth in the

seven subsections below, as follows:

(1) Life Insurance Products

(2) Annuity Products

(3) Deposit-Type Contracts

(4) Health Insurance Products

(5) Credit Life and Disability Products

(6) Riders and Supplemental Benefits

(7) Claim Reserves

All reserve requirements provided by this section relate to business issued on or after the operative date of

the Valuation Manual. All reserves must be developed in a manner consistent with the requirements and

concepts stated in the Overview of Reserve Concepts in Section I of the Valuation Manual.

Guidance Note: The terms “policies” and “contracts” are used interchangeably.

Subsection 1: Life Insurance Products

A. This subsection establishes reserve requirements for all contracts issued on and after the operative

date of the Valuation Manual that are classified as life contracts as defined in SSAP No. 50 in the

AP&P Manual, with the exception of annuity contracts and credit life contracts. Minimum reserve

requirements for annuity contracts and credit life contracts are provided below in Subsection 2 and

Subsection 5, respectively.

B. Minimum reserve requirements for variable and nonvariable individual life contracts—excluding

guaranteed issue life contracts, preneed life contracts, industrial life contracts, and policies of

companies exempt pursuant to the life PBR exemption in Subsection 1.G are provided by VM-20,

Requirements for Principle-Based Reserves for Life Products, except for election of the transition

period in Subsection 1.F.2 below. For this purpose, joint life policies are considered individual life.

C. Minimum reserve requirements of VM-20 are considered principle-based valuation requirements

for purposes of the Valuation Manual.

D. Minimum reserve requirements for individual certificates under group life contracts (regardless of

the issue date of the master group life contract) that meet all the requirements in VM-20 Section

1.B are provided by VM-20, except for election of the transition period in Subsection 1.F.1 below.

E. Minimum reserve requirements for life contracts not subject to VM-20 are those pursuant to

applicable requirements in VM-A and VM-C. For guaranteed issue life contracts issued after Dec.

31, 2018, mortality tables are defined in VM Appendix M – Mortality Tables (VM-M), and the

same table shall be used for reserve requirements as is used for minimum nonforfeiture

requirements as defined in VM-02, Minimum Nonforfeiture Mortality and Interest.

F. A company may elect to establish minimum reserves pursuant to applicable requirements in

VM-A and VM-C for:

1. Business described in Subsection 1.D above and issued on or after the operative date of the

Valuation Manual and prior to Jan. 1, 2024.

2. Business not described in Subsection 1.D otherwise subject to VM-20 requirements and issued

during the first three years following the operative date of the Valuation Manual.

Reserve Requirements

A company electing to establish reserves using the requirements of VM-A and VM-C may elect to

use the 2017 Commissioners’ Standard Ordinary (CSO) Tables as the mortality standard following

the conditions outlined in VM-20 Section 3. If a company elects to apply VM-20 to a block of such

business, then a company must continue to apply the requirements of VM-20 for future issues of

this business.

G. Life PBR Exemption

1. A company meeting at least one of the conditions in Subsection 1.G.2 below may file a

statement of exemption for individual life insurance policies or certificates, except for

policies or certificates in Subsection 1.G.3 below, issued directly or assumed during the

current calendar year, that would otherwise be subject to VM-20. If a company has no

business issued directly or assumed during the current calendar year that would otherwise

be subject to VM-20, a statement of exemption is not required. For a filed statement of

exemption, the statement must be filed with the domiciliary commissioner prior to July 1

of that year certifying that at least one of the two conditions in Subsection 1.G.2 was met,

and the statement of exemption must also be included with the NAIC filing for the second

quarter of that year.

The domiciliary commissioner may reject such statement prior to Sept. 1 and require the

company to follow the requirements of VM-20 for the ordinary life policies or certificates

covered by the statement.

If a filed statement of exemption is not rejected by the domiciliary commissioner, the filing

of subsequent statements of exemption is not required as long as the company continues to

qualify for the exemption; rather, ongoing statements of exemption for each new calendar

year will be deemed to not be rejected, unless: 1) the company does not meet either

condition in Subsection 1.G.2 below; 2) the policies contain those in Subsection 1.G.3

below; or 3) the domiciliary commissioner contacts the company prior to Sept. 1 and

notifies them that the statement of exemption is rejected. If any of these three events occur,

then the statement of exemption for the current calendar year is rejected, and a new

statement of exemption must be filed and not rejected in order for the company to exempt

additional policies or certificates. In the case of an ongoing statement of exemption, rather

than include a statement of exemption with the NAIC filing for the second quarter of that

year, the company should enter “SEE EXPLANATION” in response to the Life PBR

Exemption supplemental interrogatory and provide as an explanation that the company is

utilizing an ongoing statement of exemption.

2. Condition for Exemption:

a. The company has less than $300 million of exemption premiums, and if the

company is a member of an NAIC group that includes other life insurance

companies, the group has combined exemption premiums

of less than $600

million: or

b. The only new policies or certificates that would otherwise be subject to VM-20

being issued or assumed by the company are due to election of policy benefits or

features from existing policies or certificates valued under VM-A and VM-C and

the company was exempted from, or otherwise not subject to, the requirements of

VM-20 in the prior year.

Exemption premium is determined as follows:

Reserve Requirements

a. The amount reported in the prior calendar year life/health annual

statement, Exhibit 1, Part 1, Column 3 (“Ordinary Life Insurance”), line 20.1; plus

b. The portion of the amount in the prior calendar year life/health annual

statement, Exhibit 1, Part 1, Column 3 (“Ordinary Life Insurance”), line 20.2

assumed from unaffiliated companies; minus

c. Amounts included in either (a) or (b) that are associated with guaranteed issue

insurance policies and/or preneed life insurance policies; minus

d. Amounts included in either (a) or (b) that represent transfers of reserves in

force as of the effective date of a reinsurance assumed transaction; plus

e. Amounts of premium for individual life certificates issued under a group life

certificate that meet the conditions defined in VM-20, Section 1.B, and that are not

included in either (a) or (b).

Guidance Note:

(i) Definitions of preneed and guaranteed issue insurance policy are in VM-01.

(ii) For statements of exemption filed for calendar year 2022 and beyond, the amount in

Subsection 2.e was reported in the prior calendar year life/health annual statement,

VM-20 Reserve Supplement, Part 2, if applicable.

3. Policies and Certificates Excluded from the Life PBR Exemption:

a. Universal life with secondary guarantee (ULSG) policies or certificates, or policies

or certificates—other than ULSG—that contain a rider with a secondary guarantee,

in which the secondary guarantee does not meet the VM-01 definition of a “non-

material secondary guarantee.”

4. Each exemption, or lack of an exemption, outlined in Subsection 1.G.1 – Subsection 1.G.3

above applies only to policies or certificates issued or assumed in the current year, and it

applies to all future valuation dates for those policies or certificates. However, if policies

or certificates did not qualify for the Life PBR Exemption during the year of issue but

would have qualified for the Life PBR Exemption if the current Valuation Manual

requirements had been in effect during the year of issue, then the domiciliary commissioner

may allow an exemption for such policies or certificates. The minimum reserve

requirements for the ordinary life policies, including individual certificates under group

life contracts that meet all the requirements in VM-20 Section 1.B, subject to the exemption

are those pursuant to applicable methods required in VM-A and VM-C using the mortality

as defined in VM-20 Section 3.C.1 and VM-M Section 1.H.

Subsection 2: Annuity Products

A. This subsection establishes reserve requirements for all contracts classified as annuity contracts as

defined in SSAP No. 50 in the AP&P Manual.

B. Minimum reserve requirements for variable annuity (VA) contracts and similar business, specified

in VM-21, Requirements for Principle-Based Reserves for Variable Annuities, shall be those

provided by VM-21. The minimum reserve requirements of VM-21 are considered PBR

requirements for purposes of the Valuation Manual.

C. Minimum reserve requirements for fixed annuity contracts are those requirements as found in VM-

Reserve Requirements

A and VM-C as applicable, with the exception of the minimum requirements for the valuation

interest rate for single premium immediate annuity contracts, and other similar contracts, issued

after Dec. 31, 2017, including those fixed payout annuities emanating from host contracts issued

on or after Jan. 1, 2017, and on or before Dec. 31, 2017. The maximum valuation interest rate

requirements for those contracts and fixed payout annuities are defined in VM-22, Maximum

Valuation Interest Rates for Income Annuities.

Subsection 3: Deposit-Type Contracts

A. This subsection establishes reserve requirements for all contracts classified as deposit-type

contracts defined in SSAP No. 50 in the AP&P Manual.

B. Minimum reserve requirements for deposit-type contracts are those requirements as found in

VM-A, VM-C and VM-22, as applicable.

Subsection 4: Health Insurance Products

A. This subsection establishes reserve requirements for all contracts classified as health contracts

defined in SSAP No. 50 in the AP&P Manual.

B. Minimum reserve requirements for A&H insurance contracts, other than credit disability, are those

requirements provided by VM-25, Health Insurance Reserves Minimum Reserve Requirements,

and VM-A and VM-C requirements, as applicable.

Subsection 5: Credit Life and Disability Products

A. This subsection establishes reserve requirements for all credit life products, credit disability

products and other credit-related products defined as follows:

B. “Credit life insurance” means insurance on a debtor or debtors, pursuant to or in connection with a

specific loan or other credit transaction, to provide for satisfaction of a debt, in whole or in part,

upon the death of an insured debtor.

Credit life insurance does NOT include:

1. Insurance written in connection with a credit transaction that is:

a. Secured by a first mortgage or deed of trust.

b. Made to finance the purchase of real property or the construction of a dwelling

thereon, or to refinance a prior credit transaction made for such a purpose.

2. Insurance sold as an isolated transaction on the part of the insurer and not related to an

agreement or a plan for insuring debtors of the creditor.

3. Insurance on accounts receivable.

C. “Credit disability insurance” means insurance on a debtor or debtors to or in connection with a

specific loan or other credit transaction, to provide for lump sum or periodic payments on a specific

loan or other credit transaction due to the disability of the insured debtor.

D. “Other credit-related insurance” means insurance on a debtor or debtors, pursuant to or in

connection with a specific loan or other credit transaction, including a real estate secured loan, to

provide for satisfaction of a debt, in whole or in part, upon the death or disability of an insured

debtor.

Reserve Requirements

1. Other credit-related insurance includes insurance written in connection with a credit

transaction that is:

a. Secured by a first mortgage or deed of trust written as credit insurance, debtor

group insurance or group mortgage insurance.

b. Made to finance the purchase of real property or the construction of a dwelling

thereon, or to refinance a prior credit transaction made for such a purpose.

2. Other credit-related insurance DOES NOT include:

a. Insurance sold as an isolated transaction on the part of the insurer and not related

to an agreement or a plan for insuring debtors of the creditor.

b. Insurance on accounts receivable.

E. Minimum reserve requirements for credit life, credit disability contracts and other credit-related

insurance issued on or after the operative date of the Valuation Manual are provided in VM-26,

Credit Life and Disability Reserve Requirements. For purposes of reserves for “other credit-related

insurance” within VM-26, the terms “credit life insurance” and “credit disability insurance” shall

include benefits provided under contracts defined herein as “other credit-related insurance.”

Subsection 6: Riders and Supplemental Benefits

Guidance Note: Policy designs, which are created to simply disguise riders subject to VM-20

Section 3.A.1 or exploit a perceived loophole, must be reserved in a manner similar to more typical

designs with similar riders.

A. If a rider or supplemental benefit is attached to a health insurance product, annuity product, deposit-

type contract, or credit life or disability product, it may be valued with the base contract unless it

is required to be separated by regulation or other requirements.

B. For supplemental benefits, including Guaranteed Insurability, Accidental Death or Disability

Benefits, Convertibility, or Disability Waiver of Premium Benefits, the supplemental benefit may

be included with the base policy and follow the reserve requirements for the base policy under VM-

20, VM-A and/or VM-C, as applicable.

C. ULSG and other secondary guarantee riders shall be valued with the base policy and follow the

reserve requirements for ULSG policies under VM-20, VM-A and/or VM-C, as applicable.

D. If a rider or supplemental benefit to a life insurance policy that is not addressed in Paragraphs B or

C above possesses any of the following attributes, the rider or supplemental benefit shall be

included with the base policy and follow the reserve requirements for the base policy under VM-

20, VM-A and/or VM-C, as applicable.

1. The rider or supplemental benefit does not have a separately identified premium or charge.

2. The rider or supplemental benefit premium, charge, value or benefits are determined by

referencing the base policy features or performance.

3. The base policy value or benefits are determined by referencing the rider or supplemental

benefit features or performance. The deduction of rider or benefit premium or charge from

the contract value is not sufficient for a determination by reference.

Reserve Requirements

E. If a term life insurance rider on the named insured[s] on the base life insurance policy does not

meet the conditions of Paragraph D above, and either (1) guarantees level or near level premiums

until a specified duration followed by a material premium increase; or (2) for a rider for which level

or near level premiums are expected for a period followed by a material premium increase, the rider

is separated from the base policy and follows the reserve requirements for term policies under VM-

20, VM-A and/or VM-C, as applicable.

F. For all other riders or supplemental benefits on life insurance policies not addressed in Paragraphs

B through E above, the riders or supplemental benefits may be included with the base policy and

follow the reserve requirements for the base policy under VM-20, VM-A and/or VM-C, as

applicable. For a given rider, the election to include riders or supplemental benefits with the base

policy shall be determined at the policy form level, not on a policy-by-policy basis.

Subsection 7: Claim Reserves

Regardless of the requirement for use of the PBR approach to policy reserves, the claim reserves, including

waiver of premium claims, are not subject to PBR requirements of the Valuation Manual.

Actuarial Opinion and Report Requirements

III. Actuarial Opinion and Report Requirements

Requirements regarding the annual actuarial opinion and memorandum pursuant to Section 3 of Model

#820 are provided in VM-30, Actuarial Opinion and Memorandum Requirements. The requirements in

VM-30 are applicable to all annual statements with a year-ending date on or after the operative date of the

Valuation Manual. Existing actuarial opinion and memorandum requirements continue to apply to all

annual statements with a year-ending date before the operative date of the Valuation Manual.

PBR Actuarial Report requirements applicable to products or types of products subject to PBR as specified

in the Valuation Manual are provided in VM-31.

IV. Experience Reporting Requirements

Experience reporting requirements are provided in VM-50, Experience Reporting Requirements. The

associated experience reporting formats and additional instructions are provided in VM-51, Experience

Reporting Formats.

V. Valuation Manual Minimum Standards

This section provides the specific minimum reserve standards as referenced by the preceding sections.

Actuarial Opinion and Report Requirements

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Definitions for Terms in Requirements VM-01

VM-01: Definitions for Terms in Requirements

VM-01 provides definitions for terms used in the Valuation Manual. The definitions in VM-01 do not apply

to documents outside the Valuation Manual even if referenced or used by the Valuation Manual, such as

the AP&P Manual. Some terms in the Valuation Manual may be defined in specific sections of the

Valuation Manual instead of being defined in VM-01.

Guidance Note: Any terms defined in Model #820 are noted.

• The term “accident and health insurance” means contracts that incorporate morbidity risk and

provide protection against economic loss resulting from accident, sickness or medical conditions

and as may be specified in the Valuation Manual. (Model #820 definition.)

• The term “accumulated deficiency” means an amount measured as of the end of a projection year,

and it equals the negative of the projected statement value of general account and separate account

assets, as of the end of the projection year. Accumulated deficiencies may be positive or negative.

A positive accumulated deficiency means that there is a cumulative asset shortfall. A negative

accumulated deficiency means that there is a cumulative asset surplus.

• The term “Actuarial Standards Board” (ASB) means the board established by the American

Academy of Actuaries (Academy) to develop and promulgate Actuarial Standards of Practice

(ASOPs).

• The term “annual statement” means the statutory financial statements a company must file using

the annual blank with a state insurance commissioner as required under state insurance law.

• The term “anticipated experience assumption” means an expectation of future experience for a risk

factor given available, relevant information pertaining to the assumption being estimated.

Guidance Note:

A universally accepted definition of relevant information is not to be found in actuarial literature,

but certainly relevant experience is a part of what constitutes relevant information. Actuarial

judgment is required in selecting and applying relevant information. In the case of relevant

experience, the actuary is given guidance in ASOP No. 52, Principle-Based Reserves for Life

Products, and ASOP No. 25, Credibility Procedures, defining relevant experience and discussing

the selection of relevant experience.

• An appointed actuary means a qualified actuary who:

o Is appointed by the board of directors, or its equivalent, or by a committee of the

board, by Dec. 31 of the calendar year for which the opinion is rendered.

o Is a member of the Academy.

o Is familiar with the valuation requirements applicable to life and health insurance.

o Has not been found by the insurance commissioner (or if so found has subsequently

been reinstated as a qualified actuary) following appropriate notice and hearing to

have:

− Violated any provision of, or any obligation imposed by, the insurance law

or other law in the course of his or her dealings as a qualified actuary.

Definitions for Terms in Requirements VM-01

− Been found guilty of fraudulent or dishonest practices.

− Demonstrated incompetency, lack of cooperation or untrustworthiness to

act as a qualified actuary.

− Submitted to the insurance commissioner during the past five years,

pursuant to these AOM requirements, an actuarial opinion or

memorandum that the insurance commissioner rejected because it did not

meet the provisions of this regulation, including standards set by the ASB.

− Resigned or been removed as an actuary within the past five years as a

result of acts or omissions indicated in any adverse report on examination

or as a result of failure to adhere to generally acceptable actuarial

standards.

o Has not failed to notify the insurance commissioner of any action taken by any

insurance commissioner of any other state similar to that under the paragraph

above.

• The term “asset adequacy analysis” means an analysis of the adequacy of reserves and other

liabilities being tested, in light of the assets supporting such reserves and other liabilities, as

specified in the actuarial opinion.

• The term “asset-associated derivative” means a derivative program whose derivative instrument

cash flows are combined with asset cash flows in performing the reserve calculations.

• The term “cash flow” means any receipt, disbursement, or transfer of cash or asset equivalents.

• The term “cash-flow model” means a model designed to simulate asset and liability cash flows.

• The term “cash surrender value” means, for purposes of these requirements, the amount available

to the contract holder upon surrender of the contract, prior to any outstanding contract indebtedness

and net of any applicable surrender charges and stated in the contract.

• The term “claim reserve” means a liability established with respect to any incurred contractual

benefits not yet paid as of the valuation date.

Guidance Note: The Valuation Manual definition of “claim reserve” is different from the term as

used in the AP&P Manual. The claim reserve as defined in the Valuation Manual should be

interpreted as the sum of two values required by the AP&P Manual: 1) the AP&P “claim liability,”

which is the liability for claims unpaid for services or periods prior to the valuation date; plus

2) the AP&P “claim reserve,” which is the liability for claims incurred prior to the valuation date

for services or periods after the valuation date. Note that all of these values may include an incurred

but not reported component.

• The term “clearly defined hedging strategy” (CDHS) means a future hedging strategy for which

the following attributes are clearly documented:

a. The specific risks being hedged (e.g., cash flow, fee income, policy interest credits, delta, rho,

vega, etc.).

b. The hedging objectives.

Definitions for Terms in Requirements VM-01

c. The material risks that are not hedged (e.g., variation from expected mortality, withdrawal, and

other utilization or decrement rates assumed in the hedging strategy, etc.).

d. The financial instruments used to hedge the risks.

e. The hedging strategy’s trading rules, including the permitted tolerances from hedging

objectives.

f. The metrics, criteria, and frequency for measuring hedging effectiveness.

g. The conditions under which hedging will not take place and for how long the lack of hedging

can persist.

h. The group or area, including whether internal or external, responsible for implementing the

hedging strategy.

i. Areas where basis, gap, or assumption risk related to the hedging strategy have been identified.

j. The circumstances under which the hedging strategy will not be effective in hedging the risks.

Guidance Note: For the purposes of the CDHS documented attributes, “effectiveness” need not be

measured in a manner as defined in SSAP No. 86—Derivatives in the AP&P Manual.

• The term “commissioner” means the chief insurance regulator of a state, district or territory of the

U.S.

• The term “company” means an entity that: a) has written, issued or reinsured life insurance

contracts, A&H insurance contracts, or deposit-type contracts in this state and has at least one such

policy in force or on claim; or b) has written, issued or reinsured life insurance contracts, A&H

insurance contracts or deposit-type contracts in any state and is required to hold a certificate of

authority to write life insurance, A&H insurance or deposit-type contracts in this state. (Model #820

definition.)

• The term “conditional tail expectation” (CTE) means a risk measure that is calculated as the average

of all modeled outcomes (ranked from lowest to highest) above a prescribed percentile. For

example, CTE 70 is the average of the highest 30% modeled outcomes.

• The term “contract reserve” means a liability established for health and credit insurance with

respect to in force contracts equal to the excess of the present value of claims expected to be

incurred after a valuation date over the present value of future valuation net premiums.

• The term “deposit-type contract” means contracts that do not incorporate mortality or morbidity

risks and as may be specified in the Valuation Manual. (Model #820 definition.)

• The term “derivative instrument” means an agreement, option, instrument or a series or

combination thereof:

o To make or take delivery of, or assume or relinquish, a specified amount of one or more

underlying interests, or to make a cash settlement in lieu thereof; or

o That has a price, performance, value or cash flow based primarily upon the actual or

expected price, level, performance, value or cash flow of one or more underlying interests.

(Source: AP&P Manual.)

Definitions for Terms in Requirements VM-01

This includes, but is not limited to, an option, warrant, cap, floor, collar, swap, forward or future,

or any other agreement or instrument substantially similar thereto or any series or combination

thereof. Each derivative instrument shall be viewed as part of a specific derivative program.

• The term “derivative program” means a program to buy or sell one or more derivative instruments

or open or close hedging positions to achieve a specific objective. Both hedging and non-hedging

programs (e.g., for replication or income generation objectives) are included in this definition.

• The term “deterministic reserve” (DR) means a reserve amount calculated under a single defined

scenario, using a combination of prescribed and company-specific assumptions derived as provided

in the Valuation Manual.

• The term “discount rates” means the path of rates used to derive the present value.

• The term “domiciliary commissioner” means the chief insurance regulatory official of the state of

domicile of the company.

• The term “elimination period” means a specified number of days, weeks or months starting at the

beginning of each period of loss, during which no benefits are payable.

• The term “fraternal benefits” means payments made for charitable purposes by a fraternal life

insurance company that are consistent with and/or support the fraternal purposes of the company.

• The term “future hedging strategy” is a derivative program undertaken by a company to manage

risks through one or more future hedging transactions, including the future purchase or sale of

hedging instruments and the opening and closing of hedging positions.

A future hedging strategy may be dynamic, static, or a combination thereof. A strategy involving

the offsetting of the risks associated with products falling under the scope of different requirements

within the Valuation Manual (e.g., VM-20, VM-21, or VM-22) does not qualify as a future hedging

strategy.

• The term “guaranteed issue (GI) life insurance policy” means a life insurance policy or certificate

where the applicant must be accepted for coverage if the applicant is eligible. Additionally, the

following must hold:

o Eligibility requirements may include being within a specified age range and/or being an

active member in an eligible group (e.g., group solicitation in direct marketing).

o Inclusion of any of the following characteristics or product types disqualifies the policy as

GI:

− Actively at work requirement.

− Employer groups.

− Acceptance based on any health-related questions or information.

− Waiving of underwriting requirements based on minimum participation thresholds,

such as for worksite marketing.

− Corporate-owned life insurance (COLI) or bank-owned life insurance (BOLI).

− Credit life contracts.

− Juvenile-only products (e.g., under age 15).

− Preneed life contracts.

− Policies and certificates issued as a result of exercising a provision (e.g., conversion or

guaranteed insurability option riders) from a policy, rider or certificate that do not

qualify as GI life insurance.

Definitions for Terms in Requirements VM-01

• The term “Guaranteed Minimum Accumulation Benefit” (GMAB) means a guaranteed benefit

providing, or resulting in the provision, that an amount payable on the contractually determined

maturity date of the benefit will be increased and/or will be at least a minimum amount. Only such

guarantees having the potential to produce a contractual total amount payable on benefit maturity

that exceeds the account value, or in the case of an annuity providing income payments, an amount

payable on benefit maturity other than continuation of any guaranteed income payments, are

included in this definition.

• The term “guaranteed minimum income benefit” (GMIB) means an option under which the contract

holder has the right to apply a specified minimum amount that could be greater than the amount

that would otherwise be available in the absence of such benefit to provide periodic income using

a specified purchase basis.

i. The term “hybrid GMIB” means a GMIB design that (i) provides guaranteed

growth in the benefit basis—i.e., benefit growth that does not depend on the

performance of the account value; and (ii) adjusts the benefit for partial

withdrawals by the same dollar amount as the partial withdrawal amount for partial

withdrawal amounts not in excess of a stated maximum amount.

ii. The term “traditional GMIB” means a GMIB design that is not a hybrid GMIB.

• The term “guaranteed minimum withdrawal benefit” (GMWB) means a design providing, or

resulting in, the provision that the amount withdrawable by the contract holder each year will at

least be a minimum amount until the benefit amount depletes or until a contractually specified event

occurs, provided that the contract holder does not exceed a maximum withdrawal amount.

i. The term “lifetime GMWB” means a GMWB design providing, or resulting in, the

provision that the amount withdrawable by the contract holder each year will at

least be a minimum amount until the applicable death defined in the contract,

provided that the contract holder does not exceed a maximum withdrawal amount.

ii. The term “non-lifetime GMWB” means a GMWB design providing, or resulting

in, the provision that the amount withdrawable by the contract holder each year

will at least be a minimum amount until, and only until, the benefit amount

depletes, even if such depletion occurs before the applicable death defined in the

contract, provided that the contract holder does not exceed a maximum withdrawal

amount.

• The term “guaranteed payout annuity floor” (GPAF) means a provision in an immediate annuity

contract that guarantees that one or more of a series of periodic payments under the annuity will

not be less than a specified minimum amount that could be greater than the amount that would

otherwise be available in the absence of such benefit.

• The term “hedging transaction” means a derivative(s) transaction that is entered into and

maintained to reduce:

a. The risk of a change in the fair value; the value on a statutory, GAAP, or other basis; or cash

flow of assets and liabilities, which the company has acquired or incurred, has a firm

commitment to acquire or incur, or for which the company has a forecasted acquisition or

incurrence.

b. The currency exchange rate risk or the degree of foreign currency exposure in assets and

liabilities, which the company has acquired or incurred, has a firm commitment to acquire or

incur, or for which the company has forecasted acquisition or incurrence.

Definitions for Terms in Requirements VM-01

• The term “index credit” means any interest credit, multiplier, factor, bonus, charge reduction, or

other enhancement to policy or contract values that is directly linked to one or more indices.

Amounts credited to the policy or contract resulting from a floor on an index account are included.

An index credit may be positive or negative.

• The term “index credit hedge margin” means a margin capturing the risk of inefficiencies in the

company’s hedging program supporting index credits. This includes basis risk, persistency risk,

and the risk associated with modeling decisions and simplifications. It also includes any uncertainty

of costs associated with managing the hedging program and changes due to investment and

management decisions.

• The term ‘index crediting strategies” means the strategies defined in a contract to determine index

credits for a contract. For example, this may refer to underlying index, index parameters, date,

timing, performance triggers, and other elements of the crediting method.

• The term “indexed universal life (IUL) insurance policy” means any universal life (UL) insurance

policy where the interest credits are linked to an external reference.

• The term “industrial life insurance” means the form of life insurance written under policies under

which premiums are payable monthly or more often, bearing the words “industrial policy” or

“weekly premium policy” or words of similar import imprinted upon the policies as part of the

descriptive matter, and issued by an insurer that, as to such industrial life insurance, is operating

under a system of collecting a debit by its agent.

• The term “industry basic table” means an NAIC-approved industry experience mortality table

(without the valuation margins).

• The term “insurance department” means the regulatory agency which by law is charged with the

principal responsibility of supervising the business of insurance within a state, territory or insular

possession of the U.S.

• The term “life insurance” means contracts that incorporate mortality risk, including annuity and

pure endowment contracts, and as may be specified in the Valuation Manual. (Model #820

definition.)

• The term “margin” means an amount included in the assumptions used to determine the modeled

reserve that incorporates conservatism in the calculated value consistent with the requirements of

the various sections of the Valuation Manual. It is intended to provide for estimation error and

adverse deviation.

• The term “modeled company investment strategy” means the investment strategy used in the model

that is intended to be a representation of the actual investment strategy of the company. It is before

the comparison is made to the alternative investment strategy. It does not refer to the alternative

investment strategy when the alternative investment strategy is constraining.

• The term “modeled reserve” means the DR on the policies determined under VM-20 Section

2.A.1.a, 2.A.2.a, and 2.A.3.b, plus the greater of the DR and the stochastic reserve (SR) on the

policies determined under Section 2.A.1.b, 2.A.2.b, and 2.A.3.c.

• The term “model segment” means a group of policies and associated assets that are modeled

together to determine the path of net asset earned rates.

Definitions for Terms in Requirements VM-01

• The term “mortality segment” means a subset of policies for which a separate mortality table

representing the prudent estimate assumption will be determined.

• The term “NAIC” means the National Association of Insurance Commissioners. (Model #820

definition.)

• The term “net asset earned rates” (NAER) means the path of earned rates reflecting the net general

account portfolio rate in each projection interval (net of appropriate default costs and investment

expenses).

• The term “net premium refund liability” means the amount of money the insurance company owes

to an insured when the insured cancels his/her loan or insurance prior to its scheduled termination

date, net of amounts that the insurer will recover from other parties.

• The term “net premium reserve” (NPR) means the amount determined in Section 3 of VM-20.

• The term “non-guaranteed elements” (NGE) means either: a) dividends under participating policies

or contracts; or b) other elements affecting life insurance or annuity policyholder/contract holder

costs or values that are both established and subject to change at the discretion of the insurer.

• The term “non-material secondary guarantee” means a secondary guarantee (SG) that meets the

following parameters at time of issue:

o The policy has only one SG, and that SG is in the form of a required premium (specified

annual or cumulative premium).

o The duration of the SG for each policy is no longer than 20 years from issue through

issue age 60, grading down by 2/3-year for each higher issue age to age 82, thereafter

five years.

o The present value of the required premium under the SG must be at least as great as

the present value of net premiums resulting from the appropriate Valuation Basic Table

(VBT) over the maximum SG duration allowable under the contract (in aggregate and

subject to above duration limit).

− Present values use minimum allowable VBT rates (preferred tables are subject to

existing qualification requirements) and the maximum valuation interest rate as

defined in VM-20 Section 3.C.2.

− The minimum premium consists of the annual required premium over the

maximum SG duration.

Guidance Note: The unloaded version of the applicable CSO table is available on the Society of

Actuaries (SOA) website.

• The term “ordinary life insurance” means any individual life insurance policy that does not meet

the definition of industrial life insurance or credit life insurance.

• The term “path” means a time-indexed sequence of a set of values.

• The term “policyholder behavior” or “contract holder behavior” means any action a policyholder,

contract holder or any other person with the right to elect options, such as a certificate holder, may

take under a policy or contract subject to Model #820 including, but not limited to, lapse,

withdrawal, transfer, deposit, premium payment, loan, annuitization, or benefit elections prescribed

Definitions for Terms in Requirements VM-01

by the policy or contract but excluding events of mortality or morbidity that result in benefits

prescribed in their essential aspects by the terms of the policy or contract. (Model #820 definition.)

• The term “policyholder efficiency” or “contract holder efficiency” means the phenomenon that

policyholders or contract holders will act in their best interest with regard to the value of their

policy or contract. A policyholder or contract holder acting with high policyholder efficiency or

contract holder efficiency would take actions permitted in his/her policy or contract that would

provide the greatest relative value. Such actions include, but are not limited to, not lapsing a low

value or no value contract, persisting, surrendering, applying additional premium, and exercising

loan and partial surrender provisions.

• The term “preneed” means any life insurance policy or certificate that is issued in combination

with, in support of, an assignment to or as a guarantee for a prearrangement agreement for goods

and services to be provided at the time of and immediately following the death of the insured.

Goods and services may include, but are not limited to, embalming, cremation, body preparation,

viewing or visitation, coffin or urn, memorial stone, and transportation of the deceased. The status

of the policy or contract as preneed insurance is determined at the time of issue in accordance with

the policy form filing. (Note: Preceding definition taken from the Preneed Life Insurance Minimum

Standards for Determining Reserve Liabilities and Nonforfeiture Values Model Regulation [#817].)

The definition of preneed shall be subject to that definition of preneed in a particular state of issue

if such definition is different in that state.

• The term “pretax interest maintenance reserve” (PIMR) means the statutory interest maintenance

reserve liability at the projection start date, adjusted to a pretax basis.

• The term “Principle-Based Reserve Actuarial Report” (PBR Actuarial Report) means the

supporting information prepared by the company, as required by VM-31.

• The term “principle-based valuation” means a reserve valuation that uses one or more methods, or

one or more assumptions determined by the insurer and is required to comply with Section 12 of

Model #820 as specified in the Valuation Manual. (Model #820 definition.)

• The term “projection interval” means the time interval used in the cash-flow model to project the

cash-flow amounts (e.g., monthly, quarterly, annually).

• The term “projection period” means the period over which the cash-flow model is run. (This

definition applies to life and annuity products only.)

• The term “projection start date” means the date on which the projection period begins.

• The term “projection year” means a 12-month period starting on the projection start date or an

anniversary of the projection start date.

• The term “prudent estimate assumption” means a risk factor assumption developed by applying a

margin to the anticipated experience assumption for that risk factor.

• The term “qualified actuary” means an individual who is qualified to sign the applicable statement

of actuarial opinion in accordance with the Academy qualification standards for actuaries signing

such statements and who meets the requirements specified in the Valuation Manual. (Model #820

definition.)

• The term “reinsurance cash flows” means the amount paid under a reinsurance agreement between

a ceding company and an assuming company. Positive reinsurance cash flows shall represent

Definitions for Terms in Requirements VM-01

amounts payable from the assuming company to the ceding company; negative reinsurance cash

flows shall represent amounts payable from the ceding company to the assuming company.

• The term “revenue sharing” means any arrangement or understanding by which an entity

responsible for providing investment or other types of services makes payments to the company or

to one of its affiliates. Such payments are typically in exchange for administrative services provided

by the company or its affiliate, such as marketing, distribution and recordkeeping. Only payments

that are attributable to charges or fees from the underlying variable funds or mutual funds

supporting the policies or contracts that fall under the scope of the given standard shall be included

in the definition of “revenue sharing.”

• The term “risk factor” means an aspect of future experience that is not fully predictable on the

valuation date.

• The term “scenario” means a projected sequence of events or risk factors used in the cash flow

model, such as future interest rates, equity performance or mortality.

• The term “scenario greatest present value” means the sum, for a given scenario, of:

o The greatest of the present values, as of the projection start date, of the accumulated

deficiencies for the scenario.

o The starting asset amount.

• The term “scenario reserve” means the amount determined on an aggregated basis for a given

scenario that is used as a step in the calculation of the SR.

• The term “secondary guarantee” means a conditional guarantee that a policy will remain in force,

even if its fund value is exhausted, for either:

o More than five years (the secondary guarantee period), or

o Five years or less (the secondary guarantee period) if the specified premium for the

secondary guarantee period is less than the net level reserve premium for the secondary

guarantee period based on the CSO valuation tables defined in VM-20 Section 3.C and

VM-M and the valuation interest rates defined in this section, or if the initial surrender

charge is less than 100% of the first year annualized specified premium for the

secondary guarantee period.

• The term “shadow account” means a notional account, typically consisting of premium and interest

credits and cost of insurance and expense charges, that is associated with certain types of UL

policies and is used in conjunction with a secondary guarantee.

• The term “starting asset amount” means an amount equal to the statement value of assets at the

cash-flow projection start date.

• The term “stochastic exclusion test” (SET) means a test to determine whether a group of policies

is required to comply with stochastic modeling requirements.

• The term “stochastic reserve” (SR) means the reserve amount determined by applying a measure

(e.g., a prescribed CTE level) to the distribution of scenario reserves over a broad range of

stochastically generated scenarios and using a combination of prescribed and company-specific

assumptions derived as provided in the Valuation Manual.

Definitions for Terms in Requirements VM-01

• The term “tail risk” means a risk that occurs either where the frequency of low probability events

is higher than expected under a normal probability distribution or where there are observed events

of very significant size or magnitude. (Model #820 definition.)

• The term “unearned premium reserve” means that portion of the premium paid or due to the

company that is applicable to the period of coverage extending beyond the valuation date.

• The term “universal life insurance policy” means a life insurance policy where separately identified

interest credits (other than in connection with dividend accumulations, premium deposit funds or

other supplementary accounts) and mortality and expense charges are made to the policy. A

universal life insurance policy may provide for other credits and charges, such as charges for cost

of benefits provided by rider.

• The term “valuation date” means the date when the reserve is to be valued as required by Model

#820.

• The term “Valuation Manual” means the manual of valuation instructions adopted by the NAIC as

specified in Model #820 or as subsequently amended. (Model #820 definition.)

• The term “variable annuity guaranteed living benefit” (VAGLB) means a guaranteed benefit

providing, or resulting in the provision that, one or more guaranteed benefit amounts payable or

accruing to a living contract holder or living annuitant, under contractually specified conditions

(e.g., at the end of a specified waiting period, upon annuitization or upon withdrawal of premium

over a period of time), will increase contractual benefits should the contract value referenced by

the guarantee (e.g., account value) fall below a given level or fail to achieve certain performance

levels. Only such guarantees having the potential to provide benefits with a present value as of the

benefit commencement date that exceeds the contract value referenced by the guarantee are

included in this definition. Payout annuities without minimum payout or performance guarantees

are neither considered to contain nor to be VAGLBs.

• The term “variable life insurance policy” means a policy that provides for life insurance, the amount

or duration of which varies according to the investment experience of any separate account or

accounts established and maintained by the insurer as to the policy.

• The term “VM-20 reserving category” means one of the following three terms, as applicable:

(a) “Term reserving category” shall consist of:

i. Term life insurance policies, whether directly written or assumed.

ii. Term life insurance riders, whether directly written or assumed, that are attached to a

base policy of any kind, that is valued under VM-20, but are valued separately from

such a base policy.

iii. Riders and supplemental benefits, whether directly written or assumed, that are

attached to and valued with a term life insurance policy, whether directly written or

assumed.

iv. Life insurance coverage of any kind that the company has assumed on a yearly

renewable term (YRT) basis and would be valued under VM-20 had the company—

i.e., reinsurer—written it on a direct basis.

(b) “ULSG reserving category” shall consist of:

i. ULSG policies directly written, including any policies that are beyond the end of

their contractual secondary guarantee period, but excluding any policies in an

extended term insurance status or reduced paid-up status.

ii. Riders and supplemental benefits, whether directly written or assumed, that are

Definitions for Terms in Requirements VM-01

attached to and valued with a ULSG policy.

iii. ULSG coverage that the company has assumed on other than a YRT basis, and which

would be valued under VM-20 had the company written it on a direct basis, including

any beyond the end of the contractual secondary guarantee period.

i. All other life insurance coverage valued under VM-20 that does not belong in (a) or

(b) above.

ii. Life insurance policies valued under VM-20 that are in an extended term

insurance status or reduced paid-up status, even if they had belonged in (a) or (b)

above when originally issued.

iii. Riders and supplemental benefits that do not belong in (a) or (b) above but which are

attached to life insurance policies that are valued under VM-20.

Guidance Note: See Section II. Riders and Supplemental Benefits for the requirements specifying

when a rider or supplemental benefit is to be valued with the base policy or may be valued

separately.

Definitions for Terms in Requirements VM-01

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VM-02

VM-02: Minimum Nonforfeiture Mortality and Interest

Table of Contents

Section 1: Purpose .......................................................................................................................... 02-1

Section 2: Applicability .................................................................................................................. 02-1

Section 3: Interest ........................................................................................................................... 02-1

Section 4: Mortality ........................................................................................................................ 02-1

Section 1: Purpose

A. The purpose of VM-02 is to assign the appropriate CSO mortality table and interest rate for use in

determining the minimum nonforfeiture standard for life insurance policies issued on and after the

operative date of this Valuation Manual as authorized by applicable state requirements.

Section 2: Applicability

A. Any state requirements shall supersede requirements of this VM-02 if conflicted.

B. Requirements in this VM-02 apply to life insurance policies issued on and after the operative date

of this Valuation Manual.

Section 3: Interest

A. The nonforfeiture interest rate for any life insurance policy issued in a particular calendar year

beginning on and after the operative date of the Valuation Manual shall be equal to 125% of the

calendar year statutory valuation interest rate defined for the NPR in the Valuation Manual for a

life insurance policy with nonforfeiture values, whether or not such sections apply to such policy

for valuation purposes, rounded to the nearer one-quarter of 1%, provided, however, that the

nonforfeiture interest rate shall not be less than the Applicable Accumulation Test Minimum Rate

in the Cash Value Accumulation Test under Section 7702 (Life Insurance Contract Defined) of the

U.S. Internal Revenue Code.

Guidance Note: For flexible premium universal life insurance policies as defined in Section 3.D

of the Universal Life Insurance Model Regulation (#585), this is not intended to prevent an interest

rate guarantee less than the nonforfeiture interest rate.

Section 4: Mortality

Guidance Note: As any new CSO mortality tables are adopted in the future, language or

paragraphs will need to be added here to define what business is to use which tables. This will need

to be coordinated with the valuation requirements contained in other sections of the Valuation

Manual. Because of the various implications to systems, form filings and related issues (such as

product tax issues), lead time is needed to implement new requirements without market disruption.

Thus, it is recommended that the transition period referenced in the guidance note in VM-20

Section 3.C.1.e be adopted—that is, that there be a transition period of about 4.5 years, that the

table be adopted by July 1 of a given year, that it be permitted to be used starting Jan. 1 of the

second following calendar year, and that it be optional until Jan. 1 of the fifth following calendar

year, and thereafter mandatory.

A. Ordinary Life Insurance Policies

1. For ordinary life insurance policies issued on or after Jan. 1, 2017, and prior to Jan. 1, 2020,

except as provided below in Section 4.A.2 and Section 4.B or in Section 4.E below, the

Minimum Nonforfeiture Mortality and Interest VM-02

minimum nonforfeiture standard shall be determined using the 2001 CSO Mortality Table

as defined in VM-M of this manual and subject to the requirements defined in VM-A-814

in VM-A of this manual for using this mortality table and subject to minimum standards.

The 2001 CSO Preferred Class Structure Tables shall not be used to determine the

minimum nonforfeiture standard.

2. Except as provided in Section 4.B and Section 4.E, and subject to the requirements stated

in a. and b. below, the 2017 CSO Mortality Table as defined in VM-M Section 1.H:

a. May, at the election of the company, be used for one or more specified plans of

insurance issued on or after Jan. 1, 2017, to which Section 5cH(6) of the Standard

Nonforfeiture Law for Life Insurance (#808) is applicable, and to determine

minimum nonforfeiture standards according to the Model #808 or the state’s

equivalent statute. The 2017 CSO Preferred Structure Tables shall not be used to

determine the minimum nonforfeiture standard.

b. Shall, for policies issued on or after Jan. 1, 2020, to which Section 5cH(6) of Model

#808 is applicable, be used to determine minimum nonforfeiture standards

according to Model #808 or the state’s equivalent statute. The 2017 CSO Preferred

Structure Tables shall not be used to determine the minimum nonforfeiture

standard.

3. The following requirements shall apply with respect to the use of the 2017 CSO Mortality

Table:

a. For each plan of insurance with separate rates for smokers and nonsmokers, an

insurer may use:

i. Composite mortality tables to determine minimum cash surrender values

and amounts of paid-up nonforfeiture benefits; or

ii. Smoker and nonsmoker mortality to determine minimum cash surrender

values and amounts of paid-up nonforfeiture benefits.

b. For plans of insurance without separate rates for smokers and nonsmokers, the

composite mortality tables shall be used.

c. For the purpose of determining minimum cash surrender values and amounts of

paid-up nonforfeiture benefits, the 2017 CSO Mortality Table may, at the option

of the company for each plan of insurance, be used in its ultimate or select and

ultimate form.

d. Gender-blended tables shall apply in the following circumstances:

For any ordinary life insurance policy delivered or issued for delivery that uses the

same premium rates and charges for male and female lives or is issued in

circumstances where applicable law does not permit distinctions on the basis of

gender, a mortality table that is a blend of the 2017 CSO Mortality Table (M) and

the 2017 CSO Mortality Table (F) may, at the option of the company for each plan

of insurance, be used in determining minimum cash surrender values and amounts

of paid-up nonforfeiture benefits.

B. Preneed Life Insurance Policies

Minimum Nonforfeiture Mortality and Interest VM-02

Preneed life insurance policies issued on or after the operative date of this Valuation Manual shall

have the minimum nonforfeiture standard computed based on the 1980 CSO Mortality Tables as

defined in Appendix M.

C. Same Minimum Nonforfeiture Standard for Men and Women

For any ordinary life insurance policy that uses the same premium rates and charges for male and

female lives or is issued in circumstances where applicable law does not permit distinctions on the

basis of gender, the minimum nonforfeiture standard shall use the gender-blended mortality derived

from the mortality table assigned in VM-02 for use in determining the minimum nonforfeiture

standard. Weights used to determine the gender-blended table shall follow those provided in the

NAIC Procedure for Permitting Same Minimum Nonforfeiture Standards for Men and Women

Insured Under 1980 CSO and 1980 CET Mortality Tables (#811). The company may choose from

among the blended tables, as appropriate, developed by the Academy CSO Task Force and adopted

by the NAIC in December 2002 (preceding sentence taken from the Recognition of the 2001 CSO

Mortality Table for Use in Determining Minimum Reserve Liabilities and Nonforfeiture Benefits

Model Regulation [#814], Section 7.B). These tables are defined in Appendix M under Gender

Blended Tables.

D. Industrial Life Insurance

The minimum nonforfeiture standard values for industrial life insurance policies shall be

determined using the 1961 Commissioners Standard Industrial Mortality Tables as defined in

VM-M.

E. Guaranteed Issue Life Insurance

The minimum nonforfeiture standard values for GI life insurance policies issued before Jan. 1,

2020, shall be determined using the ultimate form of the 2001 CSO Table. The company may elect

to use the 2017 CSO Table in place of the 2001 CSO ultimate table for policies issued Jan. 1, 2017,

through Dec. 31, 2019.

The minimum nonforfeiture standard values for GI life insurance policies issued after Dec. 31,

2019, shall be determined using the

ultimate form of the 2001 CSO Table. The company may elect

to use the 2017 Commissioners Standard Guaranteed Issue Mortality Tables (2017 CSGI) defined

in VM-M in place of the 2001 CSO ultimate tables for policies issued during calendar year 2019.

Minimum Nonforfeiture Mortality and Interest VM-02

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VM-20

VM-20: Requirements for Principle-Based Reserves for Life Products

Table of Contents

Section 1: Purpose ..........................................................................................................................

20-1

Section 2: Minimum Reserve ......................................................................................................... 20-1

Section 3: Net Premium Reserve .................................................................................................... 20-5

Section 4: Deterministic Reserve ................................................................................................. 20-17

Section 5: Stochastic Reserve ....................................................................................................... 20-18

Section 6: Stochastic and Deterministic Exclusion Tests ............................................................. 20-19

Section 7: Cash-Flow Models ...................................................................................................... 20-25

Section 8: Reinsurance ................................................................................................................. 20-40

Section 9: Assumptions ................................................................................................................ 20-45

Appendix 1: Additional Description of Economic Scenarios .......................................................... 20-80

Appendix 2: Tables for Calculating Asset Default Costs and Asset Spreads, Including Basis

of Tables ...................................................................................................................... 20-84

Section 1: Purpose

A. These requirements establish the minimum reserve valuation standard for individual life insurance

policies issued on or after the operative date of the Valuation Manual and subject to a principle-

based valuation with an NPR floor under Model #820. These requirements constitute the

Commissioners Reserve Valuation Method (CRVM) for policies of individual life insurance.

B. Individual life certificates under a group life contract shall be subject to the requirements of VM-

20 if all of the following are met. These requirements constitute the CRVM for such certificates.

1. An individual risk selection process, defined as follows, is used to obtain group life

insurance coverage;

An individual risk selection process is one that is based on characteristics of the insured(s)

beyond sex, gender, age, tobacco usage, and membership in a particular group. This may

include, but is not limited to: completion of an application (beyond acknowledgement of

membership to the group, sex, gender, and age); questionnaire(s); online health history or

tele-interview to obtain non-medical and medical or health history information;

prescription history information; avocations; usage of tobacco; family history; or

submission of fluids such as blood, Home Office Specimens (HOS), or oral fluid. The

resulting risk classification is determined based on the characteristics of the individual

insured(s) rather than the group, if any, of which it is a member (e.g., employer, affinity,

etc.). The individual certificate holder is charged a premium rate based solely on the

individual risk selection process and not on membership in a specific group.

Guidance Note:

The use of evidence of insurability does not by itself constitute an individual risk selection process.

Use of information obtained from a census or question(s) regarding gender, occupation, age,

income, and/or tobacco usage solely for purposes of determining a rate classification does not by

itself qualify a group as having used an individual risk selection process. Group insurance where

the underwriting based on the characteristics of the group and census data but where some

individuals are subjected to individual risk selection as a result of compensation level, age, an

existing medical condition or impairment, late entry into the group, failure of the group to meet

minimum participation requirements, or voluntary buy-up of increased coverage does not meet the

definition of an individual risk selection process.

Requirements for Principle-Based Reserves for Life Products VM-20

2. The individual certificates utilize premiums or cost of insurance schedules and charges

based on the individual applicant’s issue age, duration from underwriting, coverage

amount, and risk classification, and there is a stated or implied schedule of maximum gross

premiums or net cash surrender value required in order to continue coverage in force for a

period in excess of one year;

Guidance Note:

Coverage amount does not imply a requirement for banding of premiums or charges but rather rates

or charges that are multiplied by number of units of coverage of face amount (or net amount at risk)

per $1,000 to obtain the actual premium or charge.

3. The group master contract is designed, priced, solicited, and managed similar to individual

ordinary life insurance policies rather than specific to the group as a whole;

4. The individual certificates have similar acquisition approaches, provisions, certificate-

holder rights, pricing, and risk classification to individual ordinary life insurance contracts.

5. The individual certificates are issued on or after the operative date of the Valuation Manual

except election of the transition period in Section II, Subsection 1.F.1.

Section 2: Minimum Reserve

A. All policies subject to these requirements shall be included in one of the VM-20 reserving

categories, as specified in Section 2.A.1, Section 2.A.2 and Section 2.A.3 below.

Guidance Note:

Since group insurance subject to an individual risk selection process and meeting all the

requirements in Section 1.B is subject to VM-20 requirements, Section 2.A shall apply—meaning

that any such contracts will be included in one of the VM-20 reserving categories defined by

Section 2.A.1, Section 2.A.2, and Section 2.A.3. All requirements in VM-31 that apply to a VM-

20 reserving category shall apply to any group insurance subject to individual risk selection that

has been included in that VM-20 reserving category.

The company may elect to exclude one or more groups of policies from the SR calculation and/or

the DR calculation. When excluding a group of policies from a reserve calculation, the company

must document that the applicable exclusion test defined in Section 6 is passed for that group of

policies. The minimum reserve for each VM-20 reserving category is defined by Section 2.A.1,

Section 2.A.2 and Section 2.A.3, and the total minimum reserve equals the sum of the Section

2.A.1, Section 2.A.2 and Section 2.A.3 results below, defined as:

1. Term reserving category — All policies and riders belonging in the Term reserving

category are to be included in Section 2.A.1.b unless the company has elected to exclude a

group of them from the SR calculation and has applied the stochastic exclusion test (SET)

defined in Section 6, passed the test and documented the results.

a. For the group of policies and riders for which the company did not compute the

SR: the sum of the policy minimum NPRs for those policies plus the excess, if any,

of the DR for those policies determined pursuant to Section 4 over the quantity

(A–B), where A = the sum of the policy minimum NPRs for those policies, and B

= any due and deferred premium asset held on account of those policies.

b. For the group of policies and riders for which the company computes all three

Requirements for Principle-Based Reserves for Life Products VM-20

reserve calculations: the sum of the policy minimum NPRs for those policies

plus the excess, if any, of the greater of the DR for those

policies determined pursuant to Section 4 and the SR for

those policies determined pursuant to Section 5 over the quantity (A–B), where A

= the sum of the policy minimum NPR’s for those policies, and

B = any due and deferred premium asset held on account of those policies.

c. The due and deferred premium asset, if any, shall be based on the valuation net

premiums computed in accordance with Section 3.B.4.a, for the base policy,

determined without regard to any NPR floor amount from Section 3.D.1. The

valuation net premium is zero in the first policy year for policies in the Term

product group. Since the due and deferred premium asset and unearned premium

reserve are based on the valuation net premium, it follows that these are also zero

in the first policy year.

Guidance Note: This may not be the case for riders that use a different reserving method.

2. ULSG reserving category — All policies and riders belonging to the ULSG reserving

category are to be included in Section 2.A.2.c unless the company has elected to exclude a

group of them from the SR calculation or both the DR and SR calculations and has applied

the applicable exclusion test(s) defined in Section 6, passed the test(s) and documented

the results.

a. For the group of policies and riders for which the company did not compute the

DR nor the SR: the sum of the policy minimum NPRs for those policies.

Guidance Note: This may be applicable for a group of ULSG policies that meet the definition of a “non-

material secondary guarantee” and passes both the DET and the SET.

b. For the group of policies and riders for which the company did not compute the

SR: the sum of the policy minimum NPRs for those policies plus the excess, if any,

of the DR for those policies determined pursuant to Section 4 over the quantity

(A–B), where A = the sum of the policy minimum NPRs for those policies, and B

= any due and deferred premium asset held on account of those policies.

c. For the group of policies and riders for which the company computes all three

reserve calculations: the sum of the policy minimum NPRs for those policies plus

the excess, if any, of the greater of the DR for those policies determined pursuant

to Section 4 and the SR for those policies determined pursuant to Section 5 over

the quantity (A–B), where A = the sum of the policy minimum NPRs for those

policies, and B = any due and deferred premium asset held on account of those

policies.

d. The due and deferred premium asset, if any, shall be based on the valuation net

premiums computed in accordance with Section 3.B.5.d, for the base policy,

determined without regard to any NPR floor amount from Section 3.D.2.

3. All Other VM-20 reserving category– All policies and riders belonging to the All Other

VM-20 reserving category are to be included in Section 2.A.3.c unless the company has

elected to exclude a group of them from the SR calculation or both the deterministic and

SR calculations and has applied the applicable exclusion test defined in Section 6, passed

the test and documented the results.

a. For the group of policies and riders for which the company did not compute the

Requirements for Principle-Based Reserves for Life Products VM-20

DR nor the SR: the sum of the policy minimum NPRs for those policies.

b. For the group of policies and riders for which the company did not compute the

SR but did compute the DR: the sum of the policy minimum NPRs for those

policies plus the excess, if any, of the DR for those policies determined pursuant

to Section 4 over the quantity (A–B), where A = the sum of the policy minimum

NPRs for those policies, and B = any due and deferred premium asset held on

account of those policies.

c. For the group of policies and riders for which the company computes all three

reserve calculations: the sum of the policy minimum NPRs for those policies plus

the excess, if any, of the greater of the DR for those policies determined pursuant

to Section 4 and the SR for those policies determined pursuant to Section 5 over

the quantity (A–B), where A = the sum of the policy minimum NPRs for those

policies, and B = any due and deferred premium asset held on account of those

policies.

B. Section 3 defines the requirements for the policy NPR. Section 4 defines the requirements for the

DR, and Section 4.C defines how that reserve is attributed to a VM-20 reserving category. Section

5 defines the requirements for the SR, and Section 5.G defines how that reserve is determined for

each VM-20 reserving category.

C. The reserve for each VM-20 reserving category as determined in Section 2.A.1, Section 2.A.2 or

Section 2.A.3 shall be allocated to each policy within that VM-20 reserving category in the same

proportion as the minimum NPR for that policy to the minimum NPR for the VM-20 reserving

category with the exception to make best efforts to minimize allocating the deterministic or SR in

excess of the net premium reserve, with any adjustment for due and deferred premiums, to policies

which did not produce this excess. A clear example is to use the NPR per policy in Section 2.A.3.a

as the allocated reserve per policy, given that no deterministic or SR is used in Section 2.A.3.a.

D. The reserves for supplemental benefits and riders shall be calculated consistent with the

requirements for “Riders and Supplemental Benefits” in Section II, Reserve Requirements.

E. The company may calculate the DR and the SR as of a date no earlier than three months before the

valuation date, using relevant company data, provided an appropriate method is used to adjust those

reserves to the valuation date. Company data used for experience studies to determine prudent

estimate assumptions are not subject to this three-month limitation.

F. If a company has separate account business, the company shall allocate the minimum reserve

between the general and separate accounts subject to the following:

1. The amount allocated to the general account shall not be less than zero and shall include

any liability related to contractual guarantees provided by the general account.

2. The amount allocated to the separate account shall not be less than the sum of the cash

surrender values and not be greater than the sum of the account values attributable to the

separate account portion of all such contracts.

G. A company may use simplifications, approximations and modeling efficiency techniques to

calculate the NPR, the DR and/or the SR required by this section if the company can demonstrate

that the use of such techniques does not understate the reserve by a material amount, and the

expected value of the reserve calculated using simplifications, approximations and modeling

efficiency techniques is not less than the expected value of the reserve calculated that does not use

them. The preceding demonstration requirements of Section 2.G do not apply to the use of model

segmentation for purposes of determining the net asset earned rates.

Requirements for Principle-Based Reserves for Life Products VM-20

Guidance Note:

Examples of modeling efficiency techniques include, but are not limited to:

1. Choosing a reduced set of scenarios from a larger set consistent with prescribed models and

parameters.

2. Generating a smaller liability or asset model to represent the full seriatim model using grouping

compression techniques or other similar simplifications.

There are multiple ways of providing the demonstration required by Section 2.G. The complexity

of the demonstration depends upon the simplifications, approximations or modeling efficiency

techniques used. Examples include, but are not limited to:

1. Rounding at a transactional level in a direction that is clearly and consistently conservative or is

clearly and consistently unbiased with an obviously immaterial impact on the resulting reserve

(e.g., rounding to the nearest dollar) would satisfy 2.G without needing a demonstration.

However, rounding to too few significant digits relative to the quantity being rounded, even in

an unbiased way, may be material and in that event, the company may need to provide a

demonstration that the rounding would not produce a material understatement in the reserve.

2. A brute force demonstration involves calculating the minimum reserve both with and without

the simplification, approximation or modeling efficiency technique, and making a direct

comparison between the resulting reserves. Regardless of the specific simplification,

approximation or modeling efficiency technique used, brute force demonstrations always satisfy

the requirements of Section 2.G.

3. Choosing a reduced set of scenarios from a larger set consistent with prescribed models and

parameters and providing a detailed demonstration of why it did not understate the reserve by a

material amount and the expected value of the reserve would not be less than the expected value

of the reserve that would otherwise be calculated. This demonstration may be a theoretical,

statistical or mathematical argument establishing, to the satisfaction of the insurance

commissioner, general bounds on the potential deviation in the reserve estimate rather than a

brute force demonstration.

4. Selecting a margin for lapse rates where the directionality of the margin changes at a certain

duration may require a detailed, calculation-based demonstration. Rather than a brute force

demonstration, a company may be able to use representative cells to establish a materiality range

supporting the use of a simplified lapse margin using, for example, the average duration that the

directionality of the margin changes.

H. The company shall establish, for the DR and SR, a standard containing the criteria for determining

whether an assumption, risk factor or other element of the principle-based valuation has a material

impact on the size of the reserve. This standard shall be applied when identifying material risks

under VM-20 Section 9.B.1. Such a standard shall also apply to the NPR with respect to VM-20

Section 2.G.

Guidance Note:

For example, the standard may be expressed as an impact of more than X dollars or Y% of the

reserve, whichever is greater, where X and Y are chosen in a manner that is meant to stand the test

of time and not need periodic revision.

The standard is based on the impact relative to the size of the NPR, DR and SR as opposed to the

Requirements for Principle-Based Reserves for Life Products VM-20

impact relative to the overall financial statement (e.g., total company reserves or surplus).

Reviewing items that may lead to a material misstatement of the financial statement in the current

year is appropriate in its own context, but it is not appropriate for identifying material risks for

PBR, which itself is an emerging risk.

Note that the criteria apply to the NPR, DR and SR, and not just the final reported reserve. For

example, if the DR is less than the NPR, the criteria still apply to the DR.

The standard also applies to exclusion tests, as they are an element of the principle-based valuation.

I. Section 2.G and Section 2.H provide companies some flexibility in assumption setting and

modeling methodologies, but they do not allow for skipping mandated steps without providing a

valid approximation, simplification, or modeling technique under Section 2.G that neither

materially understates nor downwardly biases the reserve.

Examples of omissions that would not satisfy VM-20 Section 2.G include: not computing even a

simplified NPR; not computing even a simplified DR or SR without having passed the relevant

exclusion test(s); omitting prescribed mortality margins; not establishing any lapse margins; not

building even a simplified asset model for the DR; using the alternative investment strategy without

first determining that it produces a higher reserve than the company investment strategy; and

ignoring post-level term losses.

Guidance Note:

The issue here is not the use of approximations; it is about skipping mandated VM-20 requirements.

Thus, for example, this does not rule out the use of a relatively simple asset model that is acceptable

pursuant to VM-20 Section 7.E.1.a, nor the judicious use of the previous year’s assumption

development work to save time and effort.

Section 3: Net Premium Reserve

A. Applicability

1. The NPR for each policy must be determined on a seriatim basis pursuant to Section 3.

2. When valuing term riders pursuant to Paragraph E in “Riders and Supplemental Benefits

Requirements” in Section II, the reserve requirements for term policies are applicable.

B. NPR Calculation

1. For the purposes of Section 3, the following terms apply:

a. A policy with “multiple secondary guarantees” is one that: i) simultaneously has

more than one shadow account; ii) simultaneously has more than one cumulative

premium type of guarantee; or iii) simultaneously has at least one of each. A single

shadow account with a variety of possible end dates to the secondary guarantee,

depending on the policyholder’s choice of funding level, constitutes a single—not

multiple—secondary guarantee.

Guidance Note:

Requirements for Principle-Based Reserves for Life Products VM-20

Policy designs that are created simply to disguise guarantees or exploit a perceived loophole must

be treated in a manner similar to more typical product designs with similar guarantees. If a policy

contains multiple secondary guarantees, such that a subset of those secondary guarantees in

combination represent an implicit guarantee that would produce a higher NPR if that implicit

guarantee were treated as an explicit secondary guarantee of the policy, then the policy should be

treated as if that implicit guarantee were an explicit guarantee. For example, if there were a policy

with a “sequential secondary guarantee” where only one secondary guarantee applied at any given

point in time but with a series of secondary guarantees strung together with one period ending when

the next one began, the combined terms of the secondary guarantees would be regarded as a single

secondary guarantee.

b. The “fully funded secondary guarantee” at any time is:

i. For a shadow account secondary guarantee, the minimum shadow account

fund value necessary to fully fund the secondary guarantee for the policy

at that time.

For any policy for which the secondary guarantee

contractually cannot be fully funded in advance, this shall be the present

value of the contractually permitted premium stream that would fully fund

the guarantee at the earliest possible date (using the valuation interest rate

and mortality standard specified in Section 3.C).

ii. For a cumulative premium secondary guarantee, the amount of cumulative

premiums required to have been paid to that time that would result in no

future premium requirements to fully fund the guarantee, accumulated

with any interest or accumulation factors per the contract provisions for

the secondary guarantee. For any policy for which the secondary guarantee

contractually cannot be fully funded in advance, this shall be the present

value of the contractually permitted premium stream that would fully fund

the guarantee at the earliest possible date (using the valuation interest rate

and mortality standard specified in Section 3.C).

c. The “actual secondary guarantee” at any time is:

i. For a shadow account secondary guarantee, the actual shadow account

fund value at that time.

ii. For a cumulative premium secondary guarantee, the actual premiums paid

to that point in time, accumulated with any interest or accumulation factors

per the contract provisions for the secondary guarantee.

The “level secondary guarantee” at any time is:

i. For a shadow account secondary guarantee, the shadow account fund value

that would have existed at that time assuming payment of the level gross

premium determined according to Section 3.B.5.c.i.1.

ii. For a cumulative premium secondary guarantee, the amount of cumulative

level gross premiums determined according to Section 3.B.5.c.i.1,

accumulated with any interest or accumulation factors per the contract

provisions for the secondary guarantee.

2. Section 3.B.4 and Section 3.B.5 provide the calculation of a terminal NPR under the

assumption of an annual mode gross premium. In Section 3.B.4 and Section 3.B.5, the

gross premium referenced is the gross premium for the policy assuming an annual premium

mode.

Requirements for Principle-Based Reserves for Life Products VM-20

3. Since terminal NPRs are computed as of the end of a policy year and not the reporting date,

the terminal NPR as of policy anniversaries immediately prior and subsequent to the

reporting date are adjusted to reflect that portion of the net premium that is unearned at the

reporting date. This is generally accomplished using either the mean reserve method or the

mid-terminal method as discussed in SSAP No. 51R—Life Contracts. Other appropriate

methods, including an exact reserve valuation, may also be used.

4. For all policies and riders within the Term reserving category, other than those addressed

in Section 3.B.8 below, the NPR on any valuation date shall be equal to the actuarial present

value of future benefits less the actuarial present value of future annual valuation net

premiums as follows:

a. The annual valuation net premiums shall be a uniform percent of the respective

adjusted gross premiums, described in Section 3.B.4.b, such that at issue the

actuarial present value of future valuation net premiums shall equal the actuarial

present value of future benefits plus an amount equal to $2.50 per $1,000 of

insurance for the first policy year only.

Guidance Note: When calculating the present values under Section 3.B.4.a.i and Section 3.B.4.a.ii,

benefits and premiums during the years following the end of the level term period should be

projected assuming that the policies subject to the shock lapse in each year do not pay the higher

premium in that year.

A shock lapse is deemed to have occurred in any year for which the prescribed

lapse rate is greater than or equal to 25%. Valuation net premiums for policy years

after a shock lapse shall be limited and may result in two uniform percentages, one

applicable to policy years prior to that shock lapse and one applicable to policy

years following that shock lapse. However, for policies with more than one shock

lapse, only one shock lapse shall be subject to such treatment, namely the one that

would produce the largest ratio ii/i as computed below before any such percentages

are applied. For these policies, these percentages shall be determined as follows:

i. Compute the actuarial present value of benefits for policy years following

the shock lapse.

ii. Compute the actuarial present value of valuation net premiums for policy

years following the shock lapse.

iii. If ii/i is greater than 135%, reduce the net valuation premiums in ii

uniformly to produce a ratio of ii/i of 135%.

iv. If the application of iii produces an adjustment to the net valuation

premiums following the shock lapse, increase the net valuation premiums

for policy years prior to the shock lapse by a uniform percentage such that

at issue the actuarial present value of future valuation net premiums equals

the actuarial present value of future benefits plus $2.50 per $1,000 of

insurance for the first policy year only.

b. Adjusted gross premiums shall be determined as follows:

i. The adjusted gross premium for the first policy year shall be set at zero.

ii. The adjusted gross premium for any year from the second through fifth

policy year shall be set at 90% of the corresponding gross premium for

that policy year.

Requirements for Principle-Based Reserves for Life Products VM-20

iii. The adjusted gross premium for any year after the fifth policy year shall

be set equal to the corresponding gross premium for that policy year.

c. The gross premium in any policy year is the maximum guaranteed gross premium

for that policy year, inclusive of any applicable policy fee.

d. Actuarial present values are calculated using the interest, mortality and lapse

assumptions prescribed in Section 3.C.

5. For all policies and riders within the ULSG reserving category, other than indexed

universal life policies for which the company did not compute the DR nor the SR, the NPR

shall be determined as follows:

a. If the policy duration on the valuation date is prior to the point when all secondary

guarantee periods have expired, the NPR shall be the greater of the reserve amount

determined in Section 3.B.5.c and the reserve amount determined in Section

3.B.5.d, subject to the floors specified in Section 3.D.2.

b. If the policy duration on the valuation date is after the expiration of all secondary

guarantee periods, the NPR shall be the reserve amount determined according to

Section 3.B.5.d only, subject to the floors specified in 3.D.2.

c. A reserve amount for the policy shall be calculated assuming the secondary

guarantee is in effect as described below. If the policy has multiple secondary

guarantees, the NPR shall be calculated as below for the secondary guarantee that

provides

the greatest NPR as of the valuation date. For the purposes of this

subsection, let n be the longest number of years the policy can remain in force

under the provisions of the secondary guarantee. However, if a shorter period

produces a materially greater NPR, then n shall be that shorter number of years.

i. As of the policy issue date:

1) Determine the level gross premium at issue, assuming payments

are made each year for which premiums are permitted to be paid,

such period defined as v years in this subsection, that would keep

the policy in force to the end of year n, based on policy provisions,

including the secondary guarantee provisions, such as mortality,

interest and expenses. In no event shall v be greater than n for

purposes of the NPR calculated in this subsection.

2) Determine the annual valuation net premiums at issue as that

uniform percentage (the valuation net premium ratio) of the

respective gross premiums such that at issue the actuarial present

value of future valuation net premiums over the n-year period

shall equal the actuarial present value of future benefits over the

n-year period. The valuation net premium ratio determined shall

not change for the policy.

3) Using the level gross premium from Section 3.B.5c.i.1 above,

determine the value of the expense allowance components for the

policy at issue as x



, y



and z



defined below.





= a first-year expense equal to the level gross premium at issue





= an expense equal to 10% of the level gross premium and

applied in each year from the second through fifth policy year

Requirements for Principle-Based Reserves for Life Products VM-20





= a first-year expense of $2.50 per $1,000 of insurance issued

The expense allowance shall be amortized over the span of years

in the secondary guarantee period during which premiums are

permitted to be paid. E

x+t

, the expense allowance balance as of the

end of the policy year t, shall be computed as follows:





= 

:|















:|



+ 



 





for t < v

= 0 for t ≥ v

Where:

t = 1,2,.. (number of completed years since issue)

VNPR = Valuation Net Premium Ratio from 3.B.5.c.i.2 above





= 0 when t = 1



(1/

:|







) when 2≤ t ≤5

= 



when t>5

ii. After the policy issue date, on each future valuation date, the NPR shall be

determined as follows:

1) As of the valuation date for the policy being valued, determine the

actual secondary guarantee, denoted ASG

x+t

, as outlined in

Section 3.B.1.c and the fully funded secondary guarantee, denoted

FFSG

x+t

, as outlined in Section 3.B.1.b.

2) Divide ASG

x+t

by FFSG

x+t

, 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. 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.

3) Compute the net single premium (NSP

x+t

) on the valuation date

for the coverage provided by the secondary guarantee for the

period of time ending at attained age x+n, using the interest, lapse

and mortality assumptions prescribed in Section 3.C below. The

net single premium (NSP) shall include consideration for death

benefits only.

4) The NPR for an insured age x at issue at time t shall be according

to the formula below:













, 1



 



 



Guidance Note: For a non-integer value of t, 



is obtained by taking the present value at

duration t of 



, where T is the next higher integer; i.e., entails discounting by valuation interest,

Requirements for Principle-Based Reserves for Life Products VM-20

mortality, and lapse for the fractional year between the valuation date and next anniversary (T – t).

iii. Actuarial present values referenced in this Section 3.B.5.c are calculated

using the interest, mortality and lapse assumptions prescribed in Section

3.C below.

d. A reserve amount for the policy shall be calculated assuming the secondary

guarantee is not in effect. The reserve amount shall be determined by the policy

features and guarantees of the policy without considering any secondary guarantee

provisions as follows:

i. Determine the level gross premium at issue, assuming payments are made

each year for which premiums are permitted to be paid, such period

defined as “s” in this subsection, that would keep the policy in force for

the entire period coverage is to be provided based on the policy guarantees

of mortality, interest and expenses.

ii. Determine the annual valuation net premiums as that uniform percentage

(the valuation net premium ratio) of the respective gross premiums, such

that at issue the actuarial present value of future valuation net premiums

shall equal the actuarial present value of future benefits.

iii. Using the level gross premium from Section 3.B.5.d.i, determine the value

of the expense allowance components for the policy at issue as x

, y

2-5

and

defined below.

= a first-year expense equal to the level gross premium at issue

2-5

= an expense equal to 10% of the level gross premium and applied in each

year from the second through fifth policy year

= a first-year expense of $2.50 per $1,000 of insurance issued

The expense allowance shall be amortized over the period during which

premiums are permitted to be paid. E

x+t

, the expense allowance balance, as of

the end of policy year t, shall be calculated as follows:





=   

:





(





+ 



)



:



 + 









for t < s

= 0 for t ≥ s

Where:

= 1,2,.. (number of completed years since issue)

= 









 



 













. . 5. .







= 0 when t = 1



(





1 

:





) when 2 ≤ t ≤ 5

= 



when t > 5

Requirements for Principle-Based Reserves for Life Products VM-20

iv. For a policy issued at age x, at any duration t, the net premium reserve

shall equal:





 



Where:

1) 



= the actuarial present value of future benefits less the

actuarial present value of future valuation net premiums and less

the unamortized expense allowance for the policy,





Guidance Note: For a non-integer value of t, 



is obtained by taking the present value at

duration t of 



, where T is the next higher integer; i.e., entails discounting by valuation

interest and survivorship for the fractional year between the valuation date and the next

anniversary (T – t).

2) Let:

x + t

= max (the actual policy fund value on the valuation date, 0)

x + t

= the policy fund value on the valuation date is that amount which,

together with the payment of the future level gross premiums determined

in Section 3.B.5.d.i above, keeps the policy in force for the entire period

coverage is to be provided, based on the policy guarantees of mortality,

interest and expenses.

Then set r

x+t

equal to:

1, if 

+t

< 0

min([

+t

/ 

+t

], 1), otherwise

v. The future benefits used in determining the value of m

x+t

shall be

based on the greater of e

x+t

and f

x+t

together with the future

payment of the level gross premiums determined in Section

3.B.5.d.i above, and assuming the policy guarantees of mortality,

interest and expenses.

vi. The values of ä are determined using the NPR interest, mortality

and lapse assumptions applicable on the valuation date.

vii. Actuarial present values referenced in this Section 3.B.5.d are

calculated using the interest, mortality and lapse assumptions

prescribed in Section 3.C.

6. For all policies and riders within the All Other VM-20 reserving category, as well as

indexed universal life policies for which the company did not compute the DR nor the SR

, the NPR shall be determined pursuant to applicable methods in VM-A and VM-C for the

basic reserve. The mortality tables to be used are those defined in Section 3.C.1 and in VM-

M Section 1.H.

7. The actuarial present value of future benefits equals the present value of future benefits

including, but not limited to, death, endowment (including endowments intermediate to the

term of coverage) and cash surrender benefits. Future benefits are before reinsurance and

before netting the repayment of any policy loans.

8. For life insurance coverage that the company has assumed on a YRT basis, the reinsurer’s

Requirements for Principle-Based Reserves for Life Products VM-20

net premium reserve shall be one half year’s cost of insurance for the reinsured net amount

at risk.

C. Net Premium Reserve Assumptions

1. Mortality Rates

a. Except as indicated in Section 3.C.1.b, and subject to the conditions outlined for

reserves in VM-A-814 and A-815 in Appendix A of this manual, the mortality

standard used in determining the present values described in Section B of this

section shall be the 2001 CSO Mortality Table as defined in VM-M Section 1.G

of this manual.

b. Subject to the conditions defined in Section 3.C.1.c, the 2017 CSO Mortality

Tables as defined in VM-M Section 1.H are required as the valuation standard for

ordinary life policies issued on or after Jan. 1, 2020, and subject to this section. A

company may elect to apply this table to determine minimum reserve standards to

one or more plans of insurance for policies issued on or after

Jan. 1, 2017. The 2017 CSO Mortality Tables shall be used for the Actuarial

Method, as defined in the Term and Universal Life Insurance Reserve Financing

Model Regulation (#787), for all policy issue dates.

c. Conditions for application of the 2017 CSO:

i. For each plan of insurance with separate rates for smokers and nonsmokers,

an insurer may use:

C. Composite mortality tables to determine minimum reserve

liabilities; or

D. Smoker and nonsmoker mortality to determine minimum reserve

liabilities if nonforfeiture values are also determined using smoker

and nonsmoker mortality.

ii. For plans of insurance without separate rates for smokers and nonsmokers, the

composite mortality tables shall be used.

iii. For the purpose of determining minimum reserve values and amounts of paid-

up nonforfeiture benefits, the 2017 CSO Mortality Table may, at the option of

the company for each plan of insurance, be used in its ultimate or select and

ultimate form.

d. At the election of the company, for any one or more specified plans of insurance

and subject to satisfying the conditions stated in Section 3.C.1.e, the 2017 CSO

Preferred Class Structure Mortality Table may be substituted in place of the 2017

CSO Smoker or Nonsmoker Mortality Table as the minimum valuation standard

for policies issued on or after Jan. 1, 2017, or for any policies valued using the

Actuarial Method, as defined in Model #787.

e. Conditions for preferred structure tables:

i. For each plan of insurance with separate rates for preferred and standard

nonsmoker lives, an insurer may use the super preferred nonsmoker,

preferred nonsmoker and residual standard nonsmoker tables to substitute

for the nonsmoker mortality table found in the 2017 CSO Mortality Table

Requirements for Principle-Based Reserves for Life Products VM-20

to determine minimum reserves. At the time of election and annually

thereafter, except for business valued under the residual standard

nonsmoker table, the appointed actuary shall certify that:

a) The present value of death benefits over the next 10 years after the

valuation date, using the anticipated mortality experience without

recognition of mortality improvement beyond the valuation date

for each class, is less than the present value of death benefits using

the VBT corresponding to the valuation table being used for that

class.

b) The present value of death benefits over the future life of the

contracts, using anticipated mortality experience without

recognition of mortality improvement beyond the valuation date

for each class, is less than the present value of death benefits using

the VBT corresponding to the valuation table being used for that

class.

ii. For each plan of insurance with separate rates for preferred and standard

smoker lives, an insurer may use the preferred smoker and residual

standard smoker tables to substitute for the smoker mortality table found

in the 2017 CSO Mortality Table to determine minimum reserves. At the

time of election and annually thereafter, for business valued under the

preferred smoker table, the appointed actuary shall certify that:

a) The present value of death benefits over the next 10 years after the

valuation date, using the anticipated mortality experience without

recognition of mortality improvement beyond the valuation date

for each class, is less than the present value of death benefits using

the preferred smoker VBT corresponding to the valuation table

being used for that class.

b) The present value of death benefits over the future life of the

contracts, using anticipated mortality experience without

recognition of mortality improvement beyond the valuation date

for each class, is less than the present value of death benefits using

the preferred smoker VBT.

iii. Selection of the proper set of mortality rates when a company chooses to

use a permitted preferred class structure mortality table shall be subject to

Actuarial Guideline XLII—The Application of the Model Regulation

Permitting the Recognition of Preferred Mortality Tables for Use in

Determining Minimum Reserve Liabilities (AG 42).

Guidance Note: The Valuation Manual can be updated by the NAIC to define a new valuation

table. Because of the various implications to systems, form filings and related issues (such as

product tax issues), lead time is needed to implement new requirements without market disruption.

It is recommended that this transition be for a period of about 4.5 years—that is, that the table be

adopted by July 1 of a given year, that it be permitted to be used starting Jan. 1 of the second

following calendar year, that it be optional until Jan. 1 of the fifth following calendar year, and

thereafter mandatory. It is further intended that the adoption of such tables would apply to all

Requirements for Principle-Based Reserves for Life Products VM-20

business issued since the adoption of this Valuation Manual. The details of how to implement any

unlocking of mortality tables will need to be addressed in the future.

f. For policies issued on a substandard basis, the company shall increase the CSO

mortality rates in a manner commensurate with the substandard rating, subject to

a cap that ensures that mortality rates do not exceed 1,000 per 1,000. Alternatively,

a company may choose to reserve for the substandard extra mortality separately in

Exhibit 5, for groups of policies for which the NPR dominates the DR and SR.

g. For a group of policies where the anticipated mortality experience exceeds the

prescribed CSO mortality rates determined in Section 3.C.1.a through 3.C.1.f

above, the company shall adjust the CSO mortality rates as follows:

i. For policies that pass the Life PBR Exemption, the CSO mortality rates

used to determine the basic reserve for each policy shall be adjusted in a

manner commensurate with the anticipated mortality experience for the

policies. The methodology used to test whether adjustments are needed

can be performed on an aggregate basis for the group of policies using a

reasonable method to compare the respective mortality rates, such as

comparing the present value of future death claims discounted at the

valuation interest rate used for VM-A and VM-C. However, for the

purposes of this comparison, a company may not group together policies

with significantly different risk profiles. If an adjustment is needed, the

determination of the adjustment factors should use a reasonable

methodology, subject to a cap that ensures that mortality rates do not

exceed 1,000 per 1,000.

ii. For policies where the Life PBR Exemption is not utilized, the CSO

mortality rates used in the NPR calculation shall be adjusted in a manner

commensurate with the anticipated mortality experience for the policies.

a) When the company elects to use the DET in Section 6.B for a

group of policies, the methodology used to test whether

adjustments are needed should be consistent with the

methodology used in Section 6.B.5.d (that is, using a comparison

of the PV of future death claims discounted at the valuation rate

used for the NPR). For the purposes of this comparison, a

company may not group together policies with significantly

different risk profiles. The determination of the adjustment

factors should use a reasonably consistent methodology to the one

used in Section 6.B.5.d, subject to a cap that ensures that the

mortality rates do not exceed 1,000 per 1,000.

b) For the group of policies where the DET is not used, the company

should use a reasonably consistent approach to the one described

in paragraph a) above to test whether adjustments are needed and

to determine the adjustment factors. The resulting adjustment

factors are not required to be identical to the adjustment factors

determined in paragraph a) above.

Requirements for Principle-Based Reserves for Life Products VM-20

The resulting NPR must not be lower than the NPR calculated without

adjustments to the CSO mortality rates.

Guidance Note: It is anticipated that the 3.C.1.g adjustments are generally applicable but not

limited to policies with limited underwriting, such as simplified issue or final expense. The intent

of Section 3.C.1.g is not to test every possible group of policies (e.g., attaine

d age blocks,

individual underwriting classes with lower credibility, etc.) to determine if its mortality

experience is higher than the CSO table even though more aggregate mortality experience is

lower than the CSO table. However, if a large, credible block or group of policies (e.g., a block

of business assumed from another company that has significantly different mortality experience

than the rest of the assuming company’s business, or a large block of business from an era when

the company had significantly more permissive underwriting, etc.) is expected to have worse

experience than the CSO table, then the adjustments in 3.C.1.g should be made.

2. Interest Rates

Guidance Note: This section describing the determination of the “calendar year net premium

reserve interest rate” is intended to communicate that, unlike the “unlocking” of the NPR mortality

and lapse assumptions, the interest rate used in the NPR calculation for a block of policies issued

in a particular calendar year does not change for the duration of each of the policies in that issue

year block.

a. For NPR amounts calculated according to Section 3.B.5.d:

The calendar year NPR interest rate I shall be determined according to Section

3.C.2.a and the results rounded to the nearest one-quarter of 1%. This rate shall be

used in determining the present values described in Section 3.B.5 for all policies

issued in the calendar year next following its determination.

i. I = .03 + W  (R

- .03) + (W/2)  (R

- .09)

Where: R

is the lesser of R and .09

is the greater of R and .09

R is the reference interest rate defined in Section 2.a.ii below

W is the weighting factor for a policy, as defined in Section 2.a.iii below

However, if the calendar year NPR interest rate I in any calendar year

determined without reference to this sentence differs from the

corresponding actual rate for the immediately preceding calendar year by

less than one-half of 1%, the calendar year NPR interest rate shall be set

equal to the corresponding actual rate for the immediately preceding

calendar year.

ii. The reference interest rate R for a calendar year shall equal the lesser of

the average over a period of 36 months and the average over a period of

12 months, ending on June 30 of the calendar year preceding the year of

issue, of the monthly average of the composite yield on seasoned corporate

bonds, as published by Moody’s Investors Service (MIS).

Requirements for Principle-Based Reserves for Life Products VM-20

iii. The weighting factor W for a policy shall be determined from the table

below:

Guarantee Duration (Years) Weighting Factor

10 or less 0.50

More than 10 but not more than 20 0.45

More than 20 0.35

The guarantee duration for the coverage guarantee is the maximum

number of years the life insurance can remain in force on the basis

guaranteed in the policy or under options to convert to plans of life

insurance with premium rates or nonforfeiture values or both, which are

guaranteed in the original policy.

b. For NPR amounts calculated according to Section 3.B.4 or Section 3.B.5.c:

The calendar year NPR interest rate shall be calculated by increasing the rate

determined according to Section 3.C.2.a above by 1.5%, but in no event greater

than 125% of the rate determined according to Section 3.C.2.a above rounded to

the nearest one-quarter of 1%.

Guidance Note: If a policy contains multiple coverage guarantees and each coverage guarantee stream

is valued separately, it may be important to define which reserve interest rate(s) should be used for

reporting and analysis purposes.

3. Lapse Rates

a. For NPR amounts calculated according to Section 3.B.5.d, the lapse rates used

shall be 0% per year during the premium paying period and 0% per year thereafter.

b. For NPR amounts calculated according to Section 3.B.4, the annual lapse rates

used shall vary by level premium period as stated below:

i. 10% per year during any level premium period of less than five years,

except as noted in iii, v and vi.

ii. 6% per year during any level premium period of five or more years, except

as noted in iii, iv, v and vi.

iii. For any policy that provides an endowment benefit at the end of an initial

level premium period that is materially less than the policy face amount,

such as a return of premium benefit, the annual lapse rate is 6% for the

first half of the initial level premium period and 0% for the remainder of

the initial level premium period except the final year thereof.

Guidance Note: Therefore, the first 0% lapse rate would, for example, be at the end of year 11

for a 20-year level plan and at the end of year 8 for a 15-year level plan.

iv. 10% per year during any premium paying period after an initial level

premium period of less than five years, except as noted in v and vi.

v. 0% per year for any policy whose final premium has by then been payable.

vi. The lapse rate for the final year of a level premium period, applied after

Requirements for Principle-Based Reserves for Life Products VM-20

any benefits assumed payable in the final year, and prior to the payment

of the increased premium rate, shall be determined based on the length of

the level premium periods before and after the increase, as well as the

percent increase in the gross premium (including policy fee) per $1,000 of

the face amount as shown in the table below instead of what would

otherwise apply from i through v above.

Length of Level

Premium Period Prior

to Increase

Length of Level

Premium Period After

Increase

Percent Increase in

Gross Premium per

$1000

Lapse Rate for the Final

Year of the Level

Premium Period (Shock

Lapse)

1<PP≤5

Any

50%

1<PP≤5

1<PP

Any

25%

5<PP≤10

< 400%

70%

5<PP≤10

≥ 400%

80%

5<PP≤10

1<PP≤5

Any

50%

5<PP≤10

5<PP

Any

25%

10<PP

< 400%

70%

10<PP

≥ 400%

80%

10<PP

1<PP≤5

Any

70%

10<PP 5<PP Any 50%

c. For NPR amounts calculated according to Section 3.B.5.c, the lapse rate, L

x+t

, for

an insured age x at issue for all durations subsequent to the valuation date shall be

determined as follows:

i. Determine the ratio









where:









[









 







]

[









 







] but not > 1 and

not <0

Where:

FFSG

x+t

= the fully funded secondary guarantee on the valuation date for

the insured age x at issue

ASG

x+t

= the actual secondary guarantee on the valuation date for the

insured age x at issue

LSG

x+t

= the level secondary guarantee on the valuation date for the

insured age x at issue

Guidance Note: The FFSG

x+t

, ASG

x+t

, and LSG

x+t

are based on the secondary guarantee values as

of the valuation date and will remain constant throughout the cash flow projection. This will result

in a constant lapse assumption, calculated as of the valuation date, that does not vary by duration

throughout the cash flow projection for the NPR calculation.

ii. As of the valuation date, which is t years after issue, the annual lapse rate

for the policy shall be assumed to be level for all future years and

denoted as L

x+t

, which shall be set equal to:

Requirements for Principle-Based Reserves for Life Products VM-20

x+t

= R

x+t

• 0.01 + (1 – R

x+t

) • 0.005 • r

x+t

Where r

x+t

is the ratio determined in Section 3.B.5.d.iv.2.

Guidance Note: By similar logic, it follows (from ASG

x+t

being 0 when t=0) that the level annual

lapse rate to be used in the calculations in Section 3.B.5.c.i.2 and 3.B.5.c.i.3 is 1%. On the other

hand, when performing the calculations in Section 3.B.5.d.ii.3, L

x+t

though level, is not generally

equal to what it was for the same policy on the previous valuation date.

4. The NPR shall reflect continuous deaths and the immediate payment of death claims,

including death claims on any riders or supplemental benefits for which the NPR is being

calculated.

D. NPR Calculation and Cash Surrender Value Floor

1. For policies other than universal life policies, the NPR shall not be less than the greater of:

a. The cost of insurance to the next paid to date. The cost of insurance for this purpose

shall be based on the policy year in which the valuation date falls, using the

mortality tables for the policy prescribed in Section 3.C.

b. The policy cash surrender value calculated as of the valuation date and in a manner

that is consistent with that used in calculating the NPR on the valuation date.

2. For a universal life policy, the NPR shall not be less than the greater of:

a. The amount needed to cover the cost of insurance to the next processing date on

which cost of insurance charges are deducted with respect to the policy. The cost

of insurance for this purpose shall be based on the policy year in which the

valuation date falls, using the mortality tables for the policy prescribed in Section

3.C, and it shall be based upon the net amount at risk. “Cost of insurance,” as used

here, refers to the valuation mortality rate, not the UL policy’s contractual cost of

insurance or expense charges.

b. The policy cash surrender value calculated as of the valuation date and in a manner

that is consistent with that used in calculating the NPR on the valuation date.

E. The policy minimum NPR is defined to be the policy NPR determined in Section 3.A through

Section 3.D, less a credit for reinsurance ceded as defined in Section 8.

Section 4: Deterministic Reserve

For a group of one or more policies for which a DR is to be calculated, the company shall calculate the DR

for the group using the method described in either Section 4.A or Section 4.B below.

A. Calculate the DR equal to the actuarial present value of benefits, expenses and related amounts less

the actuarial present value of premiums and related amounts, less the positive or negative PIMR

balance at the valuation date allocated to the group of one or more policies being modeled under

Section 7.D.7, plus the balance of separate account assets on the valuation date, and plus the policy

loan balance at the valuation date with appropriate reflection of any relevant due, accrued or

unearned loan interest (if policy loans are explicitly modeled under Section 7.F.3.b), where:

1. Cash flows are projected in compliance with the applicable requirements in Section 7,

Section 8 and Section 9 over economic scenario 12 described in Section 7.G.1, and further

described in Appendix 1.E.

Requirements for Principle-Based Reserves for Life Products VM-20

2. Present values are calculated using the path of discount rates for the corresponding model

segment determined in compliance with Section 7.H.3.

3. The actuarial present value of benefits, expenses and related amount equals the sum of:

a. Present value of future benefits, but before netting the repayment of any policy

loans.

Guidance Note: Future benefits include, but are not limited to, death and cash surrender benefits.

b. Present value of future expenses excluding federal income taxes and expenses paid

to provide fraternal benefits in lieu of federal income taxes.

4. The actuarial present value of premiums and related amounts equals the sum of the present

values of:

a. Future gross premium payments and/or other applicable revenue.

b. Future cash flows to the general account from the separate account, less cash flows

from the general account to the separate account.

c. Future net policy loan cash flows, if policy loans are explicitly modeled under

Section 7.F.3.b.

Guidance Note: Future net policy loan cash flows include: policy loan interest paid in cash plus

repayments of policy loan principal, including repayments occurring at death or surrender (note

that the future benefits in Section 4.A.3.a are before consideration of policy loans), less additional

policy loan principal (but excluding policy loan interest that is added to the policy loan principal

balance).

d. Future net reinsurance cash flows determined in compliance with Section 8.

e. The future derivative liability program net cash flows (i.e., cash received minus

cash paid) that are allocated to this group of policies.

5. If a group of policies is excluded from the SR requirements, the company may not include

future transactions associated with non-hedging derivative programs in determining the

DR for those policies.

B. Calculate the DR as a – b, where

a = the aggregate annual statement value of those starting assets which, when projected along with

all premium and investment income, result in the liquidation of all projected future benefits and

expenses by the end of the projection horizon. Under this alternative, the following considerations

apply:

1. Cash flows are projected in compliance with the applicable requirements in Section

7, Section 8 and Section 9 over economic scenario 12 described in Section 7.G.1

and found in Appendix 1.

2. The requirements for future benefits and premiums in Section 4.A apply as well to

the calculation of the DR under this subsection.

3. The balance of policy loans on the valuation date (if explicitly modeled under

Section 7.F.3.b) and the balance of separate account assets on the valuation date

are modeled each period in compliance with the applicable changes in these asset

Requirements for Principle-Based Reserves for Life Products VM-20

balances as defined in Section 7.

b = that portion of the PIMR amount allocated under Section 7.D.

C. If a group of policies for which a DR is calculated includes policies from more than one VM-20

reserving category, where VM-20 reserving category is as defined in VM-01, a DR shall be

determined for each subgroup of the group of policies consisting of only those policies from each

individual VM-20 reserving category by following the process of Section 4.A and Section 4.B

above. The NAER used for discounting each such subgroup may be the NAER for the group of

policies. If the sum of the DR for these subgroups does not equal the total DR calculated for the

group of policies as a whole, the DR for the group of policies shall be allocated to each such

subgroup proportionally.

Section 5: Stochastic Reserve

For a group of one or more policies for which a SR is to be calculated, the company shall calculate the SR

as follows:

A. Project cash flows in compliance with the applicable requirements in Section 7, Section 8 and

Section 9 using the stochastically generated scenarios described in Section 7.G.2., and further

described in Appendix 1. In determining the SR, the company shall determine the number and

composition of subgroups for aggregation purposes in a manner that is consistent with how the

company manages risks across products with significantly different risk profiles, and that reflects

the likelihood of any change in risk offsets that could arise from distributional shifts between

product types due to, for example, differing policyholder behavior. If a company is managing the

risks of two or more products with significantly different risk profiles as part of an integrated risk

management process, then the products may be combined into the same subgroup for aggregation

purposes. If policies from more than one VM-20 reserving category are included in such a

subgroup, the reserve for each VM-20 reserving category shall also be determined, as described in

Section 5.G.

Guidance Note: Aggregation refers to the number and composition of subgroups of policies that

are used to combine cash flows. Aggregating policies into a common subgroup allows the cash

flows arising from the policies for a given stochastic scenario to be netted against each other (i.e.,

allows risk offsets between policies to be recognized). Note Section 5.G regarding the calculation

of the SR on a stand-alone basis for each VM-20 reserving category.

B. Calculate the scenario reserve for each stochastically generated scenario as follows:

1. For each model segment at the model start date and end of each projection year, calculate

the discounted value of the negative of the projected statement value of general account

and separate account assets using the path of discount rates for the model segment

determined in compliance with Section 7.H.4 from the projection start date to the end of

the respective projection year.

The balance of policy loans on the valuation date (if

explicitly modeled under Section 7.F.3.b) and the balance of separate account assets on the

valuation date are modeled each period in compliance with the applicable changes in these

asset balances as defined in Section 7.

Guidance Note: The projected statement value of general account and separate account assets for

a model segment may be negative or positive.

2. Sum the amounts calculated in Subparagraph 1 above across all model segments at the

model start date and end of each projection year.

Requirements for Principle-Based Reserves for Life Products VM-20

Guidance Note: The amount in Subparagraph 2 above may be negative or positive.

3. Set the scenario reserve equal to the sum of the statement value of the starting assets across

all model segments and the maximum of the amounts calculated in Subparagraph 2 above.

C. Rank the scenario reserves from lowest to highest.

D. Calculate CTE 70.

E. Determine any additional amount needed to capture any material risk included in the scope of these

requirements but not already reflected in the cash-flow models using an appropriate and supportable

method and supporting rationale.

F. Add the CTE amount (D) plus any additional amount (E) less the positive or negative PIMR balance

allocated to the group of one or more policies being modeled under Section 7.D.7.

G. The SR equals the amount determined in Section 5.F. If the company includes policies from two

or more VM-20 reserving category in a subgroup for aggregation purposes as described in Section

5.A, the company shall calculate the SR for policies from each VM-20 reserving category on a

stand-alone basis by following the process of A through F above.

Section 6: Stochastic and Deterministic Exclusion Tests

A. Stochastic Exclusion Test (SET)

1. Requirements to pass the SET:

a. Groups of policies pass the SET if one of the following is met:

i. Stochastic Exclusion Ratio Test (SERT) - Annually and within 12 months

before the valuation date the company demonstrates that the groups of

policies pass the SERT defined in Section 6.A.2.

ii. Stochastic Exclusion Demonstration Test - In the first year and at least

once every three calendar years thereafter, the company provides a

demonstration in the PBR Actuarial Report as specified in Section 6.A.3.

iii. SET Certification Method - For groups of policies other than variable life

or ULSG, in the first year and at least every third calendar year thereafter,

the company provides a certification by a qualified actuary that the group

of policies is not subject to material interest rate risk or asset return

volatility risk (i.e., the risk on non-fixed-income investments having

substantial volatility of returns, such as common stocks and real estate

investments). The company shall provide the certification and

documentation supporting the certification to the commissioner upon

request.

Guidance Note: The qualified actuary should develop documentation to support the actuarial

certification that presents his or her analysis clearly and in detail sufficient for another actuary to

understand the analysis and reasons for the actuary’s conclusion that the group of policies is not

subject to material interest rate risk or asset return volatility risk. Examples of methods a qualified

actuary could use to support the actuarial certification include, but are not limited to:

a) A demonstration that NPRs for the group of policies calculated according to Section 3 are

at least as great as the assets required to support the group of policies using the company’s

Requirements for Principle-Based Reserves for Life Products VM-20

cash-flow testing model under each of the 16 scenarios identified in Section 6 or

alternatively each of the New York seven scenarios.

b) A demonstration that the group of policies passed the SERT within 36 months prior to the

valuation date and the company has not had a material change in its interest rate risk.

c) A qualitative risk assessment of the group of policies that concludes that the group of

policies does not have material interest rate risk or asset return volatility. Such assessment

would include an analysis of product guarantees, the company’s non-guaranteed elements

(NGEs) policy, assets backing the group of policies and the company’s investment strategy.

b. A company may not exclude a group of policies for which there is one or more

future hedging strategy supporting the policies from SR requirements, except in

the case where all future hedging strategies supporting the policies are solely

associated with product features that are determined to not be material under VM-

20 Section 7.B.1 due to low utilization.

2. Stochastic Exclusion Ratio Test

a. In order to exclude a group of policies from the SR requirements using the method

allowed under Section 6.A.1.a, a company shall demonstrate that the ratio of (b–

a)/c is less than 6% where:

i. a = the adjusted DR described in Section 6.A.2.b.i using economic

scenario 9, the baseline economic scenario, as described in Appendix 1.E.

ii. b = the largest adjusted DR described in Section 6.A.2.b.i under any of the

other 15 economic scenarios described in Appendix 1.E.

iii. c = an amount calculated from the baseline economic scenario described

in Appendix 1.E that represents the present value of benefits for the

policies, adjusted for reinsurance by subtracting ceded benefits. For

clarity, premium, ceded premium, expense, reinsurance expense

allowance, modified coinsurance reserve adjustment and reinsurance

experience refund cash flows shall not be considered “benefits,” but items

such as death benefits, surrender or withdrawal benefits and policyholder

dividends shall be. For this purpose, the company shall use the benefits

cash flows from the calculation of quantity “a” and calculate the present

value of those cash flows using the same path of discount rates as used

for “a.”

Guidance Note: Note that the numerator should be the largest adjusted DR for scenarios other than

the baseline economic scenario, minus the adjusted DR for the baseline economic scenario. This is

not necessarily the same as the biggest difference from the adjusted DR for the baseline economic

scenario, or the absolute value of the biggest difference from the adjusted DR for the baseline

economic scenario, both of which could lead to an incorrect test result.

b. In calculating the ratio in Section 6.A.2.a above:

i. The company shall calculate an adjusted DR for the group of policies for

each of the 16 scenarios that is equal to either (a) or (b) below:

a) The DR defined in Section 4.A, but with the following

differences:

Requirements for Principle-Based Reserves for Life Products VM-20

1) Using anticipated experience assumptions with no

margins.

2) Using the interest rates and equity return assumptions

specific to each scenario.

3) Using NAER and discount rates defined in Section 7.H

specific to each scenario to discount the cash flows.

b) The gross premium reserve developed from the cash flows from

the company’s asset adequacy analysis models, using the

experience assumptions of the company’s cash-flow analysis, but

with the following differences:

1) Using the interest rates and equity return assumptions

specific to each scenario.

2) Using the methodology to determine NAER and discount

rates defined in Section 7.H specific to each scenario to

discount the cash flows, but using the company’s cash-

flow testing assumptions for default costs and

reinvestment earnings.

ii. The company shall use the most current available baseline economic

scenario and the 15 other

economic scenarios

published by the NAIC. The

methodology for creating these

scenarios can be found in Appendix 1 of

VM-20.

iii. The company shall use assumptions within each scenario that are

dynamically adjusted as appropriate for consistency with each tested

scenario.

iv. The company may not group together contract types with significantly

different risk profiles for purposes of calculating this ratio.

v. Anticipated mortality improvement beyond the projection start date shall

be reflected in the mortality assumption for the purpose of calculating the

stochastic exclusion ratio. The future mortality improvement factors shall

be no greater than the unloaded factors determined by the SOA, adopted

by the Life Actuarial (A) Task Force, and published on the SOA website,

at https://www.soa.org/research/topics/indiv-val-exp-study-list/

(Individual Life Insurance Mortality Improvement Scale – for Use with

AG38/VM20 – 20XX).

Guidance Note: M

ortality improvement may be positive or negative (i.e., deterioration). The

anticipated mortality improvement may be lower than the rates published by the SOA—for

example, if the company’s best estimate for mortality improvement for a particular block, such as

simplified issue, is lower.

To allow time for companies to reflect the updated mortality improvement

rates, the rates that are to be used in the year-end YYYY valuation should

be adopted by the Life Actuarial (A) Task Force and published on the SOA

website by September of YYYY. If this timeline is not met, then at the

company’s option they may use the mortality improvement rates for the

prior year (year YYYY-1).

Requirements for Principle-Based Reserves for Life Products VM-20

c. If the ratio calculated in Section 6.A.2.a above is less than 6% pre-YRT

reinsurance, but is greater than 6% post-YRT reinsurance, the group of policies

will still pass the SERT if the company can demonstrate that the sensitivity of the

adjusted DR to economic scenarios is comparable pre- and post-YRT reinsurance.

i. An example of an acceptable demonstration:

a) For convenience in notation • SERT = the ratio (b–a)/c defined in

(a) above

1) The pre-YRT reinsurance results are “gross of YRT,”

with a subscript “gy,” so denoted SERT

2) The post-YRT results are “net of YRT,” with subscript

“ny,” so denoted SERT

b) If a block of business being tested is subject to one or more YRT

reinsurance cessions as well as other forms of reinsurance, such

as coinsurance, take “gross of YRT” to mean net of all non-YRT

reinsurance but ignoring the YRT contract(s), and “net of YRT”

to mean net of all reinsurance contracts. That is, treat YRT

reinsurance as the last reinsurance in, and compute certain values

below with and without that last component.

c) So, if SERT

≤ 0.060 but SERT

> 0.060, then compute the

largest percent increase in reserve (LPIR) = (b–a)/a, both “gross

of YRT” and “net of YRT.”

LPIR

= (b

– a

)/a

LPIR

= (b

– a

)/a

Note that the scenario underlying b

could be different from the

scenario underlying b

If SERT

× LPIR

/LPIR

< 0.060, then the block of policies

passes the SERT.

ii. Another more qualitative approach is to calculate the adjusted DR for the

16 scenarios both gross and net of reinsurance to demonstrate that there is

a similar pattern of sensitivity by scenario.

d. The SERT may not be used for a group of polices if, using the current year’s data,

(i) the stochastic exclusion demonstration test had already been attempted using

the method of Section 6.A.3.b.i or Section 6.A.3.b.ii and did not pass; or (ii) the

qualified actuary had actively undertaken to perform the certification method of

Section 6.A.1.a.iii and concluded that such certification could not legitimately be

made.

3. Stochastic Exclusion Demonstration Test

a. In order to exclude a group of policies from the SR requirements using the method

as allowed under Section 6.A.1.a.ii above, the company must provide a

demonstration in the PBR Actuarial Report in the first year and at least once every

three calendar years thereafter that complies with the following:

Requirements for Principle-Based Reserves for Life Products VM-20

i. The demonstration shall provide a reasonable assurance that if the SR was

calculated on a stand-alone basis for the group of policies subject to the

SR exclusion, the minimum reserve for those groups of policies would not

increase. The demonstration shall take into account whether changing

conditions over the current and two subsequent calendar years would be

likely to change the conclusion to exclude the group of policies from the

SR requirements.

ii. If, as of the end of any calendar year, the company determines the

minimum reserve for the group of policies no longer adequately provides

for all material risks, the exclusion shall be discontinued, and the company

fails the SERT for those policies.

iii. The demonstration may be based on analysis from a date that precedes the

valuation date for the initial year to which it applies if the demonstration

includes an explanation of why the use of such a date will not produce a

material change in the outcome, as compared to results based on an

analysis as of the valuation date.

iv. The demonstration shall provide an effective evaluation of the residual risk

exposure remaining after risk mitigation techniques, such as derivative

programs and reinsurance.

b. The company may use one of the following or another method acceptable to the

insurance commissioner to demonstrate compliance with Section 6.A.3.a:

i. Demonstrate that the greater of [the quantity A and the quantity B] is

greater than the SR calculated on a stand-alone basis, where:

A = the DR, and

B = the NPR less any associated due and deferred premium asset.

ii. Demonstrate that the greater of [the quantity A and the quantity B] is

greater than the scenario reserve that results from each of a sufficient

number of adverse deterministic scenarios, where:

A = the DR, and

B = the NPR less any associated due and deferred premium asset.

iii. Demonstrate that the greater of [the quantity A and the quantity B] is

greater than the SR calculated on a stand-alone basis, but using a

representative sample of policies in the SR calculations, where:

A = the DR, and

B = the NPR less any associated due and deferred premium asset.

iv. Demonstrate that any risk characteristics that would otherwise cause the

SR calculated on a stand-alone basis to exceed greater of the DR and the

NPR, less any associated due and deferred premium asset, are not present

or have been substantially eliminated through actions such as hedging,

investment strategy, reinsurance or passing the risk on to the policyholder

by contract provision.

Requirements for Principle-Based Reserves for Life Products VM-20

B. Deterministic Exclusion Test (DET)

1. Scope of Products

a. A group of ULSG policies that does not meet the definition of a “non-material

secondary guarantee” or a group of policies that is not excluded from the SR

requirement is deemed to not pass the DET, and the DR must be computed for this

group of policies.

b. The DET may not be used for term insurance policies, or term riders pursuant to

Paragraph E in the Riders and Supplemental Benefits Requirements in Section II,

and these policies may not be excluded from the DR requirements of Section 4.

2. Except as provided in Section 6.B.1, a group of policies passes the DET if

one of the

following is met:

a. Deterministic Net Premium Test - The company demonstrates that the sum of

the valuation net premiums for all future years for the group of policies, determined

according to Section 6.B.5 below, is less than or equal to the sum of the

corresponding guaranteed gross premiums for such policies. The test shall be

performed on a direct or assumed basis.

b. DET Certification Method - For a group of policies where all policyholders have

elected to convert to a product other than term life, variable life, indexed life, or

ULSG with a material secondary guarantee, in the first year and at least every third

calendar year thereafter the company shall provide a certification by a qualified

actuary that, for each policy in the group of policies, the total reserve for the policy

(including either the NPR adjusted for excess conversion mortality or the NPR plus

an additional reserve for excess reserve mortality) includes a prudent provision for

the additional mortality associated with the conversion and reasonably exceeds the

value of a DR, which otherwise would have been calculated for this group of

policies.

Guidance Note: An example of a method that a qualified actuary could use to support the

actuarial certification includes, but is not limited to, holding a net single premium as an additional

reserve for a converted policy.

3. A company may not group together policies of different contract types with significantly

different risk profiles for purposes of the calculation in Section 6.B.2.

4. If a group of policies being tested is no longer adding new issues, and the test has been

passed for three consecutive years, the group passes until determined otherwise. For this

group, the test must be computed at least once every five years going forward.

5. For purposes of determining the valuation net premiums used in the demonstration in

Section 6.B.2:

a. If pursuant to Section 2, the NPR for the group of policies is the minimum reserve

required under VM-A and VM-C, then the valuation net premiums are determined

according to those minimum reserve requirements.

b. If the NPR is determined according to Section 3.B.4 or Section 3.B.5, then the

lapse rates assumed for all durations shall for the purposes of the DET be set to

0%;

Requirements for Principle-Based Reserves for Life Products VM-20

Guidance Note: The DET no longer applies to term insurance, but in the event that companies or

state insurance regulators wish to see DET results for term for some academic purpose, the step b

instruction above and the step c instruction below have been retained.

c. For policies with guaranteed gross premium patterns that subject the policy to

shock lapses, as defined in Section 3.C.3.b.vi, the valuation net premiums

comparison to the guaranteed gross premiums indicated in paragraph 2 shall be

performed considering only the initial premium period;

d. If the anticipated mortality for the group of policies exceeds the prescribed CSO

mortality rates for the NPR determined in Section 3.C.1.a through 3.C.1.g, then the

company shall use the anticipated mortality to determine the valuation net

premium. For this purpose, mortality shall be measured as the present value of

future death claims as of the valuation date discounted at the valuation interest rate

used for the NPR.

6. For purposes of determining the guaranteed gross premiums used in the demonstration in

Section 6.B.2:

a. For universal life policies, the guaranteed gross premium shall be the premium

specified in the contract, inclusive of any applicable policy fee, or if no premium

is specified, then the level annual gross premium at issue that would keep the

policy in force for the entire period coverage is to be provided based on the policy

guarantees of mortality, interest and expenses; and

b. For policies other than universal life policies, the guaranteed gross premium shall

be the guaranteed premium specified in the contract, inclusive of any applicable

policy fee.

Section 7: Cash-Flow Models

A. Model Structure

1. The company shall design and use a cash-flow model that:

a. Complies with applicable ASOPs in developing cash-flow models and projecting

cash flows.

b. Uses model segments consistent with the company’s asset segmentation plan,

investment strategies or approach used to allocate investment income for statutory

purposes. Assets of segments that cover policies both subject to and not subject to

these requirements may be allocated as defined in Section 7.D.2.

c. Assigns each policy subject to these requirements to only one model segment and

shall use a separate cash-flow model for each model segment.

d. Projects cash flows for a period that extends far enough into the future so that no

obligations remain.

2. The company may use simplifications or modeling efficiency techniques to develop cash

flows, if the approach is consistent with Section 2.G.

Requirements for Principle-Based Reserves for Life Products VM-20

Guidance Note: For example, it may be reasonable to assume 100% deaths or 100% surrenders

after some appropriate period of time.

B. General Description of Cash-Flow Projections

1. For the DR and for each scenario for the SR, the company shall project cash flows ignoring

federal income taxes and reflecting the dynamics of the expected cash flows for the entire

model segment. The company shall reflect the effect of all material product features, both

guaranteed and non-guaranteed. The company shall project cash flows including the

following:

a. Revenues received by the company including gross premiums received from the

policyholder (including any due premiums as of the projected start date).

Guidance Note: To be consistent with quantity B defined in Section 2.A.2 and Section 2.A.3, and

quantity B defined in Section 6.A.3.b, all due premiums as of the projection start date are assumed

to be collected after the projection start date, but the company needs to determine an assumption as

to the timing of when the due premiums will be received.

Guidance Note: Because the projection of cash flows reflects premium mode directly, deferred

premiums are zero under this approach.

b. All material benefits projected to be paid to policyholders—including, but not

limited to, death claims, surrender benefits and withdrawal benefits—reflecting the

impact of all material guarantees and adjusted to take account of amounts projected

to be charged to account values on general account business. For ULSG products

with multiple secondary guarantees, all secondary guarantees should, therefore, be

taken into account.

Guidance Note: Amounts charged to account values on general account business are not revenue;

examples include cost of insurance and expense charges.

c. NGE cash flows as described in Section 7.C.

d. Net cash flows between the general account and separate account for variable

products.

Guidance Note: Cash flows going out from the general account to the separate account increase

the reserve, and cash flows coming in to the general account from the separate account decrease

the reserve. Examples include allocation of net premiums to the separate account, policyholder-

initiated transfers between fixed and variable investment options, transfers of separate account

values to pay death or withdrawal benefits, and amounts charged to separate account values for

cost of insurance, expense, etc.

e. Insurance company expenses (including overhead expenses), commissions, fund

expenses, contractual fees and charges, and taxes (excluding federal income taxes

and expenses paid to provide fraternal benefits in lieu of federal income taxes), as

described in Section 9.E.

f. Revenue-sharing income received by the company (net of applicable expenses)

and other applicable revenue and fees associated with the policies and adjusting

the revenue to reflect the uncertainty of revenue-sharing income that is not

guaranteed, as described in Section 9.G.

Requirements for Principle-Based Reserves for Life Products VM-20

g. Net cash flows associated with any reinsurance as described in Section 8.C.

h. Cash flows from derivative liability and derivative asset programs, as described in

Section 7.K.

i. Cash receipts or disbursements associated with invested assets (other than policy

loans) as described in Section 7.F, including investment income, realized capital

gains and losses, principal repayments, asset default costs, investment expenses,

asset prepayments, and asset sales.

j. If modeled explicitly, cash flows related to policy loans as described in Section

7.F.3.b, including interest income, new loan payments and principal repayments.

2. In determining the DR and SR, the company may perform the cash-flow projections for

each policy in force on the date of valuation or by grouping policies using modeling

efficiency techniques. If such techniques are used, the company shall develop the groups

in a manner consistent with Section 2.G.

C. NGE Cash Flows

1. Except as noted in Section 7.C.5, the company shall include NGE in the models to project

future cash flows beyond the time the company has authorized their payment or crediting.

2. The projected NGE shall reflect factors that include, but are not limited to, the following

(not all of these factors will necessarily be present in all situations):

a. The nature of contractual guarantees.

b. The company’s past NGE practices and established NGE policies.

c. The timing of any change in NGE relative to the date of recognition of a change in

experience.

d. The benefits and risks to the company of continuing to authorize NGE.

3. Projected NGE shall be established based on projected experience consistent with how

actual NGE are determined.

4. Projected levels of NGE in the cash-flow model must be consistent with the experience

assumptions used in each scenario. Policyholder behavior assumptions in the model must

be consistent with the NGE assumed in the model.

5. The company may exclude any portion of an NGE that:

a. Is not based on some aspect of the policy’s or contract’s experience.

b. Is authorized by the board of directors and documented in the board minutes, where

the documentation includes the amount of the NGE that arises from other sources.

However, if the board has guaranteed a portion of the NGE into the future, the

company must model that amount (unless excluded by Section 7.C.6). In other

words, the company cannot exclude from its model any NGE that the board has

guaranteed for future years, even if it could have otherwise excluded them, based

on this subsection.

Requirements for Principle-Based Reserves for Life Products VM-20

6. The liability for policyholder dividends declared but not yet paid that has been established

according to statutory accounting principles as of the valuation date is reported separately

from the statutory reserve. The policyholder dividends that give rise to this dividend

liability as of the valuation date may or may not be included in the cash-flow model at the

company’s option.

a. If the policyholder dividends that give rise to the dividend liability are not included

in the cash-flow model, then no adjustment is needed to the resulting aggregate

modeled (whether deterministic or stochastic) reserve.

b. If the policyholder dividends that give rise to the dividend liability are included in

the cash-flow model, then the resulting aggregate modeled (whether stochastic or

deterministic) reserve should be reduced by the amount of the dividend liability.

D. Starting Assets

1. For each model segment, the company shall select starting assets based on an iterative

process.

Guidance Note:

A reasonable initial set of starting assets for the iteration might be such that the aggregate annual

statement value of the assets at the projection start date equals (a) the estimated value of the

modeled reserve plus the associated PIMR balance on the projection start date; (b) the NPR for the

same set of policies net of any corresponding due and deferred premium asset; or (c) an amount

between (a) and (b).

Iteration may continue until the asset collar of Section 7.D.3 is satisfied or the company may stop

iteration before the asset collar is satisfied and provide the required documentation in Section 7.D.3

that the modeled reserve is not thereby materially understated.

2. For an asset portfolio that supports both policies that are subject and not subject to these

requirements, the company shall determine an equitable method to apportion the total

amount of starting assets between the subject and non-subject policies.

3. If for all model segments combined, the aggregate annual statement value of the final

starting assets, less the corresponding PIMR balance, is

(a) less than:

(i) 98% of the modeled reserve if modeled reserve is positive;

(ii) 102% of the modeled reserve if modeled reserve is negative; or

Requirements for Principle-Based Reserves for Life Products VM-20

(b) greater than the largest of:

(i) 102% of the modeled reserve;

(ii) the NPR for the same set of policies, net of due and deferred premiums

thereon:

and

(iii) zero,

then the company shall provide documentation in the PBR Actuarial Report that provides

reasonable assurance that the modeled reserve is not materially understated as a result of

the estimate of the amount of starting assets.

4. The company shall select starting assets for each model segment that consists of the

following:

a. All separate account assets supporting the policies.

b. All policy loans supporting the policies that are explicitly modeled under Section

7.F.3.b.

c. The relevant balance of any due, accrued or unearned investment income.

d. All derivative instruments held at the projection start date that are part of a

derivative program and can be appropriately allocated to the model segment.

e. An amount of other general account assets such that the aggregate value of starting

assets meets the requirements in Section 7.D.1. These assets shall generally be

selected on a consistent basis from one reserve valuation to the next. Any material

change in the selection methodology shall be documented in the PBR Actuarial

Report.

5. The aggregate value of general account starting assets is the sum of the amounts in Section

7.D.4.b through Section 7.D.4.e above.

Guidance Note: The aggregate value of general account assets in Section 7.D.5 may be negative.

This may occur, for example, for model segments in which a substantial portion of policyholder

funds are allocated to separate accounts. The assets in Section 7.D.4.e above may include negative

assets or short-term borrowing, resulting in a projected interest expense.

6. The company shall calculate the projected values of starting assets in a manner consistent

with their values at the start of the projection.

7. Under Section 7.D.1, any PIMR balance allocated to the group of one or more policies

being modeled at the projection start date is included when determining the amount of

starting assets and is then subtracted out, under Section 4 and Section 5, as the final step in

calculating the modeled reserves. The determination of the PIMR allocation is subject to

the following:

a. The amount of PIMR allocable to each model segment is the approximate statutory

interest maintenance reserve liability that would have developed for the model

Requirements for Principle-Based Reserves for Life Products VM-20

segment, assuming applicable capital gains taxes are excluded. The allocable

PIMR may be either positive or negative.

b. In performing the allocation to each model segment, the company shall use a

reasonable approach to allocate any portion of the total company balance that is

disallowable under statutory accounting procedures (i.e., when the total company

balance is an asset rather than a liability). The company shall use a reasonable

approach to allocate the total company balance between PBR and non-PBR

business and then allocate the PBR portion among model segments in an equitable

fashion.

c. The company may use a simplified approach to allocate the PIMR, if the impact

of the PIMR on the minimum reserve is minimal.

E. Reinvestment Assets and Disinvestment

1. At the valuation date and each projection interval as appropriate, model the purchase of

general account reinvestment assets with available cash and net asset and liability cash

flows in a manner that is representative of and consistent with the company’s investment

policy for each model segment, subject to the following requirements:

a. The modeled company investment strategy may incorporate a representation of the

actual investment policy that ranges from relatively complex to relatively simple.

In any case, the PBR Actuarial Report shall include documentation supporting the

appropriateness of the representation relative to actual investment policy.

Guidance Note: A complex model representation may include, for example, illiquid or callable

assets whereas a simple model representation may involve mapping of more complex assets to

combinations of, for example, public non-callable corporate bonds, U.S. Treasuries and cash.

b. The final maturities and cash-flow structures of assets purchased in the model, such

as the patterns of gross investment income and principal repayments or a fixed or

floating rate interest basis, shall be determined by the company as part of the model

representation.

c. The combination of price and structure for fixed income investments and

derivative instruments associated with fixed income investments shall

appropriately reflect the then-current U.S. Department of the Treasury (Treasury

Department) curve along the relevant scenario and the requirements for gross asset

spread assumptions stated below.

d. For purchases of public non-callable corporate bonds, use the gross asset spreads

over Treasuries prescribed in Section 9.F.8.a through Section 9.F.8.c. (For

purposes of this subsection, “public” incorporates both registered and 144a

securities.) The prescribed spreads reflect current market conditions as of the

model start date and grade to long-term conditions based on historical data at the

start of projection year four.

e. For transactions of derivative instruments associated with fixed income

investments, reflect the prescribed assumptions in Section 9.F.8.d for interest rate

swap spreads.

f. For purchases of other fixed income investments, if included in the modeled

company investment strategy, set assumed gross asset spreads over Treasuries in

a manner that is consistent with, and results in reasonable relationships to, the

Requirements for Principle-Based Reserves for Life Products VM-20

prescribed spreads for public non-callable corporate bonds and interest rate swaps

as defined in Section 9.F.8.

g. Notwithstanding the above requirements, the modeled reserve shall be the higher

of that produced by the modeled company investment strategy and that produced

by substituting an alternative investment strategy in which the fixed income

reinvestment assets have the same weighted average life (WAL) as the

reinvestment assets in the modeled company investment strategy and are all public

non-callable corporate bonds with gross asset spreads, asset default costs and

investment expenses by projection year that are consistent with a credit quality

blend of 50% PBR credit rating 6 (A2/A) and 50% PBR credit rating 3 (Aa2/AA).

Policy loans, equities and derivative instruments associated with the execution of

future hedging strategies supporting the policies are not affected by this

requirement.

Guidance Note: VM-31 r

equires a demonstration of compliance with VM-20 Section 7.E.1.g. In

many cases, particularly if the modeled company investment strategy does not involve callable

assets, it is expected that the demonstration of compliance will not require running the reserve

calculation twice. For example, an analysis of the weighted average net reinvestment spread on

new purchases by projection year (gross spread minus prescribed default costs minus investment

expenses) of the modeled company investment strategy compared to the weighted average net

reinvestment spreads by projection year of the alternative strategy may suffice. The assumed mix

of asset types, asset credit quality or the levels of non-prescribed spreads for other fixed income

investments may need to be adjusted to achieve compliance. Or, the company may be able to rely

on a previous year’s determination as to which strategy produces a higher reserve, if the assets and

strategy have not changed very substantially since then.

2. Model at each projection interval any disinvestment in a manner that is consistent with the

company’s investment policy and that reflects the company’s cost of borrowing where

applicable, provided that the assumed cost of borrowing is not lower than the rate at which

positive cash flows are reinvested in the same time period, taking into account duration,

ratings, and other attributes of the borrowing mechanism. Gross asset spreads used in

computing market values of assets sold in the model shall be consistent with, but not

necessarily the same as, the gross asset spreads in Section 7.E.1.d and Section 7.E.1.f

above, recognizing that starting assets may have different characteristics than modeled

reinvestment assets.

Guidance Note: The simple language above "provided that the assumed cost of borrowing is not

lower than the rate at which positive cash flows are reinvested in the same time period" is intended

to prevent excessively optimistic borrowing assumptions. If in any case, the assumed cost of

borrowing restriction cannot

be fully applied or followed precisely, then as with all other

simplifications/approximations, the company shall not allow borrowing assumptions to materially

reduce the reserve.

3. Determine the values of reinvestment assets at the valuation date and each projection

interval in a manner consistent with the values of starting assets that have similar

investment characteristics.

F. Cash Flows from Invested Assets

The company shall determine cash flows from invested assets, including starting and reinvestment

assets, as follows:

Requirements for Principle-Based Reserves for Life Products VM-20

1. Determine cash flows for each projection interval for general account fixed income assets,

including derivative asset programs associated with these assets, as follows:

a. Model gross investment income and principal repayments in accordance with the

contractual provisions of each asset and in a manner consistent with each scenario.

Grouping of assets is allowed if the company can demonstrate that grouping does

not materially understate the modeled reserve that would have been obtained using

a seriatim approach.

b. Reflect asset default costs as prescribed in Section 9.F and anticipated investment

expenses through deductions to the gross investment income.

c. Model the proceeds arising from modeled asset sales and determine the portion

representing any realized capital gains and losses.

Guidance Note: Examples of general account fixed income assets include public bonds,

convertible bonds, preferred stocks, private placements, asset backed securities, commercial

mortgage loans, residential mortgage loans, mortgage-backed securities and collateralized

mortgage obligations.

d. Reflect any uncertainty in the timing and amounts of asset cash flows related to

the paths of interest rates, equity returns or other economic values directly in the

projection of asset cash flows. Asset defaults are not subject to this requirement

since asset default assumptions must be determined by the prescribed method in

Section 9.F.

2. Determine cash flows for each projection interval for general account equity assets (i.e.,

non-fixed income investments having substantial volatility of returns, such as common

stocks and real estate investments), including derivative programs associated with these

assets, as follows:

a. Determine the grouping for equity asset categories (e.g., large cap stocks,

international stocks, owned real estate, etc.) and the allocation of specific assets to

each category as described in Section 7.I.

b. Project the gross investment return including realized and unrealized capital gains

for each investment category in a manner that is consistent with the prescribed

general account equity return described in Section 7.G.

c. Model the timing of an asset sale in a manner that is consistent with the investment

policy of the company for that type of asset. Reflect expenses through a deduction

to the gross investment return using prudent estimate assumptions.

3. Determine cash flows for each projection interval for policy loan assets by modeling

existing loan balances either explicitly or by substituting assets that are a proxy for policy

loans (e.g., bonds, cash, etc.) subject to the following:

a. If the company substitutes assets that are a proxy for policy loans, the company

must demonstrate that such substitution:

i. Produces reserves that are no less than those that would be produced by

modeling existing loan balances explicitly.

ii. Complies with the policyholder behavior requirements stated in

Section 9.D.

Requirements for Principle-Based Reserves for Life Products VM-20

b. If the company models policy loans explicitly, the company shall:

i. Treat policy loan activity as an aspect of policyholder behavior and subject

to the requirements of Section 9.D.

ii. For both the DR and the SR, assign loan balances either to exactly match

each policy’s utilization or to reflect average utilization over a model

segment or sub-segments.

iii. Model policy loan interest in a manner consistent with policy provisions

and with the scenario. In calculating the DR and SR, include interest paid

in cash as a positive policy loan cash flow in that projection interval, per

Section 4.A.4, but do not include interest added to the loan balance as a

policy loan cash flow. (The increased balance will require increased

repayment cash flows in future projection intervals.)

iv. Model policy loan principal repayments, including those that occur

automatically upon death or surrender. In calculating the DR and the SR,

include policy loan principal repayments as a positive policy loan cash

flow, per Section 4.A.4.

v. Model additional policy loan principal. In calculating the deterministic and

SR, include additional policy loan principal as a negative policy loan cash

flow, per Section 4.A.4

(but do not include interest added to the loan

balance as a negative policy loan cash flow).

vi. Model any investment expenses allocated to policy loans and include them

either with policy loan cash flows or insurance expense cash flows.

4. Determine cash flows for each projection interval for assets used in the hedging of credited

amounts for indexed accounts within life insurance products (including indexed life

products and indexed accounts within other types of life insurance products) as follows:

a. In lieu of the economic scenario 12 equity returns, as described in Section

7.G.1.a.ii for the DR, use X% of the amount spent on options, accumulated to the

end of the option settlement period, where X is equal to 100% in projection years

1–20 and 108% in projection years 21+. The one-year Treasury Department rate

from scenario 12 applicable to the projection year will be used for accumulation.

b. For the scenarios described in Section 7.G.2 for the SR, use scenario equity returns

applicable to the underlying basis for credited interest, along with mechanics of

the underlying options that reflect caps, floors and participation rates.

5. Determine cash flows for each projection interval for all other general account assets by

modeling asset cash flows on other assets that are not described in Section 7.F.1 through

Section 7.F.4 using methods consistent with the methods described in Section 7.F.1 and

Section 7.F.2. This includes assets that are a hybrid of fixed income and equity investments.

6. Determine cash flows or total investment returns as appropriate for each projection interval

for all separate account assets as follows:

a. Determine the grouping for each variable fund and subaccount (e.g., bonds funds,

large cap stocks, international stocks, owned real estate, etc.) as described in

Section 7.J.

Requirements for Principle-Based Reserves for Life Products VM-20

b. Project the total investment return for each variable fund and subaccount in a

manner that is consistent with the prescribed returns described in Section 7.G.

G. Economic Scenarios

1. Deterministic Economic Scenarios

a. For purposes of calculating the DR under Section 4, the company shall use:

i. Treasury interest rate curves following Scenario 12 from the set of

prescribed scenarios used in the SERT defined in Section 6.A.2; and

ii. Total investment return paths for general account equity assets (excluding

assets used in the hedging of credited amounts for indexed accounts as

described in Section 7.F.4) and separate account fund performance

consistent with the total investment returns for corresponding investment

categories contained in Scenario 12 from the set of prescribed scenarios

used in the SERT defined in Section 6.A.2.

b. The company shall map each of the proxy funds defined in Section 7.I and Section

7.J to the prescribed fund returns defined in Section 7.G.1.a following the mapping

process described in Section 7.G.2.b.

c. The Scenario 12 interest rate yield curves and total investment returns are based

on approximately a one standard deviation shock to the economic conditions as of

the projection start date, where the shock is spread uniformly over the first 20 years

of the projection. The values in Scenario 12 are based on the same generator that

is used for the stochastic scenarios, as described in Appendix 1.

2. Stochastic Economic Scenarios

a. For purposes of calculating the SR under Section 5, the company shall use:

i. Treasury interest rate curves following the prescribed economic scenario

generator with prescribed parameters, as described in Appendix 1; and

ii. Total investment return paths for general account equity assets and

separate account fund performance generated from a prescribed economic

scenario generator with prescribed parameters, as described in Appendix

Guidance Note: It is expected that the prescribed generator will produce prescribed returns for

several different investment categories (similar to the 19 categories provided by Academy for

C3P2): Treasuries at different tenors, money market/short-term investments, U.S. Intermediate

Term Government Bonds, U.S. Long-Term Corporate Bonds, Diversified Fixed Income,

Diversified Balanced Allocation, Diversified Large Capitalized U.S. Equity, Diversified

International Equity, Intermediate Risk Equity and Aggressive or Exotic Equity).

b. The company shall map each of the proxy funds defined in Section 7.I and Section

7.J to the prescribed fund returns defined in Section 7.G.2.a. This mapping process

may involve blending the accumulation factors from two or more of the prescribed

fixed income and/or equity returns to create the projected returns for each proxy

fund. If a proxy fund cannot be appropriately mapped to some combination of the

prescribed returns, the company shall determine an appropriate return and disclose

the rationale for determining such return.

Requirements for Principle-Based Reserves for Life Products VM-20

Guidance Note: Mapping of the returns on the proxy funds to the prescribed funds returns is left

to the judgment of the qualified actuary to whom responsibility for this group of policies is

assigned, but the returns so generated must be consistent with the prescribed returns. This does not

imply a strict functional relationship between the model parameters for various markets/funds, but

it would generally be inappropriate to assume that a market or fund consistently “outperforms”

(lower risk, higher expected return relative to the efficient frontier) over the long term.

When parameters are fit to historic data without consideration of the economic setting in which the

historic data emerged, the market price of risk may not be consistent with a reasonable long-term

model of market equilibrium. One possibility for establishing “consistent” parameters (or

scenarios) across all funds would be to assume that the market price of risk is constant (or nearly

constant) and governed by some functional (e.g., linear) relationship. That is, higher expected

returns can be garnered only by assuming greater risk. (For example, the standard deviation of log

returns is often used as a measure of risk.)

Specifically, two return distributions X and Y would satisfy the following relationship:

Market Price of Risk =

(



[





]







)

(



[





]







)

Where



[



] and σ are, respectively, the (unconditional) expected returns and volatilities, and r is

the

expected risk-free rate over a suitably long holding period commensurate with the projection

horizon. One approach to establish consistent scenarios would set the model parameters to maintain

a near-constant market price of risk.

A closely related method would assume some form of “mean-variance” efficiency to establish

consistent model parameters. Using the historic data, the mean-variance (alternatively, “drift-

volatility”) frontier could be constructed from a plot of (mean, variance) pairs from a collection of

world market indices. The frontier could be assumed to follow some functional form (quadratic

polynomials and logarithmic functions tend to work well) with the coefficients determined by

standard curve fitting or regression techniques. Recognizing the uncertainty in the data, a “corridor”

could be established for the frontier. Model parameters then would be adjusted to move the proxy

market (fund) inside the corridor.

Clearly, there are many other techniques that could be used to establish consistency between the

return on the proxy funds and the prescribed returns. While appealing, the above approaches do

have drawbacks, and the actuary should not be overly optimistic in determining the fund returns.

c. Use of fewer scenarios rather than a higher number of scenarios is permissible as

a model efficiency technique provided that:

i. The smaller set of scenarios is generated using the scenario picker tool

provided within the prescribed scenario generator, and

ii. The use of the technique is consistent with Section 2.G.

d. The number of scenarios required to comply with Section 2.G will depend on the

specific nature of the company’s assets and liabilities and may change from time

to time. Compliance with Section 2.G would ordinarily be tested by comparing

scenario reserves of a simpler model or a representative subset of policies, run

using the reduced scenario set, with the scenario reserves of the same subset or

simpler model run using the larger scenario set.

e. Companies also shall perform a periodic analysis of the impact of using a different

number of scenarios on the SR, noting the difference in results as the number of

Requirements for Principle-Based Reserves for Life Products VM-20

scenarios is increased. Again, an appropriate subset of the entire in-force block can

be used for this analysis.

H. Determination of NAER and Discount Rates

1. In calculating the DR, under Section 4.A, the company shall determine a path of NAER for

each model segment that reflects the net general account portfolio rate in each projection

interval (i.e., monthly, quarterly, annually) in compliance with Section 7, which will

depend primarily on:

a. Projected net investment earnings from the portfolio of starting assets.

b. Pattern of projected asset cash flows from the starting assets and subsequent

reinvestment assets.

c. Pattern of net liability cash flows.

d. Projected net investment earnings from reinvestment assets.

2. The company shall calculate the NAER as the ratio of net investment earnings divided by

invested assets subject to the requirements in a through e below. All items reflected in the

ratio are consistent with statutory asset valuation and accrual accounting, including

reflection of due, accrued or unearned investment income where appropriate.

a. The impact of separate accounts and policy loans is excluded.

b. The NAER for each projection interval is calculated in a manner that is consistent

with the timing of cash flows and length of the projection interval of the related

cash-flow model.

c. Net investment earnings include:

i. Gross investment income plus capital gains and losses, minus prescribed

default costs as defined in Section 9.F, and minus investment expenses.

ii. Income from derivative asset programs.

d. Invested assets are determined in a manner that is consistent with the timing of

cash flows within the cash-flow model and the length of the projection interval of

the cash-flow model.

e. The annual statement value of derivative instruments or a reasonable

approximation thereof is in invested assets.

All items reflected in the ratio are consistent with statutory asset valuation and

accrual accounting, including reflection of due, accrued or unearned investment

income where appropriate.

Guidance Note: Section 7.A.2 permits the use of modeling efficiency techniques to calculate the

DR and SR. This availability for simplification includes ways to determine appropriate NAER.

Small to intermediate size companies, or any size company with smaller blocks of business, have

options to create NAER with modeling efficiency techniques if the results are consistent with

Section 2.G.

3. The company shall use the path of NAER as the discount rates for each model segment in

the DR calculations in Section 4.A.

Requirements for Principle-Based Reserves for Life Products VM-20

4. The company shall use the path of one-year Treasury interest rates in effect at the beginning

of each projection year multiplied by 1.05 for each model segment within each scenario as

the discount rates in the SR calculations in Section 5.

Guidance Note: The use of different discount rate paths for the deterministic and scenario reserves

is driven by differences in methodology. The DR is based on a present value of all liability cash

flows, with the discount rates reflecting the investment returns of the assets backing the liabilities.

The scenario reserve is based on a starting estimate of the reserve and assets that support that

estimate, plus the greatest present value of accumulated deficiencies. Here, the discount rates are a

standard estimate of the investment returns of only the marginal assets needed to eliminate either a

positive or negative deficiency.

I. Grouping of Equity Investments in the General Account

1. The company may group the portion of the general account starting assets that are equity

investments (e.g., common stocks, real estate investments) for modeling using an approach

that establishes various equity investment categories with each investment category

defined to reflect the different types of equity investments in the portfolio.

2. The company shall design a proxy for each equity investment category in order to develop

the investment return paths and map each investment category to an appropriately crafted

proxy investment category normally expressed as a linear combination of recognized

market indices (or sub-indices). The company shall include an analysis in the proxy

construction process that establishes a firm relationship between the investment return on

the proxy and the specific equity investment category.

J. Grouping of Variable Funds and Subaccounts for Separate Accounts

1. Similar to the approach used for general account equity investments, the company may

group the portion of the starting asset amount held in the separate account represented by

the variable funds and the corresponding account values for modeling using an approach

that recognizes the investment guidelines and objectives of the funds.

2. Similar to the approach used for general account equity investments, the company shall

design an appropriate proxy for each variable subaccount in order to develop the

investment return paths and map each variable account to an appropriately crafted proxy

fund normally expressed as a linear combination of recognized market indices (or sub-

indices). The company shall include an analysis in the proxy construction process that

establishes a firm relationship between the investment return on the proxy and the specific

variable funds.

Requirements for Principle-Based Reserves for Life Products VM-20

K. Modeling of Derivative Programs

1. When determining the DR and the SR, the company shall include in the projections the

appropriate costs and benefits of derivative instruments that are currently held by the

company in support of the policies subject to these requirements. The company shall also

include the appropriate costs and benefits of anticipated future derivative instrument

transactions associated with the execution of future hedging strategies supporting the

policies, as well as the appropriate costs and benefits of anticipated future derivative

instrument transactions associated with non-hedging derivative programs (e.g., replication,

income generation) undertaken as part of the investment strategy supporting the policies,

provided they are normally modeled as part of the company’s risk assessment and

evaluation processes.

2. F

or each derivative program that is modeled, the company shall reflect the company’s

established investment policy and procedures for that program; project expected program

performance along each scenario; and recognize all benefits, residual risks and associated

frictional costs. The residual risks include, but are not limited to: basis, gap, price,

parameter estimation and variation in assumptions (mortality, persistency, withdrawal,

etc.). Frictional costs include, but are not limited to: transaction, margin (opportunity costs

associated with margin requirements) and administration. For future hedging strategies

supporting the policies, the company may not assume that residual risks and frictional costs

have a value of zero, unless the company demonstrates in the PBR Actuarial Report that

“zero” is an appropriate expectation. VM-21, Section 1.B, Principle 5 applies as a general

principle for the modeling of future hedging strategies.

3. In circumstances where one or more material risk factors related to a derivative program

are not fully captured within the cash-flow model used to calculate CTE 70, the company

shall reflect the approximation, simplification or model limitations in the modeling of such

risk factors by increasing the SR as described in Section 5.E. The company shall also be

able to justify that the method appropriately reflects the potential error using historical

experience, e.g., analysis of historical performance or backtesting.

Guidance Note: The previous two paragraphs address a variety of possible situations. Some

hedging programs may truly have zero or minimal residual risk exposure, such as when the hedge

program exactly replicates the liability being hedged. With dynamic hedging strategies, residual

risks are typically expected; however, in some cases, the cash-flow model supporting the CTE

calculation may be able to adequately reflect such risks through margins in program assumptions,

adjustments to costs and benefits, etc. In other cases, reference to additional external models or

analyses may be necessary where such results cannot be readily expressed in a format directly

amenable to a CTE calculation. In such cases, the company will need to combine the results of such

models by some method that is consistent with the objectives of these requirements. Emerging

actuarial practice will be relied on to provide approaches for a range of situations that may be

encountered.

4. In circumstances where documentation outlining the future hedging strategies is

incomplete, the company shall reflect the future hedging strategies not being clearly

defined by increasing the SR as described in Section 5.E. To support no increase to the SR,

there should be very robust documentation outlining each future hedging strategy. In

particular, if the documentation is materially incomplete for any of the individual CDHS

attributes (a) through (j), as listed in VM-01, the SR shall be at least as great as the SR that

would result if a future hedging strategy were not reflected in the SR.

Requirements for Principle-Based Reserves for Life Products VM-20

Any increases required to the SR to reflect that documentation is not available to support

that the future hedging strategies are clearly defined shall be in addition to increases to the

SR pursuant to Section 7.K.3 above.

Guidance Note: Section 5.E requires that the company “Determine any additional amount needed

to capture any material risk included in the scope of these requirements but not already reflected in

the cash-flow models using an appropriate and supportable method and supporting rationale.” In

the case of a derivative program that is a future hedging strategy, Section 7.K.3 requires such an

increase for disconnects between the hedge modeling and the future hedging strategy, while Section

7.K.4 requires such an increase for disconnects between the loosely defined future hedging strategy

and what may actually take place.

Guidance Note: Statutes, laws or regulations of any state or jurisdiction related to the use of

derivative instruments for hedging purposes supersede these provisions. Therefore, these

provisions should not be used to determine whether a company is permitted to use such instruments

in any state or jurisdiction.

Section 8: Reinsurance

A. General Considerations

1. In this section, reinsurance includes retrocession, and assuming company includes

retrocessionaire.

Guidance Note: In determining reserves, one party to a reinsurance transaction may make use of

reserve calculations of the other party. In this situation, if the company chooses assumptions that

differ from those used by the other party, the company must either rerun the reserve calculation or

be prepared to demonstrate that appropriate adjustments to the other party’s calculations have been

made.

2. The company shall assume that the laws and regulations in place as of the valuation date

regarding credit for reinsurance remain in effect throughout the projection period.

3. A company shall include a reinsurance agreement or amendment in calculating the

minimum reserve if, under the terms of the AP&P Manual, the agreement or amendment

qualifies for credit for reinsurance.

4. If a reinsurance agreement or amendment does not qualify for credit for reinsurance but

treating the reinsurance agreement or amendment as if it did so qualify would result in a

reduction to the company’s surplus, then the company shall increase the minimum reserve

by the absolute value of such reductions in surplus.

Guidance Note: Section 8.A.3 provides that, in general, if a treaty does not meet the requirements

for credit for reinsurance, it should not be allowed to reduce the reserve. Thus, it should not be

allowed a reinsurance credit to the NPR, and its cash flows should not be included in the cash-flow

models used to calculate the DR or SR. Section 8.A.4 introduces the exception that if allowing a

net premium credit and including the treaty cash flows in the cash-flow models would produce a

more conservative result, then that more conservative result should prevail.

B. Determination of a Credit to the NPR to Reflect Reinsurance Ceded

Requirements for Principle-Based Reserves for Life Products VM-20

1. Determination of the credit to the NPR to reflect reinsurance shall be done in accordance

with SSAP No. 61R—Life, Deposit-Type and Accident and Health Reinsurance in the

AP&P Manual.

Guidance Note: The credit taken under a coinsurance arrangement shall be calculated using the

same methodology and assumptions used in determining its NPR, but only for the percentage of

the risk that was reinsured. If the reinsurance is on a YRT basis, the credit shall be calculated using

the assumptions used in determining the NPR, but for the net amount at risk.

2. If a company cedes a portion of a policy under more than one reinsurance agreement, then

the company shall calculate a credit separately for each such agreement. The credit for

reinsurance ceded for the policy shall be the sum of the credits for all such agreements.

3. The credit for reinsurance ceded applied to a group of policies shall be the sum of the credit

for reinsurance ceded for each of the policies of the group.

C. Reflection of Reinsurance Cash Flows in the DR or SR

For non-guaranteed YRT reinsurance ceded or assumed, the cash-flow modeling requirements in

Sections 8.C.1 through 8.C.14 below do not apply since non-guaranteed YRT reinsurance ceded or

assumed does not need to be modeled; see Section 8.C.18 below. YRT shall include other

reinsurance arrangements that are similar in effect to YRT.

For policies issued on or after Jan. 1, 2017, and before Jan. 1, 2020, the company may elect, with

domiciliary commissioner approval, a phase-in of the current methodology for non-guaranteed

YRT reinsurance with allowance for future mortality improvement from the methodology in the

2021 Valuation Manual for non-guaranteed YRT reinsurance without allowance for future

mortality improvement, provided that the company uses a weighted average of the results from the

two methodologies, with the weight for the prior methodology being no more than (20XX-

YYYY)/(20XX-2021), where YYYY is the current valuation year, and 20XX is the final year of

the phase-in. A company may elect to phase in these requirements over a 3-year period beginning

Jan. 1, 2022, and ending Dec. 31, 2024. A company may elect a longer phase-in period of up to

seven years beginning Jan. 1, 2022, and ending Dec. 31, 2028, with approval of the domiciliary

commissioner.

In calculations of the DR or SR pursuant to Section 4 and

Section 5:

1. The company shall use assumptions and margins that are appropriate for each company

pursuant to a reinsurance agreement. In such instance, the ceding and assuming companies

are not required to use the same assumptions and margins for the reinsured policies.

2. To the extent that a single deterministic valuation assumption for risk factors associated

with certain provisions of reinsurance agreements will not adequately capture the risk, the

company shall do one of the following:

a. Stochastically model the risk factors directly in the cash-flow model when

calculating the SR.

b. Perform a separate stochastic analysis outside the cash-flow model to quantify the

impact on reinsurance cash flows to and from the company. The company shall

use the results of this analysis to adjust prudent estimate assumptions or to

determine an amount to adjust the SR to adequately make provision for the risks

of the reinsurance features.

Requirements for Principle-Based Reserves for Life Products VM-20

Guidance Note: An example of reinsurance provisions where a single deterministic valuation

assumption will not adequately capture the risk is stop-loss reinsurance.

3. The company shall determine cash flows for reinsurance ceded subject to the following:

a. The company shall include the effect of projected cash flows received from or paid

to assuming companies under the terms of ceded reinsurance agreements in the

cash flows used in calculating the DR in Section 4 and SR in Section 5.

b. If cash flows received from or paid to assuming companies under the terms of any

reinsurance agreement are dependent upon cash flows received from or paid to

assuming companies under other reinsurance agreements, the company shall first

determine reinsurance cash flows for reinsurance agreements with no such

dependency and then use the reinsurance cash flows from these independent

agreements to determine reinsurance cash flows for the remaining dependent

agreements.

c. The company shall use assumptions to project cash flows to and from assuming

companies that are consistent with other assumptions used by the company in

calculating the DR or SR for the reinsured policies and that reflect the terms of the

reinsurance agreements.

4. The company shall determine cash flows for reinsurance assumed subject to the following:

a. The company shall include the effect of cash flows projected to be received from

and paid to ceding companies under the terms of assumed reinsurance agreements

in the cash flows used in calculating the DR in Section 4 and the SR in Section 5.

b. If cash flows received from or paid to ceding companies under the terms of any

reinsurance agreement are dependent upon cash flows received from or paid to

ceding companies under other reinsurance agreements, the company shall first

determine reinsurance cash flows for reinsurance agreements with no such

dependency and then use the reinsurance cash flows from these independent

agreements to determine reinsurance cash flows for the remaining dependent

agreements.

5. If a company assumes a policy under more than one reinsurance agreement, then the

company may treat each agreement separately for the purposes of calculating the reserve.

6. An assuming company shall use assumptions to project cash flows to and from ceding

companies that reflect the assuming company’s experience for the business segment to

which the reinsured policies belong and reflect the terms of the reinsurance agreement.

7. The company shall assume that the counterparties to a reinsurance agreement are

knowledgeable about the contingencies involved in the agreement and likely to exercise

the terms of the agreement to their respective advantage, taking into account the context

of the agreement in the entire economic relationship between the parties. In setting

assumptions for the NGE in reinsurance cash flows, the company shall include, but not be

limited to, the following:

a. The usual and customary practices associated with such agreements.

b. Past practices by the parties concerning the changing of terms, in an economic

environment similar to that projected.

Requirements for Principle-Based Reserves for Life Products VM-20

c. Any limits placed upon either party’s ability to exercise contractual options in the

reinsurance agreement.

d. The ability of the direct-writing company to modify the terms of its policies in

response to changes in reinsurance terms.

e. Actions that might be taken by a party if the counterparty is in financial difficulty.

8. The company shall account for any actions that the ceding company and, if different, the

direct-writing company have taken or are likely to take that could affect the expected cash

flows of the reinsured business in determining assumptions for the modeled reserve.

Guidance Note: Examples of actions the direct-writing company could take include:

1) instituting internal replacement programs or special underwriting programs, both of which could

change expected mortality rates; or 2) changing NGE in the reinsured policies, which could affect

mortality, policyholder behavior, and possibly expense and investment assumptions. Examples of

actions the ceding company could take include: 1) the exercise of contractual options in a

reinsurance agreement to influence the setting of NGEs in the reinsured policies; or 2) the ability

to participate in claim decisions.

9. For actions taken by the ceding company and, if different, the direct-writing company, set

assumptions in a manner consistent with Section 9.D. Note that these assumptions are in

addition to, rather than in lieu of, assumptions as to the behavior of the underlying

policyholders.

10. The company shall use assumptions in determining the modeled reserve that account for

any actions that the assuming company has taken or is likely to take that could affect the

expected cash flows of the reinsured business.

Guidance Note: Examples of such actions include, but are not limited to, changes to the current

scale of reinsurance premiums and changes to expense allowances.

11. The company shall consider all elements of a reinsurance agreement that the assuming

company can change, and assumptions for those elements are subject to the requirements

in Section 7.C. Appropriate assumptions for these elements may depend on the scenario

being tested. The company shall take into account all likely consequences of the assuming

company changing an element of the reinsurance agreement, including any potential

impact on the probability of recapture by the ceding company.

Guidance Note: The ability of an assuming company to change elements of a reinsurance

agreement, such as reinsurance premiums or expense allowances, may be thought of as comparable

to the ability of a direct-writing company to change NGE on policies.

12. The company shall set assumptions in a manner consistent with Section 8.C.8, taking into

account any ceding company option to recapture reinsured business. Appropriate

assumptions may depend on the scenario being tested (analogous to interest-sensitive

lapses).

Guidance Note: The right of a ceding company to recapture is comparable to policyholder

surrender options for a direct-writing company. Cash flows associated with recapture include

recapture fees or other termination settlements.

13. The company shall set assumptions in a manner consistent with Section 8.C.10, taking into

account an assuming company’s right to terminate in-force reinsurance business. In the

Requirements for Principle-Based Reserves for Life Products VM-20

case in which the assuming company’s right to terminate is limited to cases of non-payment

of amounts due by the ceding company or other specific, limited circumstances, the

company may assume that the termination option would be expected to have insignificant

value to either party and, therefore, may exclude recognition of this right to terminate in

the cash-flow projections. However, if a reinsurance agreement contains other termination

provisions with material impact, the company shall set appropriate assumptions for these

provisions consistent with the particular scenario being tested.

14. If, under the terms of the reinsurance agreement, some of the assets supporting the reserve

are held by the counterparty or by another party, the company shall:

a. Consider the following in order to determine whether to model such assets for

purposes of projecting cash flows:

i. The degree of linkage between the portfolio performance and the

calculation of the reinsurance cash flows.

ii. The sensitivity of the valuation result to the asset portfolio performance.

b. If the company concludes that modeling is unnecessary, document the testing and

logic leading to that conclusion.

c. If the company determines that modeling is necessary, comply with the

requirements in Section 7.E and Section 9.F, taking into account:

i. The investment strategy of the company holding the assets, as codified in

the reinsurance agreement or otherwise based on current documentation

provided by that company.

ii. Actions that may be taken by either party that would affect the net

reinsurance cash flows (e.g., a conscious decision to alter the investment

strategy within the guidelines).

Guidance Note: In some situations, it may not be necessary to model the assets held by the other

party. An example would be modeling by an assuming company of a reinsurance agreement

containing provisions, such as experience refund provisions, under which the cash flows and

effective investment return to the assuming company are the same under all scenarios.

Guidance Note: Special considerations for modified coinsurance: Although the modified

coinsurance (ModCo) reserve is called a reserve, it is substantively different from other reserves.

It is a fixed liability from the ceding company to the assuming company in an exact amount, rather

than an estimate of a future obligation. The ModCo reserve is analogous to a deposit. This concept

is clearer in the economically identical situation of funds withheld. Therefore, the value of the

modified coinsurance reserve generally will not have to be determined by modeling. However, the

projected ModCo interest may have to be modeled. In many cases, the ModCo interest is

determined by the investment earnings of an underlying asset portfolio, which, in some cases, will

be a segregated asset portfolio or in others the ceding company’s general account. Some agreements

may use a rate not tied to a specific portfolio.

15. If a ceding company has knowledge that an assuming company is financially impaired, the

ceding company shall establish a margin for the risk of default by the assuming company.

In the absence of knowledge that the assuming company is financially impaired, the ceding

company is not required to establish a margin for the risk of default by the assuming

company.

Requirements for Principle-Based Reserves for Life Products VM-20

16. If an assuming company has knowledge that a ceding company is financially impaired, the

assuming company shall establish a margin for the risk of default by the ceding company.

Such margin may be reduced or eliminated if the assuming company has a right to

terminate the reinsurance upon non-payment by the ceding company. In the absence of

knowledge that a ceding company is financially impaired, the assuming company is not

required to establish a margin for the risk of default by the ceding company.

17. In setting any margins required by Section 8.C.15 and Section 8.C.16 to reflect potential

uncertainty regarding the receipt of cash flows from a counterparty, the company shall take

into account the ratings, RBC ratio or other available information related to the probability

of the risk of default by the counterparty, as well as any security or other factor limiting

the impact on cash flows.

18. When the reinsurance ceded or assumed is on a non-guaranteed YRT or similar basis, the

corresponding reinsurance cash flows do not need to be modeled. This includes

retrocession arrangements covering non-guaranteed YRT reinsurance and similar

agreements. Rather, for a ceding company, the post-reinsurance-ceded DR or SR shall be

the pre-reinsurance-ceded DR or SR pursuant to Section 8.D.2, plus any applicable

provision pursuant to Section 8.C.15 and Section 8.C.17, minus the NPR reinsurance credit

from Section 8.B. For an assuming company, the DR or SR for the business assumed on a

non-guaranteed YRT or similar basis shall be set equal to the NPR from Section 3.B.8, plus

any applicable provision pursuant to Section 8.C.16 and Section 8.C.17. In the case where

there are also other reinsurance arrangements that are not on a non-guaranteed YRT or

similar basis, the reinsurance credit shall include the modeled reinsurance credit reflecting

those other reinsurance arrangements. In particular, where there are also other reinsurance

arrangements that are dependent on the non-guaranteed YRT or similar arrangements,

actuarial judgment shall be used to project cash flows consistent with the above outlined

treatment for non-guaranteed YRT or similar arrangements.

For policies issued on or after Jan. 1, 2017, and before Jan. 1, 2020, the company may elect,

with domiciliary commissioner approval, a phase-in of the current methodology for non-

guaranteed YRT reinsurance with allowance for future mortality improvement from the

methodology in the 2021 Valuation Manual for non-guaranteed YRT reinsurance without

allowance for future mortality improvement, provided that the company uses a weighted

average of the results from the two methodologies, with the weight for the prior

methodology being no more than (20XX-YYYY)/(20XX-2021), where YYYY is the

current valuation year and 20XX is the final year of the phase-in. A company may elect to

phase in these requirements over a 3-year period beginning Jan. 1, 2022, and ending

Dec. 31, 2024. A company may elect a longer phase-in period of up to seven years

beginning Jan. 1, 2022, and ending Dec. 31, 2028, with approval of the domiciliary

commissioner.

D. Determination of a Pre-Reinsurance-Ceded Minimum Reserve

1. The minimum reserve pursuant to Section 2 is a post-reinsurance-ceded minimum reserve.

The company also shall calculate a pre-reinsurance-ceded reserve as specified in Section

8.D.2 below, for financial statement purposes where such a pre-reinsurance-ceded amount

is required. Similarly, where a reserve credit for reinsurance may be required, the credit for

reinsurance ceded shall be the pre-reinsurance-ceded minimum reserve, minus the

minimum reserve (post-reinsurance-ceded). This credit may be negative. Note that due

allowance for reasonable approximations may be used where appropriate.

Requirements for Principle-Based Reserves for Life Products VM-20

2. The pre-reinsurance-ceded minimum reserve shall be calculated pursuant to the

requirements of VM-20, using methods and assumptions consistent with those used in

calculating the minimum reserve, but excluding the effect of ceded reinsurance.

a. If, on a pre-reinsurance-ceded basis, a group of policies is not able to pass the

exclusion tests pursuant to Section 6, then the required DR or SR shall be

calculated in determining the pre-reinsurance-ceded minimum reserve, even if not

required for the minimum reserve.

b. The company shall use assumptions that represent company experience in the

absence of reinsurance—for example, assuming that the business was managed in

a manner consistent with the manner that retained business is managed—when

computing such exclusion tests and reserves.

c. The requirement in Section 7.D.3 regarding the 98% to 102% collar does apply

when determining the amount of starting assets excluding the effect of ceded

reinsurance.

Section 9: Assumptions

A. General Assumption Requirements

1. The company shall use prudent estimate assumptions in compliance with this section for

each risk factor that is not stochastically modeled by applying a margin to the anticipated

experience assumption for the risk factor if such a risk factor has been categorized as a

material risk.

2. The company shall establish the prudent estimate assumption for each risk factor in

compliance with the requirements in Section 12 of Model #820 and must periodically

review and update the assumptions as appropriate in accordance with these requirements.

3. The company shall model the following risk factors stochastically unless the company

elects the stochastic modeling exclusion defined in Section 6:

a. Interest rate movements (i.e., Treasury interest rate curves).

b. Equity performance (e.g., Standard & Poor’s 500 index [S&P 500] returns and

returns of other equity investments).

4. If the company elects to stochastically model risk factors in addition to those listed in

Section 9.A.3 above, the requirements in this section for determining prudent estimate

assumptions for these risk factors do not apply.

It is expected that companies will not stochastically model risk factors other than the

economic scenarios, such as policyholder behavior or mortality, until VM-20 has more

specific guidance and requirements available. Companies shall discuss with domiciliary

regulators if they wish to stochastically model other risk factors.

5. In determining the SR, the company shall use prudent estimate assumptions that are

consistent with those prudent estimate assumptions used for determining the DR, modified

as appropriate to reflect the effects of each scenario.

6. The company shall use its own experience, if relevant and credible, to establish an

anticipated experience assumption for any risk factor. To the extent that company

experience is not available or credible, the company may use industry experience or other

Requirements for Principle-Based Reserves for Life Products VM-20

data to establish the anticipated experience assumption, making modifications as needed

to reflect the circumstances of the company.

a. For risk factors (such as mortality) to which statistical credibility theory may be

appropriately applied, the company shall establish anticipated experience

assumptions for the risk factor by combining relevant company experience with

industry experience data, tables or other applicable data in a manner that is

consistent with credibility theory and accepted actuarial practice.

b. For risk factors (such as premium patterns on flexible premium contracts) that do

not lend themselves to the use of statistical credibility theory, and for risk factors

(such as the current situation with some lapse assumptions) to which statistical

credibility theory can be appropriately applied but cannot currently be applied due

to lack of industry data, the company shall establish anticipated experience

assumptions in a manner that is consistent with accepted actuarial practice and that

reflects any available relevant company experience, any available relevant industry

experience, or any other experience data that are available and relevant. Such

techniques include:

i. Adopting standard assumptions published by professional, industry or

regulatory organizations to the extent they reflect any available relevant

company experience or reasonable expectations.

ii. Applying factors to relevant industry experience tables or other relevant

data to reflect any available relevant company experience and differences

in expected experience from that underlying the base tables or data due to

differences between the risk characteristics of the company experience and

the risk characteristics of the experience underlying the base tables or data.

iii. Blending any available relevant company experience with any available

relevant industry experience and/or other applicable data using weightings

established in a manner that is consistent with accepted actuarial practice

and that reflects the risk characteristics of the underlying policies and/or

company practices.

c. For risk factors that have limited or no experience or other applicable data to draw

upon, the assumptions shall be established using sound actuarial judgment and the

most relevant data available, if such data exists.

d. For any assumption that is set in accordance with the requirements of Section

9.A.6.c, the qualified actuary to whom responsibility for this group of policies is

assigned shall use sensitivity testing and disclose the analysis performed to ensure

that the assumption is set at the conservative end of the plausible range.

The qualified actuary, to whom responsibility for this group of policies is assigned,

shall annually review relevant emerging experience for the purpose of assessing

the appropriateness of the anticipated experience assumption. If the results of

statistical or other testing indicate that previously anticipated experience for a

given factor is inadequate, then the qualified actuary shall set a new, adequate,

anticipated experience assumption for the factor.

7. The company shall sensitivity test risk factors that are not stochastically modeled and

examine the impact on the modeled reserve. The company shall update the sensitivity tests

periodically as appropriate. The company may update the tests less frequently when the

tests show less sensitivity of the modeled reserve to changes in the assumptions being

Requirements for Principle-Based Reserves for Life Products VM-20

tested or the experience is not changing rapidly. Providing there is no material impact on

the results of the sensitivity testing, the company may perform sensitivity testing:

a. Using samples of the policies in force rather than performing the entire valuation

for each alternative assumption set.

b. Using data from prior periods.

Guidance Note: Sensitivity testing every risk factor on an annual basis is not required.

For some risk factors, it may be reasonable, in lieu of sensitivity testing, to employ statistical

measures for margins, such as adding one or more standard deviations to the anticipated

experience assumption.

8. The company shall vary the prudent estimate assumptions from scenario to scenario within

the SR calculation in an appropriate manner to reflect the scenario-dependent risks.

B. Assumption Margins

The company shall include margins to provide for adverse deviations and estimation error in the

prudent estimate assumption for each risk factor that is not stochastically modeled or prescribed,

subject to the following:

1. The company shall determine an explicit set of initial margins for each material risk

independently (that is, without regard to any margins in other risk factors and ignoring any

correlation among risk factors). Next, if applicable, the level of a particular initial margin

may be adjusted to take into account the fact that risk factors are not normally 100%

correlated. However, in recognition that risk factors may become more heavily correlated

as circumstances become more adverse, the initially determined margin may only be

reduced to the extent the company can demonstrate that the method used to justify such a

reduction is reasonable, considering the range of scenarios contributing to the CTE

calculation or considering the scenario used to calculate the DR as applicable or

considering appropriate adverse circumstances for risk factors not stochastically modeled.

It is not permissible to adjust the initial margin to recognize, in whole or in part, implicit

or prescribed margins that are present, or are believed to be present, in other risk factors.

Risks that are stochastically modeled (e.g., interest rates, equity returns) or have prescribed

margins (e.g., mortality, revenue sharing) shall be considered material risks. Other risks

generally considered to be material include, but are not limited to, lapses/premium

persistency, YRT premiums, maintenance expenses and inflation. In some cases, the list of

material risks may also include morbidity, acquisition expenses, partial withdrawals, policy

loans, term conversions, NGEs, and/or option elections that contain an element of anti-

selection.

2. The greater the uncertainty in the anticipated experience assumption, the larger the required

margin, with the margin added or subtracted as needed to produce a larger modeled reserve

than would otherwise result. For example, the company shall use a larger margin when:

a. The experience data have less relevance or lower credibility.

b. The experience data are of lower quality, such as incomplete, internally

inconsistent or not current.

Requirements for Principle-Based Reserves for Life Products VM-20

c. There is doubt about the reliability of the anticipated experience assumption, such

as, but not limited to, recent changes in circumstances or changes in company

policies.

d. There are constraints in the modeling that limit an effective reflection of the risk

factor.

3. In complying with the sensitivity testing requirements in Section 9.A.7 above, greater

analysis and more detailed justification are needed to determine the level of uncertainty

when establishing margins for risk factors that produce greater sensitivity on the modeled

reserve.

4. A margin is permitted but not required for assumptions that do not represent material risks.

5. A margin should reflect the magnitude of fluctuations in historical experience of the

company for the risk factor, as appropriate.

6. The company shall apply the method used to determine the margin consistently on each

valuation date but is permitted to change the method from the prior year if the rationale for

the change and the impact on the modeled reserve is disclosed.

C. Mortality Assumptions

1. Procedure for Setting Prudent Estimate Mortality Assumptions

a. The company shall determine mortality segments for the purpose of determining

separate prudent estimate mortality assumptions for groups of policies that the

company expects will have different mortality experience than other groups of

policies (such as male vs. female, smoker vs. non-smoker, preferred vs. super-

preferred vs. residual, etc.).

b. For each mortality segment, the company shall establish prudent estimate mortality

assumptions using the following procedure:

i. Determine the company experience mortality rates as provided in Section

9.C.2. If company experience data is limited or not available, the company

can use an applicable industry basic table in lieu of company experience

as provided in Section

9.C.3.

ii. Use the procedure described in Section 9.C.3 to determine the applicable

industry table for each mortality segment.

iii. Determine the anticipated experience assumptions as provided in Section

9.C.4.

iv. Determine the level of credibility of the underlying company experience

as provided in Section 9.C.5.

v. Determine the prescribed mortality margins as provided in Section 9.C.6.

Separate mortality margins are determined for company experience

mortality rates and for the applicable industry basic tables.

vi. Use the procedure described in Section 9.C.7 to determine the prudent

estimate mortality assumptions.

2. Determination of Company Experience Mortality Rates

Requirements for Principle-Based Reserves for Life Products VM-20

a. For each mortality segment, the company shall determine company experience

mortality rates derived from company experience data. If company experience data

is not available or is limited, the company can choose to use an applicable industry

basic table in lieu of its own company experience, as provided in Section 9.C.3.

b. Company experience data shall be based on experience from the following sources:

i. Actual company experience for books of business within the mortality

segment.

ii. Experience from other books of business within the company with similar

underwriting.

iii. Experience data from other sources, if available and appropriate, such as

actual experience data of one or more mortality pools in which the policies

participate under the term of a reinsurance agreement. Data from other

sources is appropriate if the source has underwriting and expected

mortality experience characteristics that are similar to policies in the

mortality segment.

c. The company experience mortality rates shall not be lower than the mortality rates

the company expects to emerge, which the company can justify, and which are

disclosed in the PBR Actuarial Report.

d. The company may base mortality on the aggregate company experience for a group

of mortality segments when determining the company experience mortality rates

for each of the individual mortality segments in the group if the mortality segments

were subject to the same or similar underwriting processes.

i. For directly written policies, “underwriting processes” means the

processes by which the direct-writing company determines which risks to

accept and to which risk class each policy is assigned, including any

impacts on these determinations due to distribution systems and target

markets.

ii. For assumed policies, “underwriting processes” means the processes by

which the assuming company determines which risks to accept and to

which risk class each policy is assigned, when such processes are separate

and distinct from the underwriting processes used by the direct-writing

company. For an assuming company that depends upon the direct-writing

company’s underwriting processes, “underwriting processes” means the

direct-writing company’s underwriting processes.

iii. An underwriting process that is expected to produce similar mortality to

that of a previously established underwriting process, or for which the

expected mortality differs from that of a previously established

underwriting process only as the result of one or more specific, identifiable

modifications to the established underwriting process for which the

expected difference in mortality may be reasonably estimated, may be

treated as similar to the previously established underwriting process if

these expectations regarding mortality are supported by relevant, pursuant

to Section 9.A.6, third-party proprietary experience studies (such as those

of reinsurers or consulting firms) or published medical, clinical, actuarial

or industry studies.

Requirements for Principle-Based Reserves for Life Products VM-20

iv. An underwriting process that has been shown to produce similar mortality

to that of a previously established underwriting process based on a

retrospective demonstration using statistical analyses, predictive model

back-testing, or other modeling methods, or for which the expected

difference in mortality due to one or more specific, identifiable

modifications to a previously established underwriting process has been

estimated, based on a retrospective demonstration using statistical

analyses, predictive model back-testing, or other modeling methods, may

be treated as similar to the previously established underwriting process.

Such a retrospective demonstration shall be carried out and repeated at

least once every three years, until such a time as the estimated change in

expected mortality has been shown to be stable and unlikely to change

based on further review. Notwithstanding the above, a retrospective

demonstration is not required if the difference between the modified

underwriting process and the established underwriting process is minor,

such as a change in the thresholds associated with a risk characteristic, and

it is clearly and reasonably expected to result in mortality experience that

is not materially worse.

v. To the extent that, when treating an underwriting process as similar, the

judgment of the similarity of expected mortality or the estimate of the

expected difference in mortality increases uncertainty in the mortality

assumption, the margin applicable to the mortality assumption should be

increased pursuant to Section 9.C.6.d.

vi. If the company uses the aggregate company experience for a group of

mortality segments when determining the company experience mortality

rates for each of the individual mortality segments in the group, the

company shall use one of the following methods:

a. Use techniques to further subdivide the aggregate experience into

the various mortality segments (e.g., start with aggregate non-

smoker and then use the conservation of total deaths principle,

normalization or other approach to divide the aggregate mortality

into super preferred, preferred and residual standard non-smoker

class assumptions).

b. Use techniques to adjust the experience of each mortality segment

in the group to reflect the aggregate company experience for the

group (e.g., by credibility weighting the individual mortality

segment experience with the aggregate company experience for

the group).

c. Use a two-step sequential method, which

1) forms subgroups that are groups of mortality segments

and are subsets of the aggregate class of mortality

segments being aggregated,

2) uses techniques as in (b) to adjust the experience of each

subgroup from (1) to reflect the aggregate company

experience for the group and conserve deaths, and

3) finally, uses techniques as in (a) to further subdivide the

subgroups’ adjusted experience from (2) into the various

Requirements for Principle-Based Reserves for Life Products VM-20

mortality segments while conserving each subgroup’s

deaths determined in step (2)’s conservation of deaths.

For example, if mortality segments vary by sex, risk class, and

face bands, then

1) segments that differ by face band are aggregated to

form subgroups that vary just by sex and risk class,

2) the subgroup’s mortality experience is credibility

weighted with the aggregate company experience for the

group and normalized, and

3) the subgroups’ adjusted mortality experience are then

subdivided into the various mortality segments based on

credible, external face band relativities, and conservation

of deaths is applied to each subgroup’s normalized deaths

determined in (2).

In doing so, the company must ensure that when the mortality segments

are weighted together, the total amount of expected claims is not less than

the aggregate company experience data for the group.

Guidance Note: There are several examples of the two mortality aggregation methods outlined in

VM-20 Section 9.C.2.d.vi.a and VM-20 Section 9.C.2.d.vi.b in a Mortality Aggregation Excel

Spreadsheet, along with a Mortality Aggregation Presentation from the 2019 Summer Meeting,

located on the NAIC website (https://content.naic.org/pbr_data.htm). These may be useful

reference documents when using aggregate company experience for a group of mortality segments

in determining the company experience mortality rates.

e. The company shall review, and update as needed, the company experience data

described in Section 9.C.2.b, based on either an updated company mortality study

or updated mortality study data from other sources, at least every three years. If

updated experience becomes available prior to the end of three years since the last

review or update, which alters the company’s expected mortality for the mortality

segments in a significant manner and such impact is expected to continue into the

future, the company shall reflect the changes implied by the updated data in the

current year.

i. The company experience data for each mortality segment shall include the

most recent experience study and shall include the in-force and claim data

pertaining to the study period for all policies currently in the mortality

segment or that would have been in the mortality segment at any time

during the period over which experience is being evaluated.

ii. The period of time used for the experience study should be at least three

exposure years and should not exceed 10 exposure years.

f. The company may remove from the company experience data any policies for

which the experience is reflected through adjustments to the prudent estimate

assumptions as provided under Section 9.C.7.e below, including policies insuring

impaired lives and those for which there is a reasonable expectation, due to

conditions such as changes in premiums or other policy provisions, that

policyholder behavior will lead to mortality results that vary significantly from

those that would otherwise be expected.

Requirements for Principle-Based Reserves for Life Products VM-20

The company may adjust the company experience rates for each mortality segment

to reflect the expected incremental change due to the adoption of risk selection and

underwriting practices different from those underlying the company experience

data identified above, provided that:

i. The adjustments are supported by published medical or clinical studies or

other published studies that correlate a specific risk selection criterion to

mortality or longevity experience (for example, criterion and correlations

determined through predictive analytics).

ii. The rationale and support for the use of the study and for the adjustments

are disclosed in the PBR Actuarial Report.

Guidance Note: It is anticipated that the adjustment described in Section 9.C.2.f to experience will

rarely be made. Since these adjustments are expected to be rare, and since it is difficult to anticipate

the nature of these adjustments, the insurance commissioner may wish to determine the level of

documentation or analysis that is required to allow such adjustments. The NAIC may want to

consider whether approval by a centralized examination office would be an acceptable alternative

to approval by the insurance commissioner.

g. Company experience mortality rates shall be based on amount of insurance, not

number of policies. The amounts of insurance used in the numerators of the

mortality rates shall be computed consistently with how the amounts in the

denominators are calculated. A ceiling on the amount of insurance for a given

policy is not permitted. Smoothing and graduation may generally be used in

developing company experience mortality rates if it is done in a manner that does

not result in a material change in total expected claims. However, in the case of

catastrophic, non-recurring events, this does not preclude actuarially appropriate

adjustments to company experience mortality rates, even if such adjustments result

in a material change in total expected claims.

h. Mortality improvement shall not be incorporated beyond the valuation date in the

company experience mortality rates. However, historical mortality improvement

from the central point of the underlying company experience data to the valuation

date may be incorporated.

Guidance Note: Future mortality improvement is not applied to the company experience mortality

rates since it would be duplicative of the future mortality improvement that is applied to the prudent

estimate assumptions for mortality in Section 9.C.7.f.

3. Determination of Applicable Industry Basic Tables

a. The industry basic table shall be based on the most recent VBT listed in VM-M

Section 2, including the Primary, Limited Underwriting and Relative Risk (RR)

Table forms, if available. The industry basic table used should be based on the

table form that most appropriately reflects the risk characteristics of the respective

mortality segment.

b. A modified industry basic table is permitted in a limited number of situations

where an industry basic table does not appropriately reflect the expected mortality

experience, such as joint life mortality, simplified underwriting, or substandard or

rated lives. In cases other than modification of the table to reflect joint life

Requirements for Principle-Based Reserves for Life Products VM-20

mortality, the modification must not result in mortality rates lower than those in

the industry basic table without approval by the insurance commissioner.

c. The company may apply the Relative Risk Tool described in Subsection 9.C.3.d

below to determine:

i. The industry basic table that can serve as the industry experience rates

when company experience data is limited or not available.

ii. The applicable industry basic table for grading company experience

mortality to industry experience mortality using the grading method

described in Section 9.C.7.b.

d. The Relative Risk Tool was adopted by the Life Actuarial (A) Task Force and

contains an algorithm that scores every risk class in a preferred risk class structure

based on the specific underwriting criteria used by a company. The Relative Risk

Tool can be found by clicking on the Relative Risk Tool link on the SOA web

page, https://www.soa.org/research/topics/indiv-val-exp-study-list/

i. In using the Relative Risk Tool to determine the appropriate industry basic

table for a particular mortality segment, the company shall take into

account factors that are not recognized in the Relative Risk Tool but are

applicable to policies issued in that mortality segment.

Guidance Note: Examples of such factors include the number of underwriting exceptions that are

made, the quality and experience level of the underwriters, and characteristics of the distribution

system. For example, if a company deviates from its preferred criteria on a regular basis, then it

needs to take that into consideration since the Relative Risk Tool is not designed to quantify that

risk.

ii. In using the Relative Risk Tool to determine the appropriate industry basic

table for policies that are issued subject to simplified underwriting and

policies that are issued without underwriting, the company shall take into

account factors not recognized in the Relative Risk Tool but are applicable

to such policies.

iii. In taking into account factors that are not recognized in the Relative Risk

Tool, a company may, to the extent it can justify, adjust the industry basic

tables up or down two Relative Risk Tables from that determined by

application of the Relative Risk Tool. Further adjustments to reflect risk

characteristics not captured within the Relative Risk Tool may be allowed

upon approval by the insurance commissioner.

e. As an alternative to the Relative Risk Tool, the company may use other actuarially

sound methods to determine the applicable basic tables related to subdivisions of

mortality segments. The company shall document the analysis performed to

demonstrate the applicability of the chosen method and resulting choice in tables

and reasons why the results using the Relative Risk Tool may not be suitable.

Guidance Note: For example, the company may determine a more all-inclusive basic table as a

table appropriate for the whole mortality segment (appropriately modified by the removal of

classified lives, term conversions or any other legitimately excludable class) and then subdivide

that segment using actuarially sound methods including, but not limited to, the Relative Risk Tool.

Requirements for Principle-Based Reserves for Life Products VM-20

f. If no industry basic table appropriately reflects the risk characteristics of the

mortality segment, the company may use any well-established industry table that

is based on the experience of policies having the appropriate risk characteristics in

lieu of an industry basic table.

Guidance Note: Section 9.C.3.f above is intended to provide flexibility needed to handle products

based on group-type mortality, etc., for which there might not be an industry basic table.

g. Mortality improvement shall not be incorporated beyond the valuation date in the

industry basic table. However, historical mortality improvement from the date of

the industry basic table (e.g., Jan. 1, 2008, for the 2008 VBT and July 1, 2015, for

the 2015 VBT) to the valuation date shall be incorporated using the improvement

factors for the applicable industry basic table as determined by the SOA, adopted

by the Life Actuarial (A) Task Force and published on the SOA website,

https://www.soa.org/research/topics/indiv-val-exp-study-list/

(Individual Life

Insurance Mortality Improvement Scale – for Use with AG38/VM20 – 20XX).

Guidance Note: F

uture mortality improvement is not applied to the industry basic table since it

would be duplicative of the future mortality improvement that is applied to the prudent estimate

assumptions for mortality in Section 9.C.7.f.

To allow time for companies to reflect the updated mortality improvement rates,

the rates that are to be used in the year-end YYYY valuation should be adopted by

the Life Actuarial (A) Task Force and published on the SOA website by September

of YYYY. If this timeline is not met, then at the company’s option, they may use

the most recent set of prior mortality improvement rates adopted by the Life

Actuarial (A) Task Force and published on the SOA website.

Guidance Note: The improvement factors for the industry basic table will be determined by the

SOA. YYYY is the calendar year of valuation.

Guidance Note: The start date for the improvement factors to be applied to the industry basic tables

differs from that used for determining company experience mortality rates as described in Section

9.C.2.h, as the industry basic tables have already been improved from the mid-point of the exposure

period of the data underlying the table to the year of the table; e.g., the 2015 VBT has already been

improved from the mid-point of the underlying data supporting the table to 2015.

h. For any mortality segment, if the quantity (A – B) is positive, then the industry

basic table for the mortality segment shall be adjusted upward by the number of

tables necessary, or the industry basic table rates shall be multiplied by an

appropriate scalar—i.e., a single factor applied to all rates in the table, subject to a

cap that ensures that mortality rates do not exceed 1,000 per 1,000—such that the

quantity (A – C) is negative, where:

A = the present value of projected expected claims at the duration where grading

to the industry table begins, calculated using the company experience mortality

rates.

B = the present value of projected expected claims at the duration where grading

to the industry table begins, calculated using mortality rates from the industry basic

table determined as per Sections 9.C.3.d, 9.C.3.e or 9.C.3.f .

Requirements for Principle-Based Reserves for Life Products VM-20

C = the present value of projected expected claims at the duration where grading

to the industry table begins, calculated using the mortality rates from the basic

industry table that has been adjusted as described at the beginning of this

paragraph.

The expected claims are not to reflect mortality improvement beyond the valuation

date.

4. Anticipated Experience Assumptions

a. If the company uses an applicable industry basic table in lieu of its own company

experience, as described in Section 9.C.2.a, then the anticipated experience

assumptions shall be the applicable industry basic table.

b. If the company uses company experience as described in Section 9.C.2.a, then the

anticipated experience assumptions shall equal the company experience mortality

rates described in Section 9.C.

c. The mortality rates from the resulting anticipated experience assumptions must be

no lower than the mortality rates that are actually expected to emerge and that the

company can justify.

d. In satisfying Section 9.C.4.c, the company must ensure that any excess mortality

is appropriately reflected in the anticipated experience mortality rates. This

includes but is not limited to excess mortality associated with policies issued via

conversion from term policies or from group life contracts.

5. Credibility of Company Experience

a. For valuations in which the industry basic mortality table is the 2008 VBT,

determine an aggregate level of credibility over the entire exposure period using a

methodology to determine the level of credibility that follows common actuarial

practice as published in actuarial literature (for example, but not limited to, the

Limited Fluctuation Method or Bühlmann Empirical Bayesian Method).

For valuations in which the industry basic mortality table is the 2015 VBT,

determine an aggregate level of credibility following either the Limited Fluctuation

Method by amount, such that the minimum probability is at least 95% with an error

margin of no more than 5% or Bühlmann Empirical Bayesian Method by amount.

Not all blocks of a company’s business subject to VM-20 necessarily need to use

the same credibility method. However, a company seeking to change the

credibility method for a given block of business must request and subsequently

receive the approval of the insurance commissioner. The request must include the

justification for the change and a demonstration of the rationale supporting the

change.

The formula to determine the credibility level by amount under the Limited

Fluctuation Method is as follows:

Limited Fluctuation Z = min{1, rm/zσ}

Where,

r = error margin ≤ 5%

Requirements for Principle-Based Reserves for Life Products VM-20

z = normal distribution quantile ≥ 95%

m = mortality ratio—i.e., actual to expected (A/E) ratio by amount

σ = standard deviation of the mortality ratio

The following formula can be used in conjunction with the 2015 VBT industry

table to directly approximate the credibility based on the Bühlmann Empirical

Bayesian Method:

Bühlmann Z =



A +

(

109% * B

)



(

. % 

)

(

. 

)

Where,

A = Sum of expected deaths by amount = Σ (amount insured) x (exposure) x

(mortality)

B = Σ(amount insured)

x (exposure) x (mortality)

C = Σ(amount insured)

x (exposure)

x (mortality)

For both the Limited Fluctuation Method and the Bühlmann Empirical Bayesian

Method, the credibility percentage shall be based on amounts of insurance,

uncapped.

b. Credibility may be determined at either the mortality segment level or at a more

aggregate level if the mortality for the individual mortality segments was

determined using an aggregate level of mortality experience pursuant to Section

9.C.2.d.

A single level of credibility shall be determined over the entire exposure period,

rather than for each duration, within the exposure period. This overall level of

credibility will be used to:

i. Determine the prescribed margin for company experience mortality rates.

ii. Determine the grading period (based on the credibility percentage shown

in the first column in the Grading Table in Section 9.C.7.b.i) for grading

company experience mortality rates into the applicable industry basic

table.

6. Prescribed Mortality Margins

a. Separate prescribed margins will be added to company experience mortality rates

and to the applicable industry basic tables. The mortality margin shall be in the

form of a prescribed percentage increase applied to each mortality rate.

b. The prescribed margin percentages for the company experience mortality rates will

vary by attained age (att age), by the level of credibility of the underlying company

experience, based on the level of credibility and the method used to determine the

credibility in Section 9.C.5. The percentages are given in the following tables. To

determine the margin percentage for each table, round the credibility level amount

to the nearest whole integer.

Requirements for Principle-Based Reserves for Life Products VM-20

i. For valuations in which the industry mortality table is the 2008 VBT

limited underwriting table:

Credibility Level

Att Age 20%–39% 40%–59% 60%–79% 80%–100%

<46 13.7% 8.4% 6.3% 5.3%

46–47 13.0% 8.0% 6.0% 5.0%

48–49 12.4% 7.6% 5.7% 4.8%

50–51 11.7% 7.2% 5.4% 4.5%

52–53 11.1% 6.8% 5.1% 4.3%

54–55 10.4% 6.4% 4.8% 4.0%

56–57 9.8% 6.0% 4.5% 3.8%

58–59 9.1% 5.6% 4.2% 3.5%

60–61 8.5% 5.2% 3.9% 3.3%

62–63 7.8% 4.8% 3.6% 3.0%

64–68 7.2% 4.4% 3.3% 2.8%

69–76 6.5% 4.0% 3.0% 2.5%

77+ 5.9% 3.6% 2.7% 2.3%

Requirements for Principle-Based Reserves for Life Products VM-20

ii. For valuations in which the industry mortality table is the 2015 VBT and

where the credibility is determined using the Bühlmann Empirical

Bayesian Method by amount method:

Bühlmann Margins

Credibility Level

Att Age

20%–

22%

23%–

27%

28%–

32%

33%–

37%

38%–

42%

43%–

47%

48%–

52%

53%–

57%

58%–

62%

<46 20.4% 20.0% 19.3% 18.6% 17.9% 17.1% 16.3% 15.5% 14.6%

46– 47 20.2% 20.0% 19.3% 18.6% 17.9% 17.1% 16.3% 15.5% 14.6%

48– 49 20.0% 19.7% 19.1% 18.4% 17.6% 16.9% 16.1% 15.3% 14.4%

50– 51 19.8% 19.4% 18.8% 18.1% 17.4% 16.7% 15.9% 15.1% 14.2%

52– 53 19.6% 19.1% 18.5% 17.8% 17.1% 16.4% 15.6% 14.8% 14.0%

54– 55 19.2% 18.8% 18.2% 17.5% 16.8% 16.1% 15.4% 14.6% 13.7%

56– 57 18.9% 18.5% 17.9% 17.2% 16.5% 15.8% 15.1% 14.3% 13.5%

58– 59 18.5% 18.1% 17.5% 16.9% 16.2% 15.5% 14.8% 14.1% 13.2%

60– 61 18.2% 17.8% 17.2% 16.5% 15.9% 15.2% 14.5% 13.8% 13.0%

62– 63 17.8% 17.4% 16.8% 16.2% 15.6% 14.9% 14.2% 13.5% 12.7%

64– 65 17.4% 17.0% 16.4% 15.8% 15.2% 14.6% 13.9% 13.2% 12.4%

66– 67 16.9% 16.6% 16.0% 15.4% 14.8% 14.2% 13.5% 12.8% 12.1%

68– 69 16.5% 16.2% 15.6% 15.0% 14.5% 13.8% 13.2% 12.5% 11.8%

70– 71 16.1% 15.7% 15.2% 14.6% 14.1% 13.5% 12.8% 12.2% 11.5%

72– 73 15.6% 15.3% 14.7% 14.2% 13.7% 13.1% 12.5% 11.8% 11.1%

74–75 15.1% 14.8% 14.3% 13.8% 13.2% 12.7% 12.1% 11.5% 10.8%

76– 77 14.6% 14.3% 13.8% 13.3% 12.8% 12.2% 11.7% 11.1% 10.4%

78– 79 14.1% 13.8% 13.3% 12.8% 12.3% 11.8% 11.3% 10.7% 10.1%

80– 81 13.6% 13.3% 12.8% 12.4% 11.9% 11.4% 10.8% 10.3% 9.7%

82– 83 13.0% 12.7% 12.3% 11.9% 11.4% 10.9% 10.4% 9.9% 9.3%

84–85 12.5% 12.2% 11.8% 11.4% 10.9% 10.4% 10.0% 9.4% 8.9%

86– 87 11.9% 11.6% 11.2% 10.8% 10.4% 10.0% 9.5% 9.0% 8.5%

88–89 11.3% 11.1% 10.7% 10.3% 9.9% 9.5% 9.0% 8.6% 8.1%

90– 91 10.7% 10.5% 10.1% 9.7% 9.4% 9.0% 8.5% 8.1% 7.6%

92– 93 10.1% 9.8% 9.5% 9.2% 8.8% 8.4% 8.0% 7.6% 7.2%

94– 95 9.4% 9.2% 8.9% 8.6% 8.3% 7.9% 7.5% 7.1% 6.7%

96– 97 8.8% 8.6% 8.3% 8.0% 7.7% 7.4% 7.0% 6.6% 6.3%

98–99 8.1% 7.9% 7.7% 7.4% 7.1% 6.8% 6.5% 6.1% 5.8%

100–101 7.4% 7.3% 7.0% 6.8% 6.5% 6.2% 5.9% 5.6% 5.3%

102–103 6.7% 6.6% 6.3% 6.1% 5.9% 5.6% 5.4% 5.1% 4.8%

104–105 6.0% 5.9% 5.7% 5.5% 5.2% 5.0% 4.8% 4.5% 4.3%

>105 5.3% 5.1% 5.0% 4.8% 4.6% 4.4% 4.2% 4.0% 3.8%

Requirements for Principle-Based Reserves for Life Products VM-20

Bühlmann Margins

Credibility Level

Att Age

63%–

67%

68%–

72%

73%–

77%

78%–

82%

83%–

87%

88%–

89%

90%–

91%

92%–

93%

94%–

95%

96%–

97%

98% 99%+

<46 13.7% 12.7% 11.6% 10.3% 8.9% 8.0% 7.3% 6.5% 5.7% 4.6% 3.3% 2.3%

46–47 13.7% 12.7% 11.6% 10.3% 8.9% 8.0% 7.3% 6.5% 5.7% 4.6% 3.3% 2.3%

48–49 13.5% 12.5% 11.4% 10.2% 8.8% 7.9% 7.2% 6.4% 5.6% 4.6% 3.2% 2.3%

50–51 13.3% 12.3% 11.2% 10.0% 8.7% 7.8% 7.1% 6.4% 5.5% 4.5% 3.2% 2.2%

52–53 13.1% 12.1% 11.1% 9.9% 8.6% 7.7% 7.0% 6.3% 5.4% 4.4% 3.1% 2.2%

54–55 12.9% 11.9% 10.9% 9.7% 8.4% 7.5% 6.9% 6.1% 5.3% 4.3% 3.1% 2.2%

56–57 12.6% 11.7% 10.7% 9.5% 8.3% 7.4% 6.8% 6.0% 5.2% 4.3% 3.0% 2.1%

58–59 12.4% 11.5% 10.5% 9.4% 8.1% 7.3% 6.6% 5.9% 5.1% 4.2% 3.0% 2.1%

60–61 12.1% 11.2% 10.3% 9.2% 7.9% 7.1% 6.5% 5.8% 5.0% 4.1% 2.9% 2.1%

62–63 11.9% 11.0% 10.0% 9.0% 7.8% 7.0% 6.4% 5.7% 4.9% 4.0% 2.8% 2.0%

64–65 11.6% 10.8% 9.8% 8.8% 7.6% 6.8% 6.2% 5.6% 4.8% 3.9% 2.8% 2.0%

66–67 11.3% 10.5% 9.6% 8.6% 7.4% 6.6% 6.1% 5.4% 4.7% 3.8% 2.7% 1.9%

68–69 11.0% 10.2% 9.3% 8.3% 7.2% 6.5% 5.9% 5.3% 4.6% 3.7% 2.6% 1.9%

70–71 10.7% 9.9% 9.1% 8.1% 7.0% 6.3% 5.7% 5.1% 4.4% 3.6% 2.6% 1.8%

72–73 10.4% 9.7% 8.8% 7.9% 6.8% 6.1% 5.6% 5.0% 4.3% 3.5% 2.5% 1.8%

74–75 10.1% 9.4% 8.5% 7.6% 6.6% 5.9% 5.4% 4.8% 4.2% 3.4% 2.4% 1.7%

76–77 9.8% 9.0% 8.3% 7.4% 6.4% 5.7% 5.2% 4.7% 4.0% 3.3% 2.3% 1.7%

78–79 9.4% 8.7% 8.0% 7.1% 6.2% 5.5% 5.0% 4.5% 3.9% 3.2% 2.3% 1.6%

80–81 9.1% 8.4% 7.7% 6.9% 5.9% 5.3% 4.9% 4.3% 3.8% 3.1% 2.2% 1.5%

82–83 8.7% 8.1% 7.4% 6.6% 5.7% 5.1% 4.7% 4.2% 3.6% 2.9% 2.1% 1.5%

84–85 8.3% 7.7% 7.0% 6.3% 5.5% 4.9% 4.5% 4.0% 3.5% 2.8% 2.0% 1.4%

86–87 7.9% 7.4% 6.7% 6.0% 5.2% 4.7% 4.2% 3.8% 3.3% 2.7% 1.9% 1.3%

88–89 7.6% 7.0% 6.4% 5.7% 4.9% 4.4% 4.0% 3.6% 3.1% 2.6% 1.8% 1.3%

90–91 7.1% 6.6% 6.0% 5.4% 4.7% 4.2% 3.8% 3.4% 3.0% 2.4% 1.7% 1.2%

92–93 6.7% 6.2% 5.7% 5.1% 4.4% 3.9% 3.6% 3.2% 2.8% 2.3% 1.6% 1.1%

94–95 6.3% 5.8% 5.3% 4.8% 4.1% 3.7% 3.4% 3.0% 2.6% 2.1% 1.5% 1.1%

96–97 5.9% 5.4% 5.0% 4.4% 3.8% 3.4% 3.1% 2.8% 2.4% 2.0% 1.4% 1.0%

98–99 5.4% 5.0% 4.6% 4.1% 3.5% 3.2% 2.9% 2.6% 2.2% 1.8% 1.3% 0.9%

100–101 5.0% 4.6% 4.2% 3.7% 3.2% 2.9% 2.6% 2.4% 2.1% 1.7% 1.2% 0.8%

102–103 4.5% 4.2% 3.8% 3.4% 2.9% 2.6% 2.4% 2.1% 1.9% 1.5% 1.1% 0.8%

104–105 4.0% 3.7% 3.4% 3.0% 2.6% 2.3% 2.1% 1.9% 1.7% 1.4% 1.0% 0.7%

>105 3.5% 3.3% 3.0% 2.7% 2.3% 2.1% 1.9% 1.7% 1.5% 1.2% 0.8% 0.6%

Requirements for Principle-Based Reserves for Life Products VM-20

iii. For valuations in which the industry mortality table is the 2015 VBT and

where the credibility is determined using the Limited Fluctuation Method:

Limited Fluctuation Margins

Credibility Level

Att Age

20%–

22%

23%–

27%

28%–

32%

33%–

37%

38%–

42%

43%–

47%

48%–

52%

<46 15.9% 14.5% 13.2% 12.1% 11.0% 10.0% 9.1%

46–47 15.9% 14.5% 13.2% 12.1% 11.0% 10.0% 9.1%

48–49 15.7% 14.3% 13.0% 11.9% 10.8% 9.9% 9.0%

50–51 15.5% 14.1% 12.9% 11.7% 10.7% 9.7% 8.9%

52–53 15.2% 13.9% 12.7% 11.5% 10.5% 9.6% 8.7%

54–55 15.0% 13.6% 12.4% 11.3% 10.3% 9.4% 8.6%

56–57 14.7% 13.4% 12.2% 11.1% 10.2% 9.3% 8.5%

58–59 14.4% 13.1% 12.0% 10.9% 10.0% 9.1% 8.3%

60–61 14.1% 12.9% 11.7% 10.7% 9.8% 8.9% 8.1%

62–63 13.8% 12.6% 11.5% 10.5% 9.6% 8.7% 8.0%

64–65 13.5% 12.3% 11.2% 10.2% 9.3% 8.5% 7.8%

66–67 13.2% 12.0% 11.0% 10.0% 9.1% 8.3% 7.6%

68–69 12.8% 11.7% 10.7% 9.7% 8.9% 8.1% 7.4%

70–71 12.5% 11.4% 10.4% 9.5% 8.6% 7.9% 7.2%

72–73 12.1% 11.1% 10.1% 9.2% 8.4% 7.7% 7.0%

74–75 11.8% 10.7% 9.8% 8.9% 8.1% 7.4% 6.8%

76–77 11.4% 10.4% 9.5% 8.6% 7.9% 7.2% 6.5%

78–79 11.0% 10.0% 9.1% 8.3% 7.6% 6.9% 6.3%

80–81 10.6% 9.6% 8.8% 8.0% 7.3% 6.7% 6.1%

82–83 10.1% 9.2% 8.4% 7.7% 7.0% 6.4% 5.8%

84–85 9.7% 8.8% 8.1% 7.4% 6.7% 6.1% 5.6%

86–87 9.2% 8.4% 7.7% 7.0% 6.4% 5.8% 5.3%

88–89 8.8% 8.0% 7.3% 6.7% 6.1% 5.5% 5.1%

90–91 8.3% 7.6% 6.9% 6.3% 5.7% 5.2% 4.8%

92–93 7.8% 7.1% 6.5% 5.9% 5.4% 4.9% 4.5%

94–95 7.3% 6.7% 6.1% 5.6% 5.1% 4.6% 4.2%

96–97 6.8% 6.2% 5.7% 5.2% 4.7% 4.3% 3.9%

98–99 6.3% 5.7% 5.2% 4.8% 4.4% 4.0% 3.6%

100–101 5.8% 5.3% 4.8% 4.4% 4.0% 3.6% 3.3%

102–103 5.2% 4.8% 4.3% 4.0% 3.6% 3.3% 3.0%

104–105 4.7% 4.3% 3.9% 3.5% 3.2% 2.9% 2.7%

>105 4.1% 3.7% 3.4% 3.1% 2.8% 2.6% 2.4%

Requirements for Principle-Based Reserves for Life Products VM-20

Limited Fluctuation Margins

Credibility Level

Att Age

53%–

57%

58%–

62%

63%–

67%

68%–

72%

73%–

77%

78%–

82%

83%–

87%

88%–

92%

93%–

100%

<46 8.3% 7.6% 6.9% 6.3% 5.8% 5.3% 4.8% 4.4% 4.0%

46–47 8.3% 7.6% 6.9% 6.3% 5.8% 5.3% 4.8% 4.4% 4.0%

48–49 8.2% 7.5% 6.8% 6.2% 5.7% 5.2% 4.7% 4.3% 3.9%

50–51 8.1% 7.4% 6.7% 6.1% 5.6% 5.1% 4.7% 4.2% 3.9%

52–53 8.0% 7.3% 6.6% 6.0% 5.5% 5.0% 4.6% 4.2% 3.8%

54–55 7.8% 7.2% 6.5% 5.9% 5.4% 4.9% 4.5% 4.1% 3.8%

56–57 7.7% 7.0% 6.4% 5.8% 5.3% 4.9% 4.4% 4.0% 3.7%

58–59 7.6% 6.9% 6.3% 5.7% 5.2% 4.8% 4.3% 4.0% 3.6%

60–61 7.4% 6.8% 6.2% 5.6% 5.1% 4.7% 4.3% 3.9% 3.5%

62–63 7.2% 6.6% 6.0% 5.5% 5.0% 4.6% 4.2% 3.8% 3.5%

64–65 7.1% 6.5% 5.9% 5.4% 4.9% 4.5% 4.1% 3.7% 3.4%

66–67 6.9% 6.3% 5.7% 5.2% 4.8% 4.4% 4.0% 3.6% 3.3%

68–69 6.7% 6.1% 5.6% 5.1% 4.7% 4.2% 3.9% 3.5% 3.2%

70–71 6.6% 6.0% 5.4% 5.0% 4.5% 4.1% 3.8% 3.4% 3.1%

72–73 6.4% 5.8% 5.3% 4.8% 4.4% 4.0% 3.7% 3.3% 3.0%

74–75 6.2% 5.6% 5.1% 4.7% 4.3% 3.9% 3.5% 3.2% 2.9%

76–77 6.0% 5.4% 5.0% 4.5% 4.1% 3.8% 3.4% 3.1% 2.9%

78–79 5.8% 5.2% 4.8% 4.4% 4.0% 3.6% 3.3% 3.0% 2.8%

80–81 5.5% 5.0% 4.6% 4.2% 3.8% 3.5% 3.2% 2.9% 2.6%

82–83 5.3% 4.8% 4.4% 4.0% 3.7% 3.4% 3.1% 2.8% 2.5%

84–85 5.1% 4.6% 4.2% 3.9% 3.5% 3.2% 2.9% 2.7% 2.4%

86–87 4.8% 4.4% 4.0% 3.7% 3.4% 3.1% 2.8% 2.5% 2.3%

88–89 4.6% 4.2% 3.8% 3.5% 3.2% 2.9% 2.6% 2.4% 2.2%

90–91 4.4% 4.0% 3.6% 3.3% 3.0% 2.7% 2.5% 2.3% 2.1%

92–93 4.1% 3.7% 3.4% 3.1% 2.8% 2.6% 2.4% 2.2% 2.0%

94–95 3.8% 3.5% 3.2% 2.9% 2.7% 2.4% 2.2% 2.0% 1.8%

96–97 3.6% 3.3% 3.0% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7%

98–99 3.3% 3.0% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.6%

100–101 3.0% 2.8% 2.5% 2.3% 2.1% 1.9% 1.7% 1.6% 1.4%

102–103 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.6% 1.4% 1.3%

104–105 2.4% 2.2% 2.0% 1.9% 1.7% 1.5% 1.4% 1.3% 1.2%

>105 2.1% 2.0% 1.8% 1.6% 1.5% 1.4% 1.2% 1.1% 1.0%

Requirements for Principle-Based Reserves for Life Products VM-20

c. The prescribed margin percentages for the applicable industry basic tables will

vary by attained age and are as follows:

i. For valuations in

which the industry mortality table is the 2008 VBT

limited underwriting table:

Mortality Margin Table

Attained

Age

Load

Attained

Age

Load

< 40

21%

11%

21%

11%

21%

11%

21%

11%

21%

10%

21%

10%

21%

10%

20%

10%

20%

10%

19%

10%

19%

10%

18%

10%

18%

17%

16%

15%

14%

13%

12%

11%

ii. For valuations in which the industry table is the 2015 VBT:

Mortality Margin (Loading) for Industry Table

Attained Age Load Attained Age Load

0–45

20.4%

76–77

14.6%

46–47

20.2%

78–79

14.1%

48–49

20.0%

80–81

13.6%

50–51

19.8%

82–83

13.0%

52–53

19.6%

84–85

12.5%

54–55

19.2%

86–87

11.9%

56–57

18.9%

88–89

11.3%

58–59

18.5%

90–91

10.7%

60–61

18.2%

92–93

10.1%

62–63

17.8%

94–95

9.4%

64–65

17.4%

96–97

8.8%

66–67

16.9%

98–99

8.1%

68–69

16.5%

100–101

7.4%

70–71

16.1%

102–103

6.7%

72–73

15.6%

104–105

6.0%

74–75

15.1%

106 and over

5.3%

Requirements for Principle-Based Reserves for Life Products VM-20

d. The prescribed margin percentages shall be increased, as appropriate, to reflect the

level of uncertainty related to situations, including, but not limited to, the

following:

i. The reliability of the company’s experience studies is low due to imprecise

methodology, length of time since the data was updated or other reasons.

ii. The length of time since the experience data was updated.

iii. The underwriting or risk selection risk criteria associated with the

mortality segment have changed since the experience on which the

company experience mortality rates are based was collected.

iv. The data underlying the company experience mortality rates lack

homogeneity.

v. Unfavorable environmental or health developments are unfolding and are

expected to have a material and sustained impact on the insured

population.

vi. Changes to the company’s marketing or administrative practices or market

forces expose the policies to the risk of anti-selection.

Guidance Note: For example, the secondary market for life insurance policies.

vii. Underwriting is less effective than expected.

e.   In the event that the prescribed mortality margins set forth above do not produce a

reserve increase of adequate magnitude, and in particular when the prescribed

margins produce a decrease in the reserve, the company shall derive and use

margins that produce an appropriately conservative result.

Guidance Note: This can occur, for example, when a rider, such as a long-term care (LTC)

rider, is being valued together with the base policy, pursuant to Section II, Subsection 6 of

the Valuation Manual. Reductions to mortality rates, rather than additions, would

potentially be needed in such cases. Such a product/rider combination would likely need

to be in its own separate mortality segment.

7. Process to Determine Prudent Estimate Assumptions

a. If applicable industry basic tables are used in lieu of company experience as the

anticipated experience assumptions, or if the level of credibility of the data as

provided in Section 9.C.5 is less than 20%, the prudent estimate assumptions for

each mortality segment shall equal the respective mortality rates in the applicable

industry basic tables as provided in Section 9.C.3, adjusted as necessary pursuant

to Section 9.C.7.e and for any applicable improvement pursuant to Section 9.C.3.g,

plus the prescribed margin as provided in Section 9.C.6.c, and further adjusted by

any applicable margin changes pursuant to Section 9.C.6.d.v, Section 9.C.6.d.vi,

and/or Section 9.C.6.e. Future mortality improvement, pursuant to Section 9.C.7.f,

shall be applied to the prudent estimate assumption for mortality.

b. If the company uses company experience mortality rates as the anticipated

experience assumptions, the following process shall be used to develop prudent

estimate assumptions:

Requirements for Principle-Based Reserves for Life Products VM-20

i. Determine the values of A, B and C from the Grading Table below, based

on the level of credibility of the data as provided in Section 9.C.5.

Grading Table

Credibility of company data

(as defined in Section 9.C.5

above) rounded to nearest %

A B C

20% - 30%

31%–32%

33%–34%

35%–36%

37%–38%

39%–40%

41%–42%

43%–44%

45%–46%

47%–48%

49%

50%

51%

52%–53%

54%

55%

56%

57%

58%

59%

60%–61%

62%

63%

64%–65%

66%

67%

68%–69%

70%

71%

Requirements for Principle-Based Reserves for Life Products VM-20

72%

73%

74%

75%

76%

77%

78%

79%

80%

81%

82%

83%

84%

85%–87%

88%–89%

90%

91%–93%

94%–100%

ii. Determine the value of D, which represents the last policy duration that has a

substantial volume of claims, using the chosen data source(s) as specified in

Section 9.C.2.b. D is defined as the last policy duration at which there are 50 or

more claims (not the first policy duration in which there are fewer than 50 claims),

not counting riders. This may be determined at either the mortality segment level

or at a more aggregate level if the mortality for the individual mortality segments

was determined using an aggregate level of mortality experience pursuant to

Section 9.C.2.d.

Guidance Note: T

he same level of aggregation is used in Section 9.C.2.d for determining company

experience mortality rates, Section 9.C.5.b for determining credibility, and Section 9.C.7.b.ii for

determining the value of D. Thus, when determining the value of D, all claims being aggregated

will have used the same credibility method in Section 9.C.5.

iii. Establish the sufficient data period S, as follows:

S = min{A, D}

iv. For each issue age x, determine the values of M, E, Z and G, where:

M = min{(S + B), 100 – x} = the maximum number of policy durations for which

the company is permitted to use 100% of the company experience mortality rates.

E = the last policy duration at which the company chooses to use 100% of the

company experience mortality rates, equal to any policy duration chosen by the

company that is less than or equal to M.

Z = min{(S + C), 100 – x} = the last policy duration at which the company is

permitted to use less than 100% of the industry mortality rate.

G = the last policy duration at which the company chooses to use less than 100%

Requirements for Principle-Based Reserves for Life Products VM-20

of the industry mortality rate, which must be greater than or equal to E and less

than or equal to Z.

v. For each policy in a given mortality segment, from the start of the projection

through policy duration E, the prudent estimate mortality assumptions are the

company experience mortality rates (as defined in Section 9.C.2), plus the

prescribed margin pursuant to Section 9.C.6.b, and further adjusted by any

applicable margin changes pursuant to Section 9.C.6.d or Section 9.C.6.e.

vi. Beginning in the first policy duration after policy duration E, the prudent estimate

mortality assumptions for each policy in a given mortality segment are determined

as a weighted average of the company experience mortality rates with margins and

the applicable industry basic table with margins, in which the weights on the

company rates grade linearly from 100% down to 0%. This grading must be

completed—i.e., must reach 100% of industry table—no later than the beginning

of the first policy duration after policy duration Z (the determination of the

applicable industry basic table is described in Section 9.C.3). Thus, the prudent

estimate mortality rate, prior to any adjustments pursuant to Sections 9.C.7.c,

9.C.7.d, 9.C.7.e, and 9.C.7.f below, is:

)(

com

[x]+t-1

) + (1-W

)(

ind

[x]+t-1

)

Where

= 1 for 1<t<E

= [G+1-t] /[G+1-E] for E<t≤G

= 0 for t>G

com

[x]+t-1

is the company experience mortality rate, including

any applicable improvement pursuant to Section 9.C.2.h, with margin for policy

year t.

ind

[x]+t-1

is the industry table mortality rate, including any applicable improvement

pursuant to Section 9.C.3.g, plus margin for policy year t.

vii. For each policy within a given mortality segment, the sufficient data period,

grading period and policy durations are measured from the issue date of the policy,

not from the valuation date. The projection for a policy commences at the valuation

date, using the prudent estimate mortality rate for whatever duration the policy is

in at that point.

Guidance Note: The following examples for a policy issued at age 35 on Jan. 1, 2021, illustrate

how grading is to be performed.

Example 1

Suppose the valuation date is Dec. 31, 2025. Assume a credibility score of 96%. Based on the

Grading Table:

A = 50

B = 10

Requirements for Principle-Based Reserves for Life Products VM-20

C = 25

Assume the last policy duration that has 50 or more claims is 30, so D = 30.

S = min{A,D} = min{50, 30} = 30 = sufficient data period

M = min{(S + B), 100 – x} = min{(30 + 10), 65} = 40

E = 40

Z = min{(S + C), 100 – x} = min{(30 + 25), 65} = 55

G = 55

In this example, the company would set the prudent estimate mortality assumption at 100% of

company experience mortality, plus the prescribed margin, plus any additional margin, for policy

durations 1–40. However, policy durations 1–5 are already in the past and would not come into

play. For this particular policy, only the first 35 years of the projection (policy durations 6–40)

would use prudent mortality rates that are 100% company experience. Starting in policy duration

41, the company would linearly grade from the company experience mortality rates with margins

to 100% of the applicable industry basic table with margins. The company must be using 100% of

the applicable industry basic table with margins no later than the beginning of policy duration 56.

Thus, for policy duration 47, for instance, the prudent estimate mortality rate would be:

(9/16)(

com

[35]+47-1

) + (7/16)(

ind

[35]+47-1

)

At a valuation date two years later at Dec. 31, 2027, if a new mortality study had not been run and

S was still 30, only the first 33 years of the projection (policy durations 8–40) would be using

prudent mortality rates that are 100% company experience.

More newly issued policies with issue age 35 would be using more years of 100% company

experience than the policy in this example.

Example 2

Suppose that for the same case the company elected to begin grading five years earlier than

required, but not end the grading any sooner than required. In this case, grading must be completed

no later than the beginning of policy duration 56, just as in the example above. Electing to begin

grading early does not change the policy duration by which grading to 100% of the applicable

industry basic table with margins must be completed. The policy duration 47 prudent mortality rate

would be:

(9/21)(

com

[35]+47-1

) + (12/21)(

ind

[35]+47-1

)

Example 3

Same as Example 1, but the company elected to end grading seven years earlier than required. The

company would therefore reach 100% of industry rates at the start of policy duration 49 instead of

the start of policy duration 56. In this case, the company would set the prudent estimate mortality

assumption at 100% of company experience mortality, plus the prescribed margin, plus any

additional margin, for policy durations 1–40. The policy duration 47 prudent rate would be:

(2/9)(

com

[35]+47-1

) + (7/9)(

ind

[35]+47-1

)

c. Smoothing may be used within each mortality segment to ensure that an

appropriate relationship exists by attained age within each mortality segment. Such

Requirements for Principle-Based Reserves for Life Products VM-20

smoothing must be done in a manner that does not result in a material change in

total expected claims for the mortality segment.

d. The company may adjust the resulting mortality rates within each mortality

segment to ensure the resulting prudent estimate produces a reasonable

relationship with assumptions in other mortality segments that reflects the

underwriting class or risk class of each mortality segment. Such adjustments must

be done in a manner that does not result in a material change in total expected

claims for all mortality segments in the aggregate.

e. Adjust the prudent estimate mortality assumptions to reflect differences associated

with impaired lives and differences due to policyholder behavior if there is a

reasonable expectation that due to conditions such as changes in premiums or other

policy provisions, policyholder behavior will lead to mortality results that vary

from the mortality results that would otherwise be expected.

i. The adjustment for impaired lives shall follow established actuarial

practice, including the use of mortality adjustments determined from

clinical and other data.

ii. The adjustment for policyholder behavior shall follow common actuarial

practice, including the use of dynamic adjustments to base mortality.

f. Twenty years of future mortality improvement that the company anticipates

beyond the valuation date shall be applied to the prudent estimate assumptions for

mortality, using prudent future mortality improvement factors no greater than the

loaded factors determined by the SOA, adopted by the Life Actuarial (A) Task

Force, and published on the SOA website, at

https://www.soa.org/research/topics/indiv-val-exp-study-list/

, (Individual Life

Insurance Mortality Improvement Scale – for Use with AG38/VM20 – 20XX).

Guidance Note: M

ortality improvement may be positive or negative (i.e., deterioration). The

anticipated mortality improvement may be lower than the rates published by the SOA, even zero,

for example, if the company’s best estimate for mortality improvement for a particular block, such

as simplified issue, is lower.

To allow time for companies to reflect the updated mortality improvement rates,

the rates that are to be used in the year-end YYYY valuation should be adopted by

the Life Actuarial (A) Task Force and published on the SOA website by September

of YYYY. If this timeline is not met, then at the company’s option it may use the

mortality improvement rates for the prior year (year YYYY-1).

D. Policyholder Behavior Assumptions

1. General Prudent Estimate Policyholder Behavior Assumption Requirements

The company shall determine prudent estimate policyholder behavior assumptions such

that the assumptions:

a. Reflect expectations regarding variations in anticipated policyholder behavior

relative to characteristics that have a material impact on the modeled reserve,

which may include gender, attained age, issue age, policy duration, time to

maturity, tax status, level of account and cash surrender value, surrender charges,

transaction fees or other policy charges, distribution channel, product features, and

whether the policyholder and insured are the same person.

Requirements for Principle-Based Reserves for Life Products VM-20

b. Are appropriate for the block of business being valued, giving due consideration

to other assumptions used in conjunction with the cash-flow model and to the

scenarios whose results are likely to contribute to the modeled reserve.

c. Are based on actual experience data directly applicable to the block of business

being valued (i.e., direct data) when available. In the absence of directly applicable

data, the company should next use available data from any other block of business

that is similar to the block of business being valued, whether or not that block of

business is directly written by the company. If data from a similar block of business

are used, the company shall adjust the anticipated experience assumption to reflect

material differences between the business being valued and the similar block of

business.

d. Reflect the outcomes and events exhibited by historical experience only to the

extent such experience is relevant to the risk being modeled.

e. Reflect the likelihood that policyholder behavior will be affected by any significant

increase in the value of a product option, such as term conversion privileges or

policy loans.

f. Are assigned to policies in a manner that provides an appropriate level of

granularity.

Guidance Note: Anticipated experience policyholder behavior assumptions for policyholder

behavior risk factors include, but are not limited to, assumptions for premium payment patterns,

premium persistency, surrenders, withdrawals, allocations between available investment and

crediting options, benefit utilization, and other option elections that could contain an element of

anti-selection. For fixed premium products, many of the premium payment patterns, premium

persistency and partial withdrawal behavior assumptions may not apply and do not need to be

considered.

2. Dynamic Modeling

a. The company shall use a dynamic model or other scenario-dependent formulation

to determine anticipated policyholder behavior unless the behavior can be

appropriately represented by static assumptions.

b. For risk factors that are modeled dynamically, the company shall use a reasonable

range of future expected behavior that is consistent with the economic scenarios

and other variables in the model.

c. The company is not required to model extreme or “catastrophic” forms of behavior

in the absence of evidence to the contrary.

3. Margins for Prudent Estimate Policyholder Behavior Assumptions

The company shall establish margins for policyholder behavior assumptions in compliance

with Section 9.B subject to the following:

a. To the extent that there is an absence of relevant and fully credible data, the

company shall determine the margin such that the policyholder behavior

assumption is shifted toward the conservative end of the plausible range of

behavior, which is the end of the range that serves to increase the modeled reserve.

Requirements for Principle-Based Reserves for Life Products VM-20

b. The company must assume that policyholders’ efficiency will increase over time

unless the company has relevant and credible experience or clear evidence to the

contrary.

c. The company must reflect the data uncertainty associated with using data from a

similar but not identical block of business to determine the anticipated experience

assumption.

d. The company shall establish a higher margin for partial withdrawal and surrender

assumptions in the case where the company’s marketing or administrative

practices encourage anti-selection.

e. The company shall perform testing to determine whether the modeled reserve is

materially affected by variations in the size and direction of the margin, and it shall

do so using a methodology that recognizes that the appropriate size and/or

direction of a margin in the early durations may be quite different from that in later

durations. If the impact on the modeled reserve is material, the company shall

establish margins accordingly.

Guidance Note: For example, the lapse rate margins on a level term plan may increase lapses in

the first few years but decrease lapses for the remainder of the level term period.

4. Additional Sensitivity Testing for Policyholder Behavior Assumptions

The company shall examine the sensitivity of assumptions on the modeled reserve as

required under Section 9.A.7 and shall at a minimum sensitivity test:

a. Premium payment patterns, premium persistency, surrenders, partial withdrawals,

allocations between available investment and crediting options, benefit utilization,

and other option elections if relevant to the risks in the product.

b. For policies that give policyholders flexibility in the timing and amount of

premium payments:

i. Minimum premium scenario.

ii. No further premium payment scenario.

iii. Pre-payment of premiums – Single premium scenario.

iv. Pre-payment of premiums – Level premium scenario.

5. For a universal life policy that guarantees coverage to remain in force as long as the

secondary guarantee requirement is met and during projection periods in which the cash

surrender value is zero or minimal, industry experience, for purposes of complying with

Section 9.A.6, shall be the Lapse Experience Under Term-to-100 Insurance Policies

published by the Canadian Institute of Actuaries in September 2015. During projection

periods in which the cash surrender value of such policy is zero or minimal, the assumption

shall grade from credible company experience to the rates in the Lapse Experience Under

Term-to-100 Insurance Policies published by the Canadian Institute of Actuaries in

September 2015 in five projection years from the last duration where substantially credible

experience is available.

Requirements for Principle-Based Reserves for Life Products VM-20

Guidance Note: The term “minimal cash surrender value” means that the cash surrender value is

of such small value that its presence would not significantly affect a policyholder’s decision to

lapse the policy in comparison to a situation with zero cash surrender value.

6. Post-Level Term Period

a. For the calculation of the DR, for a term life policy issued Jan. 1, 2017, and later

in which level or near level premiums are guaranteed or expected for a specified

duration, followed by a substantial premium increase, for the period following that

substantial premium increase, the company shall compare the present value of cash

inflows to the present value of cash outflows. If the present value of cash inflows

exceeds the present value of cash outflows for the policy, then the company shall

assume a 100% lapse rate at the end of the level term period so that no post-level

term profits are reflected in the DR calculation. If the present value of cash inflows

is less than the present value of cash outflows for the policy, the post-level term

losses shall be reflected in the DR calculation.

b. For the calculation of the SR for a term life policy subject to Section 9.D.6.a and

for the calculation of the DR and the SR for a term policy issued before Jan. 1,

2017, in which level or near level premiums are guaranteed or expected for a

specified duration, followed by a substantial premium increase, for the period

following that substantial premium increase, the lapse and mortality assumptions

shall be adjusted, or margins added, such that the policy’s present value of cash

inflows in excess of cash outflows assumed shall be limited to reflect the relevance

and credibility of the experience, approaching zero for periods where the

underlying data have low or no credibility or relevance.

Guidance Note: A seriatim comparison of the present value of post-level term cash inflows and

outflows must be performed. For policies subject to Section 9.D.6.a, the 100% lapse rate

assumption at the end of the level term period applies only to those policies with post-level term

profits. Similarly, for policies subject to Section 9.D.6.b, adjustments to limit post-level term profits

must be made at a seriatim level, and post-level term losses must be reflected in the reserve

calculations.

This does not preclude a company from using a simplified approach consistent with VM-20 Section

2.G. For example, testing on a representative number of key cells could be performed to verify that

no post-level term profits are reflected in the DR calculation.

Guidance Note: Section 9.D.6.b applies to a term policy issued before Jan. 1, 2017, that is valued

using Actuarial Guideline XLVIII—Actuarial Opinion and Memorandum Requirements for the

Reinsurance of Policies Required to be Valued under Sections 6 and 7 of the NAIC Valuation of

Life Insurance Policies Model Regulation (Model 830) (AG 48) or Model #787.

E. Expense Assumptions

1. General Prudent Estimate Expense Assumption Requirements

In determining prudent estimate expense assumptions, the company:

a. Shall use expense assumptions for the deterministic and stochastic scenarios that

are the same except for differences arising from application of inflation rates.

Requirements for Principle-Based Reserves for Life Products VM-20

b. May spread certain information technology (IT) development costs and other

capital expenditures over a reasonable number of years in accordance with

accepted statutory accounting principles as defined in the SSAPs.

Guidance Note: Care should be taken with regard to the potential interaction with the inflation

assumption above.

c. Shall assume that the company is a going concern.

d. Shall choose an appropriate expense basis that properly aligns the actual expense

to the assumption. If values are not significant, they may be aggregated into a

different base assumption.

Guidance Note: For example, death benefit expenses should be modeled with an expense

assumption that is per death incurred.

e. Shall reflect the impact of inflation.

f. Shall not assume future expense improvements.

g. Shall not include assumptions for federal income taxes (and expenses paid to

provide fraternal benefits in lieu of federal income taxes) and foreign income taxes.

h. Shall use assumptions that are consistent with other related assumptions.

i. Shall use fully allocated expenses.

Guidance Note: Expense assumptions should reflect the direct costs associated with the block of

policies being modeled, as well as indirect costs and overhead costs that have been allocated to the

modeled policies.

j. Shall allocate expenses using an allocation method that is consistent across

company lines of business. Such allocation must be determined in a manner that is

within the range of actuarial practice and methodology and consistent with

applicable ASOPs. Allocations may not be done for the purpose of decreasing the

modeled reserve.

k. Shall reflect expense efficiencies that are derived and realized from the

combination of blocks of business due to a business acquisition or merger in the

expense assumption only when any future costs associated with achieving the

efficiencies are also recognized.

Guidance Note: For example, the combining of two similar blocks of business on the same

administrative system may yield some expense savings on a per unit basis, but any future cost of

the system conversion should also be considered in the final assumption. If all costs for the

conversion are in the past, then there would be no future expenses to reflect in the valuation.

l. Shall reflect the direct costs associated with the policies being modeled, as well as

an appropriate portion of indirect costs and overhead (i.e., expense assumptions

representing fully allocated expenses should be used), including expenses

categorized in the annual statement as “taxes, licenses and fees” (Exhibit 3 of the

annual statement) in the expense assumption.

Requirements for Principle-Based Reserves for Life Products VM-20

m. Shall include acquisition expenses associated with business in force as of the

valuation date and significant non-recurring expenses expected to be incurred after

the valuation date in the expense assumption.

n. For policies sold under a new policy form or due to entry into a new product line,

the company shall use expense factors that are consistent with the expense factors

used to determine anticipated experience assumptions for policies from an existing

block of mature policies taking into account:

i. Any differences in the expected long-term expense levels between the

block of new policies and the block of mature policies.

ii. That all expenses must be fully allocated as required under Section 9.E.1.i

above.

2. Margins for Prudent Estimate Expense Assumptions

The company shall determine margins for expense assumptions according to the

requirements given in Section 9.B.

F. Asset Assumptions

Guidance Note: This subsection includes requirements for prescribed asset default costs, certain

prescribed asset spreads, and handling of uncertainty of timing and amounts of cash flows due to

embedded options in the assets.

1. Procedure for Setting Annual Default Cost Factors by Projection Year for Starting Fixed

Income Assets with an NAIC Designation

The company shall determine a set of total annual default cost factors, by projection year,

for each starting fixed income asset that has an NAIC designation, expressed as percentages

of the statement value in each projection year. In making such determination for each asset,

the company shall use certain inputs from company records according to Section 9.F.2,

assign a PBR credit rating according to the procedure in Section 9.F.3, and use prescribed

tables or other sources as indicated in this subsection and contained or referenced in

Appendix 2. The total annual default cost factor in each year shall be the sum of three

prescribed components (a) + (b) + (c) as follows:

a. The “baseline annual default cost factor” in all projection years shall be taken from

the most current available baseline default cost table published by the NAIC using

the PBR credit rating and weighted average life (WAL) of the asset on the

valuation date. The methodology for creating this table can be found in Appendix

2 of VM-20.

b. The “spread related factor” shall grade linearly in yearly steps from the prescribed

amount in year one to zero in years four and after. The prescribed amount in year

one may be positive or negative and shall be calculated as follows:

i. Multiply 25% by the result of (ii) minus (iii).

ii. The current market benchmark spread published by the NAIC consistent

with the PBR credit rating and WAL of the asset on the valuation date.

iii. The most current available long-term benchmark spread published by the

NAIC.

Requirements for Principle-Based Reserves for Life Products VM-20

iv. The resulting amount shall not be less than the negative of the baseline

annual default cost in year one and shall not be greater than two times the

baseline annual default cost in year one.

c. The “maximum net spread adjustment factor” shall be the same amount for each

starting fixed income asset within a model segment and shall grade linearly in

yearly steps from the prescribed amount in year one to zero in years four and after.

The prescribed amount in year one shall be calculated as follows:

i. For each asset included in the model segment and subject to this Section

9.F.1, calculate a preliminary year one net spread equal to the option

adjusted spread of the asset on the valuation date less the sum of the

amounts from Section 9.F.1.a and Section 9.F.1.b for the asset and less the

investment expense for the asset.

ii. Calculate a weighted average preliminary year one net spread for the

model segment using a weight applied to the amount in Section 9.F.1.c.i

for each asset equal to that asset’s statement value on the valuation date

multiplied by the lesser of three years and the asset’s WAL on the

valuation date.

iii. Calculate the amount in Section 9.F.1.c.i for a hypothetical asset with the

following assumed characteristics (the regulatory threshold asset):

a) A PBR credit rating of 9.

b) A WAL equal to the average WAL on the valuation date for the

assets in the model segment and subject to Section 9.F.1.

c) An option adjusted spread equal to the current market benchmark

spread published by the NAIC for the assumed PBR credit rating

and WAL. The methodology for determining this published

spread can be found in Appendix 2.

d) Investment expense of 0.10%.

iv. The prescribed amount in year one is the excess, if any, of the result in

Section 9.F.1.c.ii over the result in Section 9.F.1.c.iii.

Guidance Note: A broader explanation for this factor: For each model segment, a comparison is

to be made of two spread amounts, both being net of the default costs calculated thus far and net of

investment expenses. In each case, the gross option adjusted spread is based on current market

prices at the valuation date. The first result represents the weighted average net spread for all the

assets in the model segment (and subject to this subparagraph), as if all the assets were purchased

at their current market spreads. The second result represents the net spread for a portfolio of index

Baa bonds (NAIC 2, PBR credit rating of 9) as if the index Baa portfolio were purchased at the

current average market spread. If the first result is higher than the second, additional default costs

must be added to each asset until the two results are equal for the first projection year. This

additional amount of default cost on each asset then grades off linearly in the model until it reaches

zero in year four and after. This process is repeated each actual valuation date. A company that

invests in an asset mix earning an average gross spread greater than Baa bonds initially or an asset

mix whose average market spread could widen significantly relative to market spreads for Baa

bonds are examples of situations likely to trigger additional assumed default costs either initially

or in the future.

Requirements for Principle-Based Reserves for Life Products VM-20

2. Company-Determined Inputs for Each Asset

The company shall determine certain items for each asset that are necessary to calculate

the total annual default cost factors:

a. “Investment expense” for each asset shall mean the company’s anticipated

experience assumption for assets of the same type, expressed as an annual

percentage of statement value.

b. “Option adjusted spread (OAS)” for each asset shall mean the average spread over

zero coupon Treasury bonds that equates a bond’s market price as of the valuation

date with its modeled cash flows across an arbitrage free set of stochastic interest

rate scenarios. For floating rate bonds, the OAS shall be calculated as the

equivalent spread over Treasuries if the bonds were swapped to a fixed rate.

Market conventions and other approximations are acceptable for the purposes of

this subsection.

c. “Weighted average life (WAL)” for each asset means, for any fixed-income

security that has either a maturity date or a redemption date, the weighted average

number of years from the valuation date until 100% of the outstanding principal is

expected to be repaid. Market conventions and other approximations are

acceptable.

In selecting the Benchmark Spread from Table F, Table G, Table H or Table I, identify the

appropriate term from the “WAL” column as follows:

(i) For a bond that has a maturity date, or a preferred stock issue that has a

redemption date, use the WAL, rounded to the nearest term available in

the “WAL” column, but not exceeding 30; and

(ii) For a bond that does not have a maturity date, or a preferred stock issue that

does not have a redemption date, use 30.

Then select the spread corresponding to that term and the bond’s PBR credit rating.

For a swap, refer to the nearest Term to Maturity shown in Table J.

Guidance Note: OAS is a metric used for callable corporate bonds and other bonds with

optionality, such as residential mortgage-backed securities (RMBS). Any excess of the nominal

spread of an asset over its OAS represents additional return for taking on the risk of embedded

options. This additional return is not considered when using OAS to make adjustments to annual

default cost factors because the additional return is assumed to be related to the cost of embedded

options that must be modeled directly by the company along each scenario in the cash-flow model.

(See Section 9.F.8.) OAS is dependent on market prices, which may be gathered by companies in

a variety of ways for financial reporting purposes. For instance, prices and OAS may be developed

internally for assets with less relative liquidity, such as private placements. The general sources of

market prices used to determine OAS, as well as the method or source for the OAS calculation,

should be documented in the PBR Actuarial Report. In some cases, OAS may not be available due

to unavailability of market prices. When such is the case, the asset may be excluded from the

particular calculation.

3. Determination of PBR Credit Rating

a. Table K, referenced in Appendix 2 Section H, converts the ratings of NAIC

approved ratings organizations (AROs) and NAIC designations to a numeric rating

Requirements for Principle-Based Reserves for Life Products VM-20

system from 1 through 20 that is to be used in the steps below. A rating of 21

applies for any ratings of lower quality than those shown in the table.

b. For an asset with an NAIC designation that is derived solely by reference to

underlying ARO ratings without adjustment, the company shall determine the PBR

credit rating as the average of the numeric ratings corresponding to each available

ARO rating, rounded to the nearest whole number.

c. For an asset that is not a commercial mortgage and that has an NAIC designation

that is not derived solely by reference to underlying ARO ratings without

adjustment, the company shall determine the PBR credit rating as the second least

favorable numeric rating associated with that NAIC designation.

d. For a commercial or agricultural mortgage loan, the company shall determine the

PBR credit rating as the Table K lookup of the numeric rating corresponding to the

loan’s NAIC commercial mortgages (CM) category, where the latter is assigned

by the company in accordance with NAIC life RBC instructions.

Guidance Note: The 1 through 21 PBR credit rating system attempts to provide a more granular

assessment of credit risk than has been used for establishing NAIC designations for RBC and asset

valuation reserve (AVR) purposes. The reason is that unlike for RBC and AVR, the VM-20 reserve

cash-flow models start with the gross yield of each asset and make deductions for asset default

costs. The portion of the yield represented by the purchase spread over Treasuries is often

commensurate with the more granular rating assigned, such as A+ or A-. Thus, use of the PBR

credit rating system may provide a better match of risk and return for an overall portfolio in the

calculation of VM-20 reserves. However, for assets that have an NAIC designation that does not

rely directly on ARO ratings, a more granular assessment consistent with the designation approach

is not currently available.

Guidance Note: The Purposes and Procedures Manual of the NAIC Investment Analysis Office

(P&P Manual), which establishes the rules for setting NAIC designations, underwent significant

change during 2009–2010, particularly in the area of assessing the credit risk of structured

securities. The NAIC Valuation of Securities (E) Task Force implemented an interim solution in

2009 to set designations for non-agency RMBS based on modeling by a third-party firm. The Task

Force is developing a long-term solution for these and other structured securities, such as

commercial mortgage-backed securities (CMBS), that may involve a combination of modeling and

other methods, such as “notching up” or “notching down” the result derived by reference to ARO

ratings. In all such cases where the ARO rating basis is either not used at all or is adjusted in some

way, the intent is that paragraph (c) be used to determine the PBR credit rating. Another common

example where (c) is to be used would be securities that are not Securities Valuations Office (SVO)

filing exempt (FE), such as many private placement bonds. For example, a private placement that

was not FE and was rated by the SVO as NAIC 1 would be assigned a PBR credit rating of 6

(second least favorable), equivalent to A2.

4. Special Situations

For an asset handled under Section 9.F.3.c and for which the NAIC designation varies

depending on the company’s carrying value of the asset, the company must avoid

overstatement of the net return of the asset when projecting future payments of principal

and interest together with the prescribed annual default costs.

Guidance Note: For example, if a non-agency RMBS is rated NAIC 2 if held at a particular

company’s carrying value but NAIC 4 if held at par, and that company’s cash-flow model first

projects the full recovery of scheduled principal and interest, it would be more appropriate to then

Requirements for Principle-Based Reserves for Life Products VM-20

deduct annual default costs consistent with NAIC 4 rather than NAIC 2. If the company’s cash-

flow model has already incorporated a reduced return of principal and interest consistent with the

company’s carrying value, then it would be more appropriate to deduct annual default costs

consistent with NAIC 2. Modeling of assets with impairments is an emerging topic, and methods

for handling in vendor and company projection models vary.

5. Annual Default Cost Factors for Starting Fixed Income Assets without an NAIC

Designation

For starting assets that do not have an NAIC designation, the default assumption shall be

established such that the net yield shall be capped at 104% of the applicable corresponding

historical Treasury yield rate most closely coinciding with the dates of purchase and

maturity structure of supporting assets plus 25 basis points (bps).

6. Annual Default Cost Factors for Reinvestment Fixed Income Assets

The sets of annual default cost factors for reinvestment fixed income assets are determined

following the same process as for starting fixed income assets except that Section 9.F.1.c

does not apply to reinvestment assets.

7. Amount of Assumed Default Costs

The assumed default costs in the cash-flow model for a projection interval shall be the sum

over all fixed income assets of the result of the total annual default cost factor for each

asset, adjusted appropriately for the length of the projection interval, multiplied by the

appropriate credit exposure for each asset.

8. Procedure for Setting Prescribed Gross Asset Spreads by Projection Year for Certain Asset

Transactions and Operations in the Cash-Flow Model

a. Gross asset spreads over Treasuries for public non-callable corporate bonds

purchased in projection year one shall be the current market benchmark spreads

published by the NAIC consistent with the PBR credit rating and WAL of assets

purchased.

b. Gross asset spreads over Treasuries for public non-callable corporate bonds

purchased in projection years four and after shall be the most current available

long-term benchmark spreads published by the NAIC consistent with the PBR

credit rating and WAL of assets purchased.

c. The prescribed gross asset spreads for these asset types shall grade linearly

between year one and year four in yearly steps.

d. Interest rate swap spreads over Treasuries shall be prescribed by the NAIC for use

throughout the cash-flow model wherever appropriate for transactions and

operations including, but not limited to, purchase, sale, settlement, cash flows of

derivative positions and reset of floating rate investments. A current and long-term

swap spread curve shall be prescribed for year one and years four and after,

respectively, with yearly grading in between.

i. The current prescribed swap spread curve shall be the Secured Overnight

Financing Rate (SOFR) swap curve.

ii. The long-term SOFR swap spread curve, given that the SOFR swap

market did not emerge before late 2021 and the SOFR is an index for

Requirements for Principle-Based Reserves for Life Products VM-20

which there is no official data before April 2, 2018, shall be calculated

based on 15 year moving averages of prescribed estimates of historical

SOFR swap spreads for valuation dates prior to June 30, 2037.

Guidance Note: Actuarial judgment may be required in the use of prescribed swap

spreads (e.g., in the case where the company has a financial instrument with

floating rate payments based on an index that is not prescribed by the NAIC [e.g.,

one-month SOFR or three-month London Interbank Offered Rate (LIBOR)]).

9. Basis of NAIC Long-Term Benchmark Spreads

The prescribed long-term benchmark spread table established by the NAIC shall to the

extent practicable:

a. Reflect recent historical market data based on actual daily trading activity.

b. Reflect an expanding observation period that uses the most recent reported data,

with a minimum observation period of seven years expanding to a maximum

observation period of 15 years.

c. Be based on an “85% conditional mean” of the periodic market data. This measure

is defined as the mean obtained after excluding from the observation period the

trading days involving the 7.5% highest and 7.5% lowest observed spreads for “A”

rated 7- to 10-year maturities or other most similar asset category available from

the source data. For other asset categories, the mean shall be obtained after

excluding the same trading days that were excluded for the primary asset category.

d. Provide a table of bond spreads by PBR credit rating and WAL and swap spreads

by maturity. If needed, interpolation and/or smoothing techniques should be

applied to the source data to provide sufficient granularity and logical relationships

by credit quality.

Guidance Note: Long-term prescribed spreads are targeted at the historical mean because any

biased measure could either add or subtract conservatism depending on whether assets are

predominantly being purchased or being sold in the cash-flow model. The conditional mean

concept is intended to limit the volatility of the long-term prescribed spreads from one valuation

date to the next by excluding a limited number of observations in both tails within the averaging

period. Empirical analysis during the 2000–2009 time period showed little change in volatility or

the level of prescribed spreads from excluding more than the highest and lowest 7.5% observations.

10. Modeling of Embedded Options in Assets

Reflect any uncertainty in the timing and amounts of asset cash flows related to the paths

of interest rates, equity returns, or other economic values contained in the various scenarios

directly in the projection of asset cash flows under the various scenarios within the SR

calculation model and under the deterministic scenario within the DR calculation model.

Guidance Note: For example, model the impact on cash flows of embedded prepayment, extension

and call, and put options in a manner consistent with current asset adequacy analysis practice.

G. Revenue-Sharing Assumptions

1. The company may include income from projected future revenue sharing (as defined in

these requirements equals gross revenue-sharing income (GRSI)) net of applicable

projected expenses (net revenue-sharing income) in cash-flow projections, if:

Requirements for Principle-Based Reserves for Life Products VM-20

a. The GRSI is received by the company.

b. A signed contractual agreement or agreements are in place as of the valuation date

and support the current payment of the GRSI.

c. The GRSI is not already accounted for directly or indirectly as a company asset.

2. For purposes of this section, GRSI is considered to be received by the company if it is paid

directly to the company through a contractual agreement with either the entity providing

the GRSI or an affiliated company that receives the GRSI. The GRSI also would be

considered to be received if it is paid to a subsidiary that is owned by the company and if

100% of the statutory income from that subsidiary is reported as statutory income of the

company. In this case, the company shall assess the likelihood that future GRSI is reduced

due to the reported statutory income of the subsidiary being less than future GRSI received.

3. If the requirements in Section 9.G.1 are not met, and the GRSI is not included in cash-flow

projections, applicable projected expenses also are not included.

4. In determining the anticipated experience assumption for the GRSI, the company shall

reflect factors that include, but are not limited to, the following (not all of these factors will

necessarily be present in all situations):

a. The terms and limitations of the agreement(s), including anticipated revenue,

associated expenses and any contingent payments incurred or made by either the

company or the entity providing the GRSI as part of the agreement(s).

b. The relationship between the company and the entity providing the GRSI that

might affect the likelihood of payment and the level of expenses.

c. The benefits and risks to both the company and the entity paying the GRSI of

continuing the arrangement.

d. The likelihood that the company will collect the GRSI during the term(s) of the

agreement(s) and the likelihood of continuing to receive future revenue after the

agreement(s) has ended.

e. The ability of the company to replace the services provided to it by the entity

providing the GRSI or to provide the services itself, along with the likelihood that

the replaced or provided services will cost more to provide.

f. The ability of the entity providing the GRSI to replace the services provided to it

by the company or to provide the services itself, along with the likelihood that the

replaced or provided services will cost more to provide.

5. The company shall include all expenses required or assumed to be incurred by the company

in conjunction with the arrangement providing the GRSI, as well as any assumed expenses

incurred by the company in conjunction with the assumed replacement of the services

provided to it in the projections as a company expense. In addition, the company shall

include expenses incurred by either the entity providing the net revenue-sharing income or

an affiliate of the company in the applicable expenses that reduce the GRSI.

6. In determining the prudent estimate of projected GRSI, the company shall reflect a margin

(which decreases the assumed GRSI) related to the uncertainty of the revenue. Such

uncertainty is driven by many factors, including, but not limited to, the potential for

changes in industry trends. Contractually guaranteed GRSI shall not reflect a margin,

Requirements for Principle-Based Reserves for Life Products VM-20

although company expenses related to contractually guaranteed GRSI shall reflect a

margin.

7. The company is responsible for reviewing the revenue-sharing agreements that apply to

that group of policies and verifying compliance with these requirements.

8. The amount of net revenue-sharing income assumed in a given scenario shall be applied

with a margin to reflect any uncertainty but shall not exceed the sum of (a) and (b), where:

a. Is the contractually guaranteed GRSI, net of applicable expenses, projected under

the scenario.

b. Is the company’s estimate of non-contractually guaranteed net revenue-sharing

income before reflecting any margins for uncertainty multiplied by

the following

factors:

i. 1.0 in the first projection year.

ii. 0.95 in the second projection year.

iii. 0.90 in the third projection year.

iv. 0.85 in the fourth projection year.

v. 0.80 in the fifth and all subsequent projection years.

Guidance Note: Provisions such as one that gives the entity paying the GRSI the option to stop or

change the level of income paid would prevent the income from being guaranteed. However, if

such an option becomes available only at a future point in time, and the revenue up to that time is

guaranteed, the income is considered guaranteed up to the time the option first becomes available.

Guidance Note: If the agreement allows the company to unilaterally take control of the underlying

fund fees that ultimately result in the GRSI, then the revenue is considered guaranteed up until the

time at which the company can take such control. Since it is unknown whether the company can

perform the services associated with the revenue-sharing arrangement at the same expense level, it

is presumed that expenses will be higher in this situation. Therefore, the revenue-sharing income

shall be reduced to account for any actual or assumed additional expenses.

Requirements for Principle-Based Reserves for Life Products VM-20

Appendix 1: Additional Description of Economic Scenarios

The prescribed economic scenario generator can be found on the SOA’s website at

www.soa.org/tables-

calcs-tools/research-scenario/.

A. Generating Interest Rates

The prescribed economic scenario generator uses three random numbers per period. These are:

1. A random shock to the 20-year Treasury rate.

2. A random shock to the spread between 1-year and 20-year Treasury rates.

3. A random shock to the volatility.

In generating the scenarios for the SERT, zero shocks to volatility are used.

When generating scenarios for the SERT, upward shocks to the 20-year Treasury are associated

with downward shocks to the spread, making the yield curve less steep (or potentially inverted).

The prescribed mean reversion parameter described in Section D shall be used in calculating the

scen

arios based on the prescribed scenario generator.

The prescribed economic scenario generator can be found on the SOA’s website at

www.soa.org/tables-calcs-tools/research-scenario/

B. Generating Equity Returns

The equity returns scenarios can be generated using the prescribed economic scenario generator,

located on the SOA’s website at www.soa.org/tables-calcs-tools/research-scenario/

C. Source of U.S. Treasury Interest Rates

Treasury interest rates can be found at the website:

www.treas.gov/offices/domestic-finance/debt-

management/interest-rate/yield_historical_main.shtml.

D. Prescribed Mean Reversion Parameter

The mean reversion point for the 20-year Treasury bond rate is dynamic, based on historical interest

rates as they emerge.

The formula for the dynamic mean reversion point is:

20% of the median 20-year Treasury bond rate over the last 600 months.

+ 30% of the average 20-year Treasury bond rate over the last 120 months.

+ 50% of the average 20-year Treasury bond rate over the last 36 months.

The result is then rounded to the nearest 0.25%.

The mean reversion point for use in the generator changes once per year, in January, and is based

on historical rates through the end of the prior year. While the mean reversion point is dynamic

depending on the date from which a scenario starts, it remains constant (rather than dynamic) across

all time periods after the scenario start date, for purposes of generating the scenario.

Requirements for Principle-Based Reserves for Life Products VM-20

The historical 20-year Treasury bond rate for each month is the rate reported for the last business

day of the month.

E. This section describes the set of 16 scenarios for the SERT in VM-20. Starting with the yield

curve on the valuation date, the scenarios are created using the Academy’s stochastic scenario

generator using predefined sets of random numbers, where each random number is a sample from

a normal distribution with mean zero and variance 1.

The rationale for this approach is twofold. First, the scenarios should be realistic in that they

could be produced by the generator. Second, in some way the likelihood of any scenario occurring

can be measured.

e way to measure the likelihood of a scenario occurring is to measure the likelihood of its series

of random shocks—that

s, the random numbers used in the generator. Given any sequence of

random numbers, their sum can be compared with a mean of zero and a standard error equal to the

square root of the number of deviates in the sequence. With the mean and standard error, we can

determine, in a crude way, where the sum of deviates in our sequence lies in

e distribution of

the sum of all such sequences.

r example, if we want a sequence that is always one standard error above average, we start with

a value of 1.0 as the first deviate. The value of the n

deviate is the excess of the square root of

n over the square root of n-1. So, the second value is 1.414 – 1 = 0.414, and the third value is

1.732 – 1.414 = 0.318.

Scenario 1 – Pop up, high equity

Interest rate shocks are selected to maintain the cumulative shock at the 90% level (1.282 standard

errors). Equity returns are selected to maintain the cumulative equity return at the 90% level.

Scenario 2 – Pop up, low equity

Interest rate shocks are selected to maintain the cumulative shock at the 90% level (1.282 standard

errors). Equity returns are selected to maintain the cumulative equity return at the 10% level.

Scenario 3 – Pop down, high equity

Interest rate shocks are selected to maintain the cumulative shock at the 10% level (1.282 standard

errors). Equity returns are selected to maintain the cumulative equity return at the 90% level.

Scenario 4 – Pop down, low equity

Interest rate shocks are selected to maintain the cumulative shock at the 10% level (1.282 standard

errors). Equity returns are selected to maintain the cumulative equity return at the 10% level.

Scenario 5 – Up/down, high equity

Interest rate shocks are selected that, for each five-year period, are consistently in the same

direction. The cumulative shock for each five-year period is at the 90% level during “up” periods

and at the 10% level during “down” periods.

Equity returns are selected to maintain the cumulative equity return at the 90% level.

Scenario 6 – Up/down, low equity

Requirements for Principle-Based Reserves for Life Products VM-20

Interest rate shocks are selected that, for each five-year period, are consistently in the same

direction. The cumulative shock for each five-year period is at the 90% level during “up” periods

and at the 10% level during “down” periods.

Equity returns are selected to maintain the cumulative equity return at the 10% level.

Scenario 7 – Down/up, high equity

Interest rate shocks are selected that, for each five-year period, are consistently in the same

direction. The cumulative shock for each five-year period is at the 90% level during “up” periods

and at the 10% level during “down” periods.

Equity returns are selected to maintain the cumulative equity return at the 90% level.

Scenario 8 – Down/up, low equity

Interest rate shocks are selected that, for each five-year period, are consistently in the same

direction. The cumulative shock for each five-year period is at the 90% level during “up” periods

and at the 10% level during “down” periods.

Equity returns are selected to maintain the cumulative equity return at the 10% level.

Scenario 9 – Baseline scenario

All shocks are zero.

Scenario 10 – Inverted yield curves

There are no shocks to long-term rates and equities.

There are shocks to the spread between short and long rates that are consistently in the same

direction for each three-year period. The shocks for the first three-year period are in the direction

of reducing the spread (usually causing an inverted yield curve). Shocks for each subsequent three-

year period alternate in direction.

Scenario 11 – Volatile equity returns

There are no shocks to interest rates. There are shocks to equity returns that are consistently in the

same direction for each two-year period and then switch directions.

Scenario 12 – Deterministic scenario for valuation

There are uniform downward shocks each month for 20 years, sufficient to get down to the one

standard deviation point (84%) on the distribution of 20-year shocks. After 20 years, shocks are

zero.

Scenario 13 – Delayed pop up, high equity

There are interest rate shocks that are zero for the first 10 years, followed by 10 years of shocks—

each 1.414 (square root of 2) times those in the first 10 years of Scenario 1. This gives the same

20-year cumulative shock as scenario 1, but all the shock is concentrated in the second 10 years.

After 20 years, the shock is the same as scenario 1.

Equity returns are selected to maintain the cumulative equity return at the 90% level.

Requirements for Principle-Based Reserves for Life Products VM-20

Scenario 14 – Delayed pop up, low equity

There are interest rate shocks that are zero for the first 10 years, followed by 10 years of shocks—

each 1.414 (square root of 2) times those in the first 10 years of Scenario 2. This gives the same

20-year cumulative shock as scenario 2, but all the shock is concentrated in the second 10 years.

After 20 years, the shock is the same as scenario 1.

Equity returns are selected to maintain the cumulative equity return at the 10% level.

Scenario 15 – Delayed pop down, high equity

There are interest rate shocks that are zero for the first 10 years, followed by 10 years of shocks—

each 1.414 (square root of 2) times those in the first 10 years of Scenario 3. This gives the same

20-year cumulative shock as scenario 3, but all the shock is concentrated in the second 10 years.

After 20 years, the shock is the same as scenario 3.

Equity returns are selected to maintain the cumulative equity return at the 90% level.

Scenario 16 – Delayed pop down, low equity

There are interest rate shocks that are zero for the first 10 years, followed by 10 years of shocks—

each 1.414 (square root of 2) times those in the first 10 years of Scenario 4. This gives the same

20-year cumulative shock as scenario 4, but all the shock is concentrated in the second 10 years.

After 20 years, the shock is the same as scenario 4.

Equity returns are selected to maintain the cumulative equity return at the 10% level.

Requirements for Principle-Based Reserves for Life Products VM-20

Appendix 2: Tables for Calculating Asset Default Costs and Asset Spreads, Including Basis of

Tables

This appendix describes the basis for certain prescribed asset default cost and asset spread tables to be

updated and published by the NAIC. Asset default cost tables will be updated on an annual basis. The data

source used to update the asset default cost tables is Moody’s. The current market benchmark spreads and

the current benchmark swap spreads will be updated on a monthly basis. The long-term benchmark spreads

and the long-term benchmark swap spreads will be updated on a quarterly basis. The data sources used to

update the spread tables are JP Morgan and Bank of America. The NAIC will provide access to the

published tables via links that may be found on the NAIC website home page (www.naic.org

) under the

Industry tab. These tables are needed for insurers to comply with the requirements of Section 9.F for asset

default costs and asset spreads in VM-20. In some cases, as specified in Section 9.F, tables published in

this appendix will serve as the NAIC published table until a different table is published. The development

of the various tables is described in Section A through Section G of this appendix. Certain tables were

developed based on various source material referenced herein. Other tables are simply compilations or

presentations of data from such sources.

It is important to note up front that the development of prescribed default costs is based entirely on analysis

of corporate bonds. Default costs for other fixed income securities and commercial and agricultural

mortgages are assumed to follow those of corporate bonds with similar NAIC designations through a

mapping tool called “PBR credit rating.” Examples of other fixed income securities are structured

securities, private placements and preferred stocks. Discussions at the NAIC during

2009–2010, particularly at the Valuation of Securities (E) Task Force, focused on the observation that

similarly rated assets of different types may have similar likelihood of default or loss of principal but may

have a significantly different distribution of the severity of that loss. Discussions have particularly focused

on the different drivers of severity between structured securities and corporate bonds. As a result, the

Valuation of Securities (E) Task Force has been developing updated methods to assign NAIC designations

for C-1 RBC purposes for structured securities in order to better take into account these differences. The

VM-20 procedure to assign a PBR credit rating has been structured so that in the cases where the Task

Force decides to go away from directly using the ratings of approved ratings organizations, the PBR credit

rating will be based on the NAIC designation rather than underlying ratings. Where the Task Force

continues to authorize use of underlying ratings, the PBR credit rating also will be based on those ratings.

However, VM-20 uses the underlying ratings to assign the PBR credit rating in a somewhat different

manner.

Section 9.F.3 describes the process the company must follow to assign a PBR credit rating for any fixed

income asset with an NAIC designation.

A. Baseline Annual Default Cost Factors

The general process followed to determine the baseline annual default cost factors shown in Table

A (see Section H) was as follows:

1. Determine from historical corporate bond data a matrix of cumulative default rates, for

maturities of one to 10 years and for 20 ratings classes (Aaa, Aa1, Aa2, Aa3 … Caa2, Caa3,

Ca).

2. Determine also from historical corporate bond data a set of recovery rates that varies only

by rating class.

3. Determine a matrix of baseline annual default cost factors (in bps), where for a given rating,

the baseline annual default cost factor for a bond with maturity or weighted average life of

t = 10,000* (1- Recovery Rate) * (1-[1-Cumulative Default Rate (t)]^[1/t]).

Requirements for Principle-Based Reserves for Life Products VM-20

4. Item 1 and Item 2 above were determined from Moody’s reports that were published in

February 2008. In February 2009 and February 2010, Moody’s published updated versions

of these reports, but there is no commitment from Moody’s to continue updating these

reports in the future. It was not explored whether another source for one or both elements

might be preferable. If the NAIC decides to use Moody’s as the source going forward, then

the matrix of baseline annual default cost factors could be updated after Moody’s publishes

any updated research.

Details of step 1 and step 2 above are contained in Section B and Section C below.

Essentially, step 1 involved gathering from Moody’s historical data the cumulative default

rates for key maturities over many cohort years, ranking those rates and applying a CTE

70 metric. For example, for the period 1970–2007, representing 37 years, there were 37

one-year cohorts, 33 five-year cohorts and 28 10-year cohorts. A CTE 70 for

10-year maturities involved averaging the eight cohorts with the highest 10-year

cumulative default rates. Step 2 involved gathering from Moody’s historical data the annual

recovery rates for various bond categories from 1982–2007, ranking those rates, and

calculating sample mean and CTE 70 statistics. The final recovery rate table uses the mean

for higher quality investment grade rating classes and uses the CTE 70 for lower quality

below investment grade rating classes and grades in between.

Among tables published on the NAIC website (See Section H):

a. Table A shows baseline default costs using Moody’s data.

b. Table B shows the baseline default cost margin (Table A rates minus the historical

mean rates).

B. Cumulative Default Rates Used in Baseline Annual Default Cost Factors

The current process to determine cumulative default rates is as follows:

1. Obtain the most recent Moody’s report on default rates (e.g., Moody's 2008-02-11 Special

Comment – Corporate Default & Recovery Rates 1920–2007).

2. Extract one-year, five-year and 10-year average cumulative default rate data by whole letter

rating (e.g., Aaa, Aa, … CCC) from the report (e.g., Exhibit 27 – Average Cumulative

Issuer-Weighted Global Default Rates, 1970–2007).

3. Extract one-year, five-year and 10-year cumulative default rate cohort data by whole letter

rating from the report (e.g., Exhibit 36 – Cumulative Issuer-Weighted Default Rates by

Annual Cohort, 1970–2007). Calculate the mean of these one-year, five-year and

10-year cumulative default rates, which should be close to the result in item 2 for each

whole letter rating.

4. Sort the data in item 3 to calculate preliminary CTE 70 one-year, five-year and 10-year

cumulative default rates at each whole letter rating.

5. Adjust the result in item 4 to reflect any differences between the result in item 2 and the

result in item 3:

(i.e., the result in item 5 = the result in item 4 + (the result in item 2 – the result in item 3).

6. Use linear interpolation to determine cumulative default rates for maturities two to four

years and six to nine years.

Requirements for Principle-Based Reserves for Life Products VM-20

7. Transform the data into a matrix that varies by ratings category (e.g., Aaa, Aa1, Aa2, Aa3,

A1 … Caa2, Caa3, Ca) using a smoothing algorithm to ensure that in the matrix, the rows

are monotonic by maturity, the columns are monotonic by rating, and to the extent possible

the matrix has a shape comparable to another Moody’s cumulative default rate table that

varies by notch (e.g., Moody’s Idealized Cumulative Default Rates).

8. For maturities greater than 10 years, define baseline annual default cost factors as equal to

those for 10-year maturities.

Among tables published on the NAIC website (See Section H):

a. Table C shows empirical CTE 70 default rates from Moody’s.

b. Table D shows prescribed cumulative default rates derived from Moody’s data.

C. Recovery Rate Used in Baseline Annual Default Cost Factors

The current process to determine the recovery rate is as follows:

1. Obtain the most recent Moody’s report on recovery rates (e.g., Moody's 2008-02-11

Special Comment – Corporate Default & Recovery Rates 1920–2007).

2. Extract historical annual data on recovery rates (e.g., the All Bonds column from Exhibit

22 – Annual Average Defaulted Bond and Loan Recovery Rates, 1982–2007).

3. Determine the mean and CTE 70 of the annual sample observations for each of the different

lien position categories, as well as for the All Bonds category.

Among tables published on the NAIC website (See Section H):

a. Table E1 shows a sorted version of “Exhibit 22 – Annual Average Defaulted Bond

and Loan Recovery Rates, 1982–2007,” and develops the CTE 70 recovery rates

and the implied margin.

Table E1 develops mean and CTE 70 recovery rates for all bonds, as well as for

senior bank loans and five bond lien position categories that make up the All Bonds

statistics. Implementation will be facilitated if VM-20 uses one recovery rate based

on All Bonds rather than using all six lien position categories. Using the more

detailed data would require either companies or the SVO to assign each asset to

one of the categories.

Table E1 also illustrates that bonds that are more senior in the issuer’s capital

structure tend to have higher recovery rates than bonds that are subordinated.

b. Table E2 shows the final recovery rates that vary by PBR credit rating. This table

was determined by assuming CTE 70 applies for Ba3/BB- and below, mean applies

for Baa1/BBB+ and above, and interpolated recovery rates apply for ratings that

are between Ba3/BB- and Baa1/BBB+. This approach recognizes that investment-

grade bonds are more likely to be senior in the issuer’s capital structure, and below-

investment-grade bonds are more likely to be subordinated. Differentiating by

actual seniority position of each bond was not considered practical. In addition,

because recovery rates and default rates are not 100% correlated and the

cumulative default rates were set at CTE 70, use of the mean recovery rate, at least

for the higher-quality bonds, helps to avoid overly conservative prescribed default

costs for those bonds.

Requirements for Principle-Based Reserves for Life Products VM-20

D. Current Market Benchmark Spreads

Current market benchmark spreads published by the NAIC are intended to represent average market

spreads at the valuation date for public non-callable corporate bonds and interest rate swaps. They

are used to establish the initial spread environment in the cash-flow model for purposes of modeling

reinvestment assets and disinvestment and for modeling prescribed default costs. Section 9.F calls

for both spreads and default costs to grade from initial to long-term conditions by the start of

projection year four. The current process to determine current market benchmark spreads is as

follows:

1. Extract the Investment Grade bond index spread data determined as of the last business

day of the month by ratings category and maturity bucket from JP Morgan and Bank of

America. Adjust the Bank of America Investment Grade spread data for the maturity

buckets 10–15 years and 15+ years to a single maturity bucket of 10+ years (using a

weighting process) to align with the JP Morgan maturity bucket of 10+ years. Average the

JP Morgan and Bank of America Investment Grade bond spreads as of the last business

day of the month by ratings category and maturity bucket.

2. Extract the Below Investment Grade bond index spread data determined as of the last

business day of the month by ratings category and assume that the Below Investment Grade

spread curve is flat across maturities. Average the JP Morgan and Bank of America Below

Investment Grade bond spreads as of the last business day of the month by ratings category.

3. Transform the averaged spread data into a matrix that varies by ratings category (e.g., Aaa,

Aa1, Aa2, Aa3, A1 …, Caa2, Caa3, Ca) and maturity (1, 2 …, 30) using a smoothing

algorithm to ensure that in the matrix: (a) the rows are monotonic by rating category; (b)

the investment grade columns are monotonic by maturity; and (c) the columns on the

borderline between investment grade and below investment grade (Baa3/BBB-) is

interpolated between Baa2/BBB and Ba1/BB+.

4. Publish the resulting Investment Grade and Below Investment Grade current market

benchmark spreads in separate tables.

Among tables published on the NAIC website (See Subsection H):

a. Table F shows Current Market Benchmark Spreads for Investment Grade bonds.

b. Table G shows Current Market Benchmark Spreads for Below Investment Grade

bonds.

E. Long-Term Benchmark Spreads

Long-term benchmark spreads published by the NAIC are the assumed long-term average spreads

for non-callable public bonds and interest rate swaps. They are used to establish the long-term

spread environment in the cash-flow model for purposes of modeling reinvestment assets and

disinvestment. They are also used as the normative spreads when calculating the spread related

factor in the asset default cost methodology. The current process to determine the long-term

benchmark spreads is as follows:

1. Extract the daily Investment Grade bond index spread data for the prescribed observation

period (rolling 15-year period) ending on the last business day of the quarter by ratings

category and maturity bucket from JP Morgan and Bank of America. Adjust the Bank of

America Investment Grade spread data for the maturity buckets 10–15 years and the 15+

years to a single maturity bucket of 10+ years (using a weighting process) to align with the

JP Morgan maturity bucket of 10+ years. Average the JP Morgan and Bank of America

Requirements for Principle-Based Reserves for Life Products VM-20

daily Investment Grade Bond spreads over the observation period by ratings category and

maturity bucket.

2. Extract the daily Below Investment Grade bond index spread data for the prescribed

observation period (rolling 15–year period) ending on the last business day of the quarter

by ratings category and assume that the Below Investment Grade spread curve is flat across

maturities.

Average the JP Morgan and Bank of America daily Below Investment Grade

bond spreads over the observation period by ratings category.

3. For the primary asset rating category (whole letter “A” rated 7- to 10-year maturity bucket),

calculate the “85% conditional mean” by excluding the 7.5% highest and 7.5% lowest daily

observations over the prescribed observation period and then computing the mean of the

remaining business trading day observations.

4. Calculate the “85% conditional mean” for each of the other ratings categories and maturity

buckets over the prescribed observation period after excluding the observations from the

same business trading days excluded in step 3.

5. Transform the averaged spread data into a matrix that varies by rating category (e.g., Aaa,

Aa1, Aa2, Aa3, A1…,Caa2, Caa3, Ca) and maturity (1, 2 … 30) using a smoothing

algorithm to ensure that in the matrix: (a) the rows are monotonic by rating category;

(b) the investment grade columns are monotonic by maturity; and (c) the columns on the

borderline between investment grade and below investment grade (Baa3/BBB-) are

interpolated between Baa2/BBB and Ba1/BB+.

6. Publish the resulting Investment Grade and Below Investment Grade long-term benchmark

spreads in separate tables.

Among tables published on the NAIC website (See Subsection H):

a. Table H shows Long-Term Mean Benchmark Spreads for Investment Grade bonds.

b. Table I shows Long-Term Mean Benchmark Spreads for Below Investment Grade

bonds.

F. Current Benchmark Swap Spreads

1. For tenors of three months, six months, and one year through 30 years, extract swap spread

data determined as of the last business day of the month by maturity from at least two

nationally recognized providers of this data. If the data source provides swap rates rather

than swap spreads, convert the swap rate for each maturity to a swap spread by subtracting

the corresponding maturity Treasury yield from the swap rate.

2. Average the swap spreads from the data sources by maturity determined as of the last

business day of the month.

3. Publish the Current Benchmark Swap Spreads by maturity in a table.

Guidance Note: Three-month and six-month SOFR swap rates are defined herein as the fixed rate

one party pays at the end of three months or six months in exchange for receiving at such time

three-month SOFR or six-month SOFR, calculated on a compounded in arrears basis.

G. Long-Term Benchmark Swap Spreads

1. Extract daily swap spread data over the prescribed observation period (rolling 15-year

Requirements for Principle-Based Reserves for Life Products VM-20

period) ending on the last business day of the quarter from at least two nationally

recognized providers of this data. If the data source provides swap rates rather than swap

spreads, convert the daily swap rate for each maturity to a swap spread by subtracting the

corresponding maturity Treasury yield from the swap rate.

2. F

or a valuation date during or after 2023 and before 2037, calculate SOFR swap spreads

as follows for each business day on or after the effective date of the adoption by the Life

Actuarial (A) Task Force of SOFR swap spreads as the replacement for swap spreads

previously prescribed:

a. For each maturity, “m” = 0.25, 0.5, 1 … 30 years, and business day “u”:

SOFR swap spread (m,u) = SOFR swap rate (m,u) - Treasury yield (m,u).

3. For a valuation date during or after 2023 and before 2037, for each business day before the

effective date of the adoption by the Life Actuarial (A) Task Force of SOFR swap spreads

as the replacement for swap spreads previously prescribed, utilize Bloomberg’s 2021-03-

05 published USD Spread Adjustments as follows:

a. For each maturity, “m” = 3 or 6 months, and business day “u”:

i. SOFR swap spread (3 months,u) = LIBOR swap spread (3 months,u) -

0.26161% (the USD 3-month Spread Adjustment)

ii. SOFR swap spread (6 months,u) = LIBOR swap spread (6 months,u) -

0.42826% (the USD 6-month Spread Adjustment)

b. For each maturity, “m” = 1 … 30 years, and business day “u”:

SOFR swap spread (m,u) = LIBOR swap spread (m,u) - 0.26161% (the USD 3-month

Spread Adjustment)

4. For a valuation date during or after 2037, calculate SOFR swap spreads as follows for each

business day:

a. For each maturity, “m” = 0.25, 0.5, 1 … 30 years, and business day “u”:

SOFR swap spread (m,u) = SOFR swap rate (m,u) - Treasury yield (m,u).

5. Average the swap spread data from the data sources by maturity over the prescribed

observation (rolling 15-year period).

6. Calculate the Long-Term Benchmark Swap Spreads as the 85% conditional mean for each

of the 32 maturity categories (three-month, six-month, one-year, two-year, … 30-year)

using the same business trading days as were used in the 85% conditional mean for long-

term bonds spreads.

7. Publish the Long-Term Benchmark Swap Spreads in a table.

Among tables published on the NAIC website (See Subsection H). Table J shows Long-

Term Benchmark Swap Spreads.

H. Tables

Current and historical versions of Tables A through K used for calculating asset default costs and

asset spreads are available on the NAIC website home page (www.naic.org

) under the Industry tab

Requirements for Principle-Based Reserves for Life Products VM-20

of the website.

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VM-21

VM-21: Requirements for Principle-Based Reserves for Variable Annuities

Table of Contents

Section 1: Background ...................................................................................................................

21-1

Section 2: Scope and Effective Date .............................................................................................. 21-6

Section 3: Reserve Methodology.................................................................................................... 21-8

Section 4: Determination of the SR ................................................................................................ 21-9

Section 5: Reinsurance Ceded ...................................................................................................... 21-19

Section 6: Requirements for the Additional Standard Projection Amount................................... 21-20

Section 7: Alternative Methodology ............................................................................................ 21-40

Section 8: Scenario Generation .................................................................................................... 21-56

Section 9: Modeling of Hedges Under a CDHS ........................................................................... 21-60

Section 10: Contract Holder Behavior Assumptions ..................................................................... .21-66

Section 11: Guidance and Requirements for Setting Prudent Estimate Mortality Assumptions....21-70

Section 12: Other Guidance and Requirements for Assumptions .................................................. 21-75

Section 13: Allocation of the Aggregate Reserves to the Contract Level………………...............21-75

Section 1: Background

A. Purpose

These requirements establish the minimum reserve valuation standard for VA contracts, and certain

other policies and contracts (“contracts”) as defined in Section 2.A, issued on or after the operative

date of the Valuation Manual as required by Model #820. These requirements constitute the

Commissioners Annuity Reserve Valuation Method (CARVM) for all contracts encompassed by

Section 2.A.

The contracts subject to these requirements may be aggregated with the contracts subject to

Actuarial Guideline XLIII—CARVM for Variable Annuities (AG 43), published in Appendix C of

the AP&P Manual, for purposes of performing and documenting the reserve calculations.

Guidance Note:

Effectively, through reference in AG 43, the reserve requirements in VM-21 also apply to those

contracts issued prior to Jan. 1, 2017, that would not otherwise be encompassed by the scope of

VM-21. Reserves for contracts subject to VM-21 or AG 43 may be computed as a single group. If

a company chooses to aggregate business subject to AG 43 with business subject to VM-21 in

calculating the reserve, then the provisions in VM-G apply to this aggregate principle-based

valuation.

Guidance Note:

Relationship to RBC Requirements

These requirements anticipate that the projections described herein are used for the determination

of RBC for all of the contracts falling within the scope of these requirements. These requirements

and the RBC requirements for the topics covered within Sections 4.A through 4.E are identical.

However, while the projections described in these requirements are performed on a basis that

ignores federal income tax, a company may elect to conduct the projections for calculating the RBC

requirements by including projected federal income tax in the cash flows and reducing the discount

interest rates used to reflect the effect of federal income tax as described in the RBC requirements.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

A company that has elected to calculate RBC requirements in this manner may not switch back to

using a calculation that ignores the effect of federal income tax without approval from the

domiciliary commissioner.

B. Principles

The projection methodology used to calculate the SR, as well as the approach used to develop the

Alternative Methodology, is based on the following set of principles. These principles should be

followed when interpreting and applying the methodology in these requirements and analyzing the

resulting reserves.

Guidance Note: The principles should be considered in their entirety, and it is required that

companies meet these principles with respect to those contracts that fall within the scope of these

requirements and are in force as of the valuation date to which these requirements are applied.

Principle 1: The objective of the approach used to determine the SR is to quantify the amount of

statutory reserves needed by the company to be able to meet contractual obligations in light of the

risks to which the company is exposed.

Principle 2: The calculation of the SR is based on the results derived from an analysis of asset and

liability cash flows produced by the application of a stochastic cash-flow model to equity return

and interest rate scenarios. For each scenario, the greatest present value of accumulated deficiency

is calculated. The analysis reflects prudent estimate assumptions for deterministic variables and is

performed in aggregate (subject to limitations related to contractual provisions) to allow the natural

offset of risks within a given scenario. The methodology uses a projected total cash flow analysis

by including all projected income, benefit and expense items related to the business in the model

and sets the SR at a degree of confidence using the CTE measure applied to the set of scenario

specific greatest present values of accumulated deficiencies that is deemed to be reasonably

conservative over the span of economic cycles.

Guidance Note: Examples where full aggregation between contracts may not be possible include

experience rated group contracts and the operation of reinsurance treaties.

Principle 3: The implementation of a model involves decisions about the experience assumptions

and the modeling techniques to be used in measuring the risks to which the company is exposed.

Generally, assumptions are to be based on the conservative end of the confidence interval. The

choice of a conservative estimate for each assumption may result in a distorted measure of the total

risk. Conceptually, the choice of assumptions and the modeling decisions should be made so that

the final result approximates what would be obtained for the SR at the required CTE level if it were

possible to calculate results over the joint distribution of all future outcomes. In applying this

concept to the actual calculation of the SR, the company should be guided by evolving practice and

expanding knowledge base in the measurement and management of risk.

Guidance Note: The intent of Principle 3 is to describe the conceptual framework for setting

assumptions. Section 10 provides the requirements and guidance for setting contract holder

behavior assumptions and includes alternatives to this framework if the company is unable to fully

apply this principle. More guidance and requirements for setting assumptions in general are

provided in Section 12.

Principle 4: While a stochastic cash-flow model attempts to include all real-world risks relevant

to the objective of the stochastic cash-flow model and relationships among the risks, it will still

contain limitations because it is only a model. The calculation of the SR is based on the results

derived from the application of the stochastic cash-flow model to scenarios, while the actual

statutory reserve needs of the company arise from the risks to which the company is (or will be)

Requirements for Principle-Based Reserves for Variable Annuities VM-21

exposed in reality. Any disconnect between the model and reality should be reflected in setting

prudent estimate assumptions to the extent not addressed by other means.

Principle 5: Neither a cash-flow scenario model nor a method based on factors calibrated to the

results of a cash-flow scenario model can completely quantify a company’s exposure to risk. A

model attempts to represent reality but will always remain an approximation thereto and, hence,

uncertainty in future experience is an important consideration when determining the SR. Therefore,

the use of assumptions, methods, models, risk management strategies (e.g., hedging), derivative

instruments, structured investments or any other risk transfer arrangements (such as reinsurance)

that serve solely to reduce the calculated SR without also reducing risk on scenarios similar to those

used in the actual cash-flow modeling are inconsistent with these principles. The use of assumptions

and risk management strategies should be appropriate to the business and not merely constructed

to exploit “foreknowledge” of the components of the required methodology.

C. Risks Reflected and Risks Not Reflected

1. The risks reflected in the calculation of reserves under these requirements arise from actual

or potential events or activities that are both:

a. Directly related to the contracts falling under the scope of these requirements or

their supporting assets; and

b. Capable of materially affecting the reserve.

2. Categories and examples of risks reflected in the reserve calculations include, but are not

necessarily limited to:

a. Asset risks

i. Separate account fund performance.

ii. Credit risks (e.g., default or rating downgrades).

iii. Commercial mortgage loan roll-over rates (roll-over of bullet loans).

iv. Uncertainty in the timing or duration of asset cash flows (e.g., shortening

(prepayment risk) and lengthening (extension risk)).

v. Performance of equities, real estate and Schedule BA assets.

vi. Call risk on callable assets.

vii. Risk associated with hedge instrument (includes basis, gap, price,

parameter estimation risks and variation in assumptions).

viii. Currency risk.

b. Liability risks

i. Reinsurer default, impairment or rating downgrade known to have

occurred before or on the valuation date.

ii. Mortality/longevity, persistency/lapse, partial withdrawal and premium

payment risks.

iii. Utilization risk associated with guaranteed living benefits.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

iv. Anticipated mortality trends based on observed patterns of mortality

improvement or deterioration, where permitted.

v. Annuitization risks.

vi. Additional premium dump-ins (high interest rate guarantees in low interest

rate environments).

vii. Applicable expense risks, including fluctuation in maintenance expenses

directly attributable to the business, future commission expenses, and

expense inflation/growth.

c. Combination risks

i. Risks modeled in the company’s risk assessment processes that are related

to the contracts, as described above.

ii. Disintermediation risk (including such risk related to payment of surrender

or partial withdrawal benefits).

iii. Risks associated with revenue-sharing income.

3. The risks not necessarily reflected in the calculation of reserves under these requirements

are:

a. Those not reflected in the determination of RBC.

b. Those reflected in the determination of RBC but arising from obligations of the

company not directly related to the contracts falling under the scope of these

requirements, or their supporting assets, as described above.

4. Categories and examples of risks not reflected in the reserve calculations include, but are

not necessarily limited to:

a. Asset risks

i. Liquidity risks associated with a “run on the bank.”

b. Liability risks

i. Reinsurer default, impairment or rating downgrade occurring after the

valuation date.

ii. Catastrophic events (e.g., epidemics or terrorist events).

iii. Major breakthroughs in life extension technology that have not yet

fundamentally altered recently observed mortality experience.

iv. Significant future reserve increases as an unfavorable scenario is realized.

c. General business risks

i. Deterioration of reputation.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

ii. Future changes in anticipated experience (reparameterization in the case

of stochastic processes), which would be triggered if and when adverse

modeled outcomes were to actually occur.

iii. Poor management performance.

iv. The expense risks associated with fluctuating amounts of new business.

v. Risks associated with future economic viability of the company.

vi. Moral hazards.

vii. Fraud and theft.

D. Definitions

1. The term “cash surrender value” means, for the purposes of these requirements, the amount

available to the contract holder upon surrender of the contract. Generally, it is equal to the

account value less any applicable surrender charges, where the surrender charge reflects

the availability of any free partial surrender options. However, for contracts where all or a

portion of the amount available to the contract holder upon surrender is subject to a market

value adjustment, the cash surrender value shall reflect the market value adjustment

consistent with the required treatment of the underlying assets. That is, the cash surrender

value shall reflect any market value adjustments where the underlying assets are reported

at market value, but it shall not reflect any market value adjustments where the underlying

assets are reported at book value.

2. The term “guaranteed minimum death benefit” (GMDB) means a provision (or provisions)

for a guaranteed benefit payable on the death of a contract holder, annuitant, participant or

insured where the amount payable is either (i) a minimum amount; or (ii) exceeds the

minimum amount and is:

– is increased by an amount that may be either specified by or computed from other policy

or contract values; and

– has the potential to produce a contractual total amount payable on such death that

exceeds the account value, or

– in the case of an annuity providing income payments, guarantees payment upon

such death of an amount payable on death in addition to the continuation of any

guaranteed income payments.

Guidance Note: The definition of GMDB includes benefits that are based on a portion of the excess

of the account value over the net of premiums paid less partial withdrawals made (e.g., an earnings

enhanced death benefit).

3. The term “total asset requirement” (TAR) means the sum of the reserve determined from

the VM-21 requirements prior to any adjustment for the elective phase-in pursuant to

Section 2.B plus the C3 RBC amount from LR027 step (paragraph D) prior to any

adjustment for phase-in or smoothing.

E. Materiality

Requirements for Principle-Based Reserves for Variable Annuities VM-21

The company shall establish a standard containing the criteria for determining whether an

assumption, risk factor, or other element of the principle-based valuation has a material impact on

the size of the reserve or TAR. This standard shall be applied when identifying material risks.

Section 2: Scope and Effective Date

A. Scope

1. The following categories of annuities or product features, issued on or after the operative

date of the Valuation Manual directly written or assumed through reinsurance, are subject

to the requirements of VM-21:

a. Variable deferred annuity contracts, whether or not such contracts contain GMDBs

or VAGLBs.

b. Variable immediate annuity contracts, whether or not such contracts contain

GMDBs or VAGLBs.

c. Any group annuity contract containing guarantees similar in nature to GMDBs,

VAGLBs or any combination thereof.

Guidance Note: The term “similar in nature” as used in Section 2.A.1.c and Section 2.A.1.d is

intended to capture current products and benefits, as well as product and benefit designs that may

emerge in the future. Examples of the currently known designs are listed in the Guidance below

following Section 2.A.3. Any product or benefit design that does not clearly fit the scope should be

evaluated on a case-by-case basis taking into consideration factors that include, but are not limited

to, the nature of the guarantees, the definitions of GMDB in VM-21 and VAGLB inVM-01, and

whether the contractual amounts paid in the absence of the guarantee are based on the investment

performance of a market-value fund or market-value index (whether or not part of the company’s

separate account).

d. Any other policy or contract which contains guarantees similar in nature to

GMDBs or VAGLBs, even if the insurer does not offer the mutual funds, variable

funds, or other supporting investments to which these guarantees relate, where

there is no other explicit reserve requirement. If such a benefit is offered as part of

a contract that has an explicit reserve requirement and that benefit does not

currently have an explicit reserve requirement:

i. These requirements shall be applied to the benefit on a stand-alone basis

(i.e., for purposes of the reserve calculation, the benefit shall be treated as

a separate contract).

ii. The reserve for the underlying contract, excluding any benefits valued

under (i) above, is determined according to the explicit reserve

requirement.

iii. The reserve held for the contract shall be the sum of (i) and (ii).

Guidance Note: For example, a group life contract that wraps a GMDB around a mutual fund

generally would fall under the scope of these requirements since there is not an explicit reserve

requirement for this type of group life contract. However, for an individual variable life contract

with a GMDB and a benefit similar in nature to a VAGLB, the requirements generally would apply

only to the VAGLB-type benefit, since there is an explicit reserve requirement that applies to the

variable life contract and the GMDB.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

2. These requirements do not apply to contracts falling under the scope of VM-A-255:

Modified Guaranteed Annuities; however, they do apply to contracts listed above that

include one or more subaccounts containing features similar in nature to those contained

in modified guaranteed annuities (MGAs) (e.g., market value adjustments).

3. Separate account contracts that guarantee an index and do not offer GMDBs or VAGLBs

are excluded from the scope of these requirements.

Guidance Note: Current VAGLBs include GMABs, hybrid and traditional GMIBs, lifetime and

non-lifetime GMWBs, and GPAFs. These requirements will be applied to future variations on these

designs and to new guarantee designs.

B. Effective Date and Phase-In

These requirements apply for valuation dates on or after Jan. 1, 2020. A company may elect to

phase in these requirements over a 36-month period beginning Jan. 1, 2020. A company may elect

a longer phase-in period, up to seven years, with approval of the domiciliary commissioner. The

election of whether to phase in and the period of phase-in must be made prior to the Dec. 31, 2020,

valuation. At the company’s option, a phase-in may be terminated prior to the originally elected

end of the phase-in period; the reserve would then be equal to the unadjusted reserve calculated

according to the requirements of VM-21 applicable for valuation dates on or after Jan. 1, 2020. If

there is a material decrease in the book of business by sale or reinsurance ceded, the company shall

adjust the amount of the phase-in provision. The phase-in amount (C = R1 – R2, as described

below) must be scaled down in proportion to the reduction in the excess reserve, measured on the

effective transaction date as the reserve amount in excess of cash surrender value before and after

the impact of the transaction. The company must obtain approval for any other modification of the

remaining phase-in amount. The method to be used for the phase-in calculation is as follows:

1. Compute R1 = the reserve as of Jan. 1, 2020, following the VM-21 requirements

applicable in the 2020 NAIC Valuation Manual for all business in-force on the

valuation date. The in-force used should include any reinsurance that is expected

to be recaptured during 2020.

2. Separately, compute R2 = the reserve as of Jan. 1, 2020, following the VM-21

requirements applicable in the 2019 NAIC Valuation Manual for the same in-force

contracts used to compute R1.

3. Compute the reported reserve on the valuation date as follows:

Reserve = D – (B – A) * C /B, where

• A is the number of months that have elapsed since Dec. 31, 2019. For example,

for the March 31, 2020. valuation, A = 3.

• B = 36 unless the company has obtained approval for a longer phase-in, in

which case B = number of months of approved phase-in.

• C = R1 – R2

• D is the reserve on the valuation date determined according to these

requirements, prior to the phase-in adjustment.

A company may elect to apply the VM-21 requirements applicable to the 2020 NAIC Valuation

Manual as the requirements for the valuation on Dec.31, 2019. For such election, the phase-in

Requirements for Principle-Based Reserves for Variable Annuities VM-21

provision of Section 2.B may not be elected. Any company electing early adoption of VM-21 shall

also:

1. Apply the provisions of AG 43 as amended for 2020 to the Dec. 31, 2019, valuation of

contracts within the scope of that guideline.

2. Apply the Life RBC instructions for 2020 in the calculation of C-3 RBC in LR027 for

2019.

3. Follow the documentation and certification requirements of VM-31 from the 2020

Valuation Manual for the VA Business. In the VA Summary, clearly indicate the use of

the new requirements in the section on change in methods from prior year.

4. Notify the Commissioner of the state of domicile of such elections.

Section 3: Reserve Methodology

A. Aggregate Reserve

The aggregate reserve for contracts falling within the scope of these requirements shall equal the

SR (following the requirements of Section 4) plus the additional standard projection amount

(following the requirements of Section 6) less any applicable PIMR for all contracts not valued

under the Alternative Methodology (Section 7), plus the reserve for any contracts determined using

the Alternative Methodology (following the requirements of Section 7).

B. Impact of Reinsurance Ceded

Where reinsurance is ceded for all or a portion of the contracts, all components in the aggregate

reserve shall be determined post-reinsurance ceded, that is net of any reinsurance treaties that meet

the statutory requirements that would allow the treaty to be accounted for as reinsurance, and pre-

reinsurance ceded, that is ignoring such costs and benefits.

C. The Additional Standard Projection Amount

The additional standard projection amount is determined by applying one of the two standard

projection methods defined in Section 6. The same method must be used for all contracts within a

group of contracts that are aggregated together to determine the reserve, and the additional standard

projection amount excluding any contracts whose reserve is determined using the Alternative

Methodology. The company shall elect which method they will use to determine the additional

standard projection amount. The company may not change that election for a future valuation

without the approval of the domiciliary commissioner.

D. The SR

The SR shall be determined based on asset and liability projections for the contracts falling within

the scope of these requirements, excluding those contracts valued using the Alternative

Methodology, over a broad range of stochastically generated projection scenarios described in

Section 8 and using prudent estimate assumptions as required herein.

The SR may be determined in aggregate for all contracts falling within the scope

of these

requirements—i.e., a single model segment— or, at the option of the company, it may be

determined by

subgrouping contracts into model segments, in which case the SR shall equal the

sum of the amounts computed for each model segment.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

The SR for any group of contracts shall be determined as CTE70 of the scenario reserves following

the requirements of Section 4.

E. Alternative Methodology

For a group of variable deferred annuity contracts that contain either no guaranteed benefits or only

GMDBs—i.e., no VAGLBs—the reserve may be determined using the Alternative Methodology

described in Section 7 rather than using the approach described in Section 3.C and Section 3.D.

However, in the event that the approach described in Section 3.C and Section 3.D has been used in

prior valuations for that group of contracts, the Alternative Methodology may not be used without

approval from the domiciliary commissioner.

The reserve for the group of contracts to which the Alternative Methodology is applied shall not be

less than the aggregate cash surrender value of those contracts.

Groups of contracts to which the Alternative Methodology is applied are only subject to the

applicable requirements for the Alternative Methodology in VM-21. Groups of contracts to which

the Alternative Methodology is applied are subject to the applicable sub-report requirements

outlined in VM-31 Sections 3.E and 3.F. Groups of contracts to which the Alternative Methodology

is applied are not subject to the requirements of VM-G Sections 2 and 3.

F. Allocation of the Aggregate Reserve to Contracts

The aggregate reserve shall be allocated to the contracts falling within the scope of these

requirements using the method outlined in Section 12.

G. Reserve to Be Held in the General Account

The portion of the aggregate reserve held in the general account shall not be less than the excess of

the aggregate reserve over the aggregate cash surrender value held in the separate account and

attributable to the separate account portion of all such contracts. For contracts for which a cash

surrender value is not defined, the company shall substitute for cash surrender value held in the

separate account the implicit amount for which the contract holder is entitled to receive income

based on the performance of the separate account. For example, for a variable payout annuity for

which a specific number of units is payable, the implicit amount could be the present value of that

number of units, discounted at the assumed investment return and defined mortality, times the unit

value as of the valuation date.

Guidance Note: This approach is equivalent to assuming that the separate account performance is

equal to the assumed investment return.

H. A company may use simplifications, approximations, and modeling efficiency techniques to

calculate the

SR and/or the additional standard projection amount required by this section if the

company can demonstrate that the use of such techniques does not understate TAR by a material

amount, and the expected value of TAR calculated using simplifications, approximations, and

modeling efficiency techniques is not less than the expected value of TAR calculated that does not

use them.

I. The company may calculate the SR and the additional standard projection amount as of a date no

earlier than three months before the valuation date, using relevant company data, provided an

appropriate method is used to adjust those amounts to the valuation date. Company data used for

experience studies to determine prudent estimate assumptions are not subject to this three-month

limitation.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Section 4: Determination of the

A. Projection of Accumulated Deficiencies

1. General Description of Projection

Guidance Note:

Examples of modeling efficiency techniques include, but are not limited to:

1. Choosing a reduced set of scenarios from a larger set consistent with prescribed models and parameters.

2. Generating a smaller liability or asset model to represent the full seriatim model using grouping compression

techniques or other similar simplifications.

There are multiple ways of providing the demonstration required by Section 3.H. The complexity of the

demonstration depends upon the simplifications, approximations, or modeling efficiency techniques used.

Examples include, but are not limited to:

1. Rounding at a transactional level in a direction that is clearly and consistently conservative or is clearly

and consistently unbiased with an obviously immaterial impact on the result (e.g., rounding to the

nearest dollar) would satisfy 3.H without needing a demonstration. However, rounding to too few

significant digits relative to the quantity being rounded, even in an unbiased way, may be material and

in that event, the company may need to provide a demonstration that the rounding would not produce

a material understatement of TAR.

2. A brute force demonstration involves calculating the minimum reserve both with and without the

simplification, approximation, or modeling efficiency technique, and making a direct comparison

between the resulting TAR. Regardless of the specific simplification, approximation, or modeling

efficiency technique used, brute force demonstrations always satisfy the requirements of Section 3.H.

3. Choosing a reduced set of scenarios from a larger set consistent with prescribed models and parameters

and providing a detailed demonstration of why it did not understate TAR by a material amount and the

expected value of TAR would not be less than the expected value of TAR that would otherwise be

calculated. This demonstration may be a theoretical, statistical, or mathematical argument establishing,

to the satisfaction of the insurance commissioner, general bounds on the potential deviation in the TAR

estimate rather than a brute force demonstration.

4. Justify the use of randomly sampling withdrawal ages for each contract instead of following the exact

prescribed WDCM method by demonstrating that the random sampling method is materially equivalent

to the exact prescribed approach, and the simplification does not materially reduce the Additional

Standard Projection Amount and the final reported TAR. In particular, the company should

demonstrate that the statistical variability of the results based on the random sampling approach is

immaterial by testing different random sets

(e.g., if randomly selecting a withdrawal age for each

contract, the probability distribution of the withdrawal age should be stable and not vary significantly

when using different random number sets).

Requirements for Principle-Based Reserves for Variable Annuities VM-21

The projection of accumulated deficiencies shall be made ignoring federal income tax in

both cash flows and discount rates, and it shall reflect the dynamics of the expected cash

flows for the entire group of contracts, reflecting all product features, including any

guarantees provided under the contracts. Insurance company expenses (including overhead

and investment expense), fund expenses, contractual fees and charges, revenue-sharing

income received by the company (net of applicable expenses), and cash flows associated

with any reinsurance or hedging instruments are to be reflected on a basis consistent with

the requirements herein. Cash flows from any fixed account options also shall be included.

Any market value adjustment assessed on projected withdrawals or surrenders also shall

be included (whether or not the cash surrender value reflects market value adjustments).

Throughout the projection, all assumptions shall be determined based on the requirements

herein. Accumulated deficiencies shall be determined at the end of each projection year as

the sum of the accumulated deficiencies for all contracts within each model segment.

Guidance Note: Section 4.A.1 requires market value adjustments (MVAs) on liability cash flows

to be reflected because in a cash flow model, assets are assumed to be liquidated at market value to

cover the cash outflow of the cash surrender; therefore, inclusion of the market value adjustment

aligns the asset and liability cash flows. This may differ from the treatment of MVAs in the

definition of cash surrender value (Section 1.D), which defines the statutory reserve floor for which

the values must be aligned with the annual statement value of the assets.

2. Grouping of Variable Funds and Subaccounts

The portion of the starting asset amount held in the separate account represented by the

variable funds and the corresponding account values may be grouped for modeling using

an approach that recognizes the investment guidelines and objectives of the funds. In

assigning each variable fund and the variable subaccounts to a grouping for projection

purposes, the fundamental characteristics of the fund shall be reflected, and the parameters

shall have the appropriate relationship to the stochastically generated projection scenarios

described in Section 8. The grouping shall reflect characteristics of the efficient frontier

(i.e., returns generally cannot be increased without assuming additional risk).

An appropriate proxy fund for each variable subaccount shall be designed in order to

develop the investment return paths. The development of the scenarios for the proxy funds

is a fundamental step in the modeling and can have a significant impact on results. As such,

the company must map each variable account to an appropriately crafted proxy fund

normally expressed as a linear combination of recognized market indices, sub-indices or

funds.

3. Model Cells

Projections may be performed for each contract in force on the date of valuation or by

assigning contracts into representative cells of model plans using all characteristics and

criteria having a material impact on the size of the reserve. Assigning contracts to model

cells may not be done in a manner that intentionally understates the resulting reserve.

4. Modeling of Hedges

a. For a company that does not have a future hedging strategy supporting the

contracts:

i. The company shall not consider the cash flows from any future hedge

purchases or any rebalancing of existing hedge assets in its modeling, since

they are not included in the company’s investment strategy supporting the

contracts.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

ii. Existing hedging instruments that are currently held by the company in

support of the contracts falling under the scope of these requirements shall

be included in the starting assets.

b. For a company with one or more future hedging strategies supporting the contracts:

i. For a future hedging strategy with hedge payoffs that solely offset index

credits associated with index crediting strategies (index credits):

a) In modeling cash flows, the company shall include the cash flows from

future hedge purchases or any rebalancing of existing hedge assets that

are intended solely to offset index credits to contract holders.

b) Existing hedging instruments that are currently held by the company

for offsetting the index credits in support of the contracts falling under

the scope of these requirements shall be included in the starting assets.

c) An index credit hedge margin for these hedge instruments shall be

reflected in both the “best efforts” and the “adjusted” runs, as

applicable, by reducing index credit hedge payoffs by a margin

multiple that shall be justified by sufficient and credible company

experience and account for model error. It shall be no less than 1.5%

multiplicatively of the portion of the index credit that is hedged. In the

absence of sufficient and credible company experience, a margin of at

least 20% shall be assumed. There is no cap on the index credit hedge

margin if company experience indicates actual error is greater than

these minimums.

ii. For a company with one or more future hedging strategies supporting the

contracts that do not solely offset indexed interest credits, the detailed

requirements for the modeling of hedges are defined in Section 9. The

following paragraphs are a high-level summary and do not supersede the

detailed requirements.

a) The appropriate costs and benefits of hedging instruments that are

currently held by the company in support of the contracts falling under

the scope of these requirements shall be included in the projections

used in the determination of the SR.

b) The projections shall take into account the appropriate costs and

benefits of hedge positions expected to be held in the future through

the execution of the future hedging strategies supporting the contracts.

Because models do not always accurately portray the results of hedge

programs, the company shall, through back-testing and other means,

assess the accuracy of the hedge modeling. The company shall

determine a SR as the weighted average of two CTE values; first, a

CTE70 (“best efforts”) representing the company’s projection of all of

the hedge cash flows, including future hedge purchases, and a second

CTE70 (“adjusted”) which shall use only hedge assets held by the

company on the valuation date and only future hedge purchases

associated solely with index credits. These are discussed in greater

detail in Section 9. The SR shall be the weighted average of the two

CTE70 values, where the weights reflect the error factor E determined

following the guidance of Section 9.C.4.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

c) The company is responsible for verifying compliance with all

requirements in Section 9 for all hedging instruments included in the

projections.

d) The use of products not falling under the scope of these requirements

(e.g., equity-indexed annuities) as a hedge shall not be recognized in

the determination of accumulated deficiencies.

iii. If a company has a more comprehensive hedge strategy combining index

credits with guaranteed benefit and/or other risks (e.g., full fair value or

economic hedging), no portion of this hedge strategy is eligible for the

treatment described in section 4.A.4.b.i.

Guidance Note:

The requirements of Section 4.A.4 govern the determination of reserves for annuity contracts and

do not supersede any statutes, laws or regulations of any state or jurisdiction related to the use of

derivative instruments for hedging purposes and should not be used in determining whether a

company is permitted to use such instruments in any state or jurisdiction.

5. Revenue Sharing

a. Projections of accumulated deficiencies may include income from projected future

revenue-sharing, net of applicable projected expenses (net revenue-sharing

income) if each of the following requirements are met:

i. The net revenue-sharing income is received by the company.

Guidance Note: For purposes of this section, net revenue-sharing income is considered to be

received by the company if it is paid directly to the company through a contractual agreement with

either the entity providing the net revenue-sharing income or an affiliated company that receives

the net revenue-sharing income. Net revenue-sharing income also would be considered to be

received if it is paid to a subsidiary that is owned by the company and if 100% of the statutory

income from that subsidiary is reported as statutory income of the company. In this case, the

company needs to assess the likelihood that future net revenue-sharing income is reduced due to

the reported statutory income of the subsidiary being less than future net revenue-sharing income

received.

ii. Signed contractual agreement(s) are in place as of the valuation date and

support the current payment of the net revenue-sharing income.

iii. The net revenue-sharing income is not already accounted for directly or

indirectly as a company asset.

b. The amount of net revenue-sharing income to be used shall reflect the company’s

assessment of factors that include, but are not limited to, the following (not all of

these factors will necessarily be present in all situations):

i. The terms and limitations of the agreement(s), including anticipated

revenue, associated expenses and any contingent payments incurred or

made by either the company or the entity providing the net revenue-

sharing as part of the agreement(s).

Requirements for Principle-Based Reserves for Variable Annuities VM-21

ii. The relationship between the company and the entity providing the net

revenue-sharing income that might affect the likelihood of payment and

the level of expenses.

iii. The benefits and risks to both the company and the entity paying the net

revenue-sharing income of continuing the arrangement.

iv. The likelihood that the company will collect the net revenue-sharing

income during the term(s) of the agreement(s) and the likelihood of

continuing to receive future revenue after the agreement(s) has ended.

v. The ability of the company to replace the services provided to it by the

entity providing the net revenue-sharing income or to provide the services

itself, along with the likelihood that the replaced or provided services will

cost more to provide.

vi. The ability of the entity providing the net revenue-sharing income to

replace the services provided to it by the company or to provide the

services itself, along with the likelihood that the replaced or provided

services will cost more to provide.

c. The amount of projected net revenue-sharing income shall reflect a margin (which

decreases the assumed net revenue-sharing income) directly related to the

uncertainty of the revenue. The greater the uncertainty, the larger the margin. Such

uncertainty is driven by many factors, including the potential for changes in the

securities laws and regulations, mutual fund board responsibilities and actions, and

industry trends. Since it is prudent to assume that uncertainty increases over time,

a larger margin shall be applied as time that has elapsed in the projection increases.

d. All expenses required or assumed to be incurred by the company in conjunction

with the arrangement providing the net revenue-sharing income, as well as any

expenses assumed to be incurred by the company in conjunction with the assumed

replacement of the services provided to it (as discussed in Section 4.A.5.b.v), shall

be included in the projections as a company expense under the requirements of

Section 4.A.1. In addition, expenses incurred by either the entity providing the net

revenue-sharing income or an affiliate of the company shall be included in the

applicable expenses discussed in Section 4.A.1 and Section 4.A.5.a that reduce the

net revenue-sharing income.

e. The company is responsible for reviewing the revenue-sharing agreements and

verifying compliance with these requirements.

f. The amount of net revenue-sharing income assumed in a given scenario shall be

applied with a margin to reflect any uncertainty but shall not exceed the sum of (i)

and (ii), where:

(i) Is the contractually guaranteed net revenue-sharing income

projected under the scenario; and

(ii) Is the company’s estimate of non-contractually guaranteed net

revenue-sharing income before reflecting any margins for

uncertainty multiplied by the following factors:

a) 1.00 in the first projection year.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

b) 0.95 in the second projection year.

c) 0.90 in the third projection year.

d) 0.85 in the fourth projection year.

e) 0.80 in the fifth and all subsequent projection years.

Guidance Note: Provisions such as one that gives the entity paying the revenue-sharing

income the option to stop or change the level of income paid would prevent the income

from being guaranteed. However, if such an option becomes available only at a future point

in time, and the revenue up to that time is guaranteed, the income is considered guaranteed

up to the time the option first becomes available.

Guidance Note: If the agreement allows the company to unilaterally take control of the

underlying fund fees that ultimately result in the revenue sharing, then the revenue is

considered guaranteed up until the time at which the company can take such control. Since

it is unknown whether the company can perform the services associated with the revenue-

sharing agreement at the same expense level, it is presumed that expenses will be higher

in this situation. Therefore, the revenue-sharing income shall be reduced to account for any

actual or assumed additional expenses.

6. Length of Projections

Projections of accumulated deficiencies shall be run for as many future years as needed so

that no materially greater reserve value would result from longer projection periods.

7. Interest Maintenance Reserve (IMR)

The IMR shall be handled consistently with the treatment in the company’s cash-flow

testing, and the amounts should be adjusted to a pre-tax basis.

B. Determination of Scenario Reserve

1. General

For a given scenario, the scenario reserve is the sum of:

a. The greatest present value, as of the projection start date, of the projected

accumulated deficiencies; and

b. The starting asset amount.

When using the direct Iteration method, the scenario reserve will equal the final starting

asset amount determined according to Section 4.B.4.

The scenario reserve for any given scenario shall not be less than the cash surrender value

in aggregate on the valuation date for the group of contracts modeled in the projection.

2. Discount Rates

In determining the scenario reserve, accumulated deficiencies shall be discounted at the

NAER on additional assets, as defined in Section 4.B.3.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Determination of NAER on Additional Invested Asset Portfolio

a. The additional invested asset portfolio for a scenario is a portfolio of general

account assets as of the valuation date, outside of the starting asset portfolio, that

is required in that projection scenario so that the projection would not have a

positive accumulated deficiency at the end of any projection year. This portfolio

may include only (i) general account assets available to the company on the

valuation date that do not constitute part of the starting asset portfolio; and (ii) cash

assets.

Guidance Note:

Additional invested assets should be selected in a manner such that if the starting asset portfolio

were revised to include the additional invested assets, the projection would not be expected to

experience any positive accumulated deficiencies at the end of any projection year.

It is assumed that the accumulated deficiencies for this scenario projection are known.

b. To determine the NAER on additional invested assets for a given scenario:

i. Project the additional invested asset portfolio as of the valuation date to

the end of the projection period,

a) Investing any cash in the portfolio and reinvesting all investment

proceeds using the company’s investment policy.

b) Excluding any liability cash flows.

c) Incorporating the appropriate returns, defaults and investment

expenses for the given scenario.

ii. If the value of the projected additional invested asset portfolio does not

equal or exceed the accumulated deficiencies at the end of each projection

year for the scenario, increase the size of the initial additional invested

asset portfolio as of the valuation date, and repeat the preceding step.

iii Determine a vector of annual earned rates that replicates the growth in the

additional invested asset portfolio from the valuation date to the end of the

projection period for the scenario. This vector will be the NAER for the

given scenario.

Guidance Note: There are multiple ways to select the additional invested asset portfolio at the

valuation date. Similarly, there are multiple ways to determine the earned rate vector. The

company shall be consistent in its choice of methods, from one valuation to the next.

4. Direct Iteration

In lieu of the method described in Section 4.B.2 and Section 4.B.3 above, the company

may solve for the amount of starting assets which, when projected along with all contract

cash flows, result in the defeasement of all projected future benefits and expenses at the

end of the projection horizon with no accumulated deficiencies at the end of any projection

year during the projection period.

C. Projection Scenarios

Requirements for Principle-Based Reserves for Variable Annuities VM-21

1. Number of Scenarios

The number of scenarios for which the scenario reserve shall be computed shall be the

responsibility of the company, and it shall be considered to be sufficient if any resulting

understatement in the SR, as compared with that resulting from running additional

scenarios, is not material.

2. Economic Scenario Generation

Treasury Department interest rate curves, as well as investment return paths for general

account equity assets and separate account fund performance shall be determined on a

stochastic basis using the methodology described in Section 8. If the company uses a

proprietary generator to develop scenarios, the company shall demonstrate that the

resulting scenarios meet the requirements described in Section 8.

D. Projection of Assets

1. Starting Asset Amount

a. For the projections of accumulated deficiencies, the value of assets at the start of

the projection shall be set equal to the approximate value of statutory reserves at

the start of the projection plus the allocated amount of PIMR attributable to the

assets selected. Assets shall be valued consistently with their annual statement

values. The amount of such asset values shall equal the sum of the following items,

all as of the start of the projection:

i. All of the separate account assets supporting the contracts;

ii. Any hedge instruments held in support of the contracts being valued; and

iii. An amount of assets held in the general account equal to the approximate

value of statutory reserves as of the start of the projections plus the

allocated amount of PIMR attributable to the assets selected less the

amount in (i) and (ii).

Guidance Note: Deferred hedge gains/losses developed under SSAP No. 108—Derivatives

Hedging Variable Annuity Guarantees are not included in the starting assets

b. If the amount of initial general account assets is negative, the model should

reflect a projected interest expense. General account assets chosen for use

as described above shall be selected on a consistent basis from one reserve

valuation hereunder to the next.

c. To the extent that the sum of the value of hedge assets, or cash, or other

general account assets in an amount equal to the aggregate market value

of such hedge assets, and the value of separate account assets supporting

the contracts is greater than the approximate value of statutory reserves as

of the start of the projections, then the company shall include enough

negative general account assets or cash such that the starting asset amount

equals the approximate value of statutory reserves as of the start of the

projections.

2. Valuation of Projected Assets

For purposes of determining the projected accumulated deficiencies, the value of projected

Requirements for Principle-Based Reserves for Variable Annuities VM-21

assets shall be determined in a manner consistent with their value at the start of the

projection. For assets assumed to be purchased during a projection, the value shall be

determined in a manner consistent with the value of assets at the start of the projection that

have similar investment characteristics. However, for derivative instruments that are used

in hedging and are not assumed to be sold during a particular projection interval, the

company may account for them at an amortized cost in an appropriate manner elected by

the company.

3. Separate Account Assets

For purposes of determining the starting asset amounts in Section 4.D.1 and the valuation

of projected assets in Section 4.D.2, assets held in a separate account shall be summarized

into asset categories determined by the company as discussed in Section 4.A.2.

4. General Account Assets

a. General account assets shall be projected, net of projected defaults, using assumed

investment returns consistent with their book value and expected to be realized in

future periods as of the date of valuation. Initial assets that mature during the

projection and positive cash flows projected for future periods shall be invested in

a manner that is representative of and consistent with the company’s investment

policy, subject to the following requirements:

i. The final maturities and cash flow structures of assets purchased in the

model, such as the patterns of gross investment income and principal

repayments or a fixed or floating rate interest basis, shall be determined

by the company as part of the model representation;

ii. The combination of price and structure for fixed income investments and

derivative instruments associated with fixed income investments shall

appropriately reflect the projected Treasury Department curve along the

relevant scenario and the requirements for gross asset spread assumptions

stated below;

iii. For purchases of public non-callable corporate bonds, use the gross asset

spreads over Treasuries prescribed in VM-20 Section 9.F.8.a through

Section 9.F.8.c. (For the purposes of this subsection, “public” incorporates

both registered and 144a securities). The prescribed spreads reflect current

market conditions as of the model start date and grade to long-term

conditions based on historical data at the start of projection year four;

iv. For transactions of derivative instruments associated with fixed income

investments, reflect the prescribed assumptions in VM-20 Section 9.F.8.d

for interest rate swap spreads;

v. For purchases of other fixed income investments, if included in the

modeled company investment strategy, set assumed gross asset spreads

over U.S. Treasuries in a manner that is consistent with, and results in

reasonable relationships to, the prescribed spreads for public non-callable

corporate bonds and interest rate swaps.

b. Notwithstanding the above requirements, the SR shall be the higher of that

produced by the modeled company investment strategy and that produced by

substituting an alternative investment strategy in which the fixed income

reinvestment assets have the same weighted average life (WAL) as the

Requirements for Principle-Based Reserves for Variable Annuities VM-21

reinvestment assets in the modeled company investment strategy and are all public

non-callable corporate bonds with gross asset spreads, asset default costs, and

investment expenses by projection year that are consistent with a credit quality

blend of 50% PBR credit rating 6 (A2/A) and 50% PBR credit rating 3 (Aa2/AA).

Policy loans, equities and derivative instruments associated with the execution of

future hedging strategies supporting the contracts are not affected by this

requirement.

Drafting Note: This limitation is being referred to Life Actuarial (A) Task Force for review.

c. Any disinvestment shall be modeled in a manner that is consistent with the

company’s investment policy and that reflects the company’s cost of borrowing

where applicable, provided that the assumed cost of borrowing is not lower than

the rate at which positive cash flows are reinvested in the same time period, taking

into account duration, ratings, and other attributes of the borrowing mechanism.

Gross asset spreads used in computing market values of assets sold in the model

shall be consistent with, but not necessarily the same as, the gross asset spreads in

Section 4.D.4.a.iii and Section 4.D.4.a.v, recognizing that initial assets that mature

during the projection may have different characteristics than modeled reinvestment

assets.

Guidance Note: The simple language above “provided that the assumed cost of borrowing is not

lower than the rate at which positive cash flows are reinvested in the same time period” is intended

to prevent excessively optimistic borrowing assumptions. If in any case, the assumed cost of

borrowing restriction cannot be fully applied or followed precisely, then as with all other

simplifications/approximations, the company shall not allow borrowing assumptions to materially

reduce the reserve.

5. Cash Flows from Invested Assets

a. Cash flows from general account fixed income assets and derivative asset

programs associated with these assets, including starting and reinvestment assets,

shall be reflected in the projection as follows:

i. M

odel gross investment income and principal repayments in accordance

with the contractual provisions of each asset and in a manner consistent

with each scenario. Grouping of assets is allowed if the company can

demonstrate that grouping does not materially understate the modeled

reserve that would have been obtained using a seriatim approach.

ii. Reflect asset default costs as prescribed in VM-20 Section 9.F and

anticipated investment expenses through deductions to the gross

investment income.

iii. Model the proceeds arising from modeled asset sales and determine the

portion representing any realized capital gains and losses.

iv. Reflect any uncertainty in the timing and amounts of asset cash flows

related to the paths of interest rates, equity returns or other economic

values directly in the projection of asset cash flows. Asset defaults are not

subject to this requirement, since asset default assumptions must be

determined by the prescribed method in VM-20 Section 9.F.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

b. Cash flows from general account equity assets—i.e., non-fixed income assets

having substantial volatility of returns, such as common stocks and real estate—

and derivative asset programs associated with these assets, including starting and

reinvestment assets, shall be reflected in the projection as follows:

i. Determine the grouping for asset categories and the allocation of specific

assets to each category in a manner that is consistent with that used for

separate account assets, as discussed in Section 4.A.2.

ii. Project the gross investment return including realized and unrealized

capital gains in a manner that is consistent with the stochastically

generated scenarios.

iii. Model the timing of an asset sale in a manner that is consistent with the

investment policy of the company for that type of asset. Reflect expenses

through a deduction to the gross investment return using prudent estimate

assumptions.

c. Determine cash flows for each projection interval for all other general account

assets by modeling asset cash flows on other assets that are not described in Section

4.D.5.a and Section 4.D.5.b using methods consistent with the methods described

in Section 4.D.5.a and Section 4.D.5.b. This includes assets that are a hybrid of

fixed income and equity investments.

d. Determine cash flows or total investment returns, as appropriate, for each

projection interval for all separate account assets as follows:

i. Determine the grouping for each variable fund and sub-account

(e.g., bonds funds, large cap stocks, international stocks, owned

real estate, etc.) as described in Section 4.A.2.

ii. Project the total investment return for each variable fund and sub-

account in a manner that is consistent with the prescribed returns

described in Section 4.A.2 and Section 8.C.3.

E. Projection of Annuitization Benefits (Including GMIBs and GMWBs)

1. Assumed Annuitization Purchase Rates at Election

For purposes of projecting annuitization benefits (including annuitizations stemming from

the election of a GMIB) and withdrawal amounts from GMWBs, the projected

annuitization purchase rates shall be determined assuming that market interest rates

available at the time of election are the interest rates used to project general account assets,

as determined in Section 4.D.4.

2. Projected Election of GMIBs, GMWBs and Other Annuitization Options

a. For contracts projected to elect annuitization options (including annuitizations

stemming from the election of a GMIB) or for projections of GMWB benefits once

the account value has been depleted, the projections may assume one of the

following at the company’s option:

i. The contract is treated as if surrendered at an amount equal to the statutory

reserve that would be required at such time for a fixed payout annuity

benefit equivalent to the guaranteed benefit amount (e.g., GMIB or

Requirements for Principle-Based Reserves for Variable Annuities VM-21

GMWB benefit payments).

ii. The contract is assumed to stay in force and the projected periodic

payments are paid.

b. If the projected payout annuity is a variable payout annuity containing a floor

guarantee (such as a GPAF) under a specified contractual option, only option (ii)

under Section 4.E.2.a above shall be used.

c. Where mortality improvement is used to project future annuitization purchase

rates, as discussed in Section 4.E.1 above, mortality improvement also shall be

reflected on a consistent basis in either the determination of the reserve in Section

4.E.2.a.i above or the projection of the periodic payments in Section 4.E.2.a.ii.

3. Projected Statutory Reserve for Payout Annuity Benefits

If the statutory reserve for payout annuity benefits referenced above in Section 4.E.2.a

requires a parameter that is not determined in a formulaic fashion, the company must make

a reasonable and supportable assumption regarding this parameter.

F. Frequency of Projection and Time Horizon

1. Use of an annual cash-flow frequency (“timestep”) is generally acceptable for

benefits/features that are not sensitive to projection frequency. The lack of sensitivity to

projection frequency should be validated by testing wherein the company should determine

that the use of a more frequent—i.e., shorter—time step does not materially increase

reserves. A more frequent time increment should always be used when the product features

are sensitive to projection period frequency.

2. Care must be taken in simulating fee income and expenses when using an annual time step.

For example, recognizing fee income at the end of each period after market movements,

but prior to persistency decrements, would normally be an inappropriate assumption. It is

also important that the frequency of the investment return model be linked appropriately to

the projection horizon in the liability model. In particular, the horizon should be sufficiently

long so as to capture the vast majority of costs (on a present value basis) from the scenarios.

Guidance Note: As a general guide, the forecast horizon should not be less than 20 years.

G. Compliance with ASOPs

When determining a SR, the analysis shall conform to the ASOPs as promulgated from time to time

by the ASB.

Under these requirements, an actuary will make various determinations, verifications and

certifications. The company shall provide the actuary with the necessary information sufficient to

permit the actuary to fulfill the responsibilities set forth in these requirements and responsibilities

arising from each applicable ASOPs.

Section 5: Reinsurance Ceded

A. Treatment of Reinsurance Ceded in the Aggregate Reserve

1. Aggregate Reserve Pre- and Post- Reinsurance Ceded

As noted in Section 3.B, the aggregate reserve is determined both pre-reinsurance ceded

Requirements for Principle-Based Reserves for Variable Annuities VM-21

and post-reinsurance ceded. Therefore, it is necessary to determine the components needed

to determine the aggregate reserve—i.e., the additional standard projection amount, the SR

determined using projections, and/or reserve amount determined using the Alternative

Methodology, as applicable—on both bases. Sections 5.A.2 through 5.A.4 discuss

adjustments to inputs necessary to determine these components on both a post-reinsurance

ceded and a pre-reinsurance ceded basis. Note that due allowance for reasonable

approximations may be used where appropriate.

2. SR

In order to determine the aggregate reserve post-reinsurance ceded, accumulated

deficiencies, scenario reserves, and the resulting SR shall be determined reflecting the

effects of reinsurance treaties that meet the statutory requirements that would allow the

treaty to be accounted for as reinsurance within statutory accounting. This involves

including, where appropriate, all anticipated reinsurance premiums or other costs and all

reinsurance recoveries, where both premiums and recoveries are determined by

recognizing any limitations in the reinsurance treaties, such as caps on recoveries or floors

on premiums.

In order to determine the SR pre-reinsurance ceded, accumulated deficiencies, scenario

reserves, and the resulting SR shall be determined ignoring the effects of reinsurance ceded

within the projections. One acceptable approach involves a projection based on the same

starting asset amount as for the aggregate reserve post-reinsurance ceded and by ignoring,

where appropriate, all anticipated reinsurance premiums or other costs and all reinsurance

recoveries in the projections.

3. Reserve Determined using the Alternative Methodology

If a company chooses to use the Alternative Methodology, as allowed in Section 3.E, it is

important to note that the methodology produces reserves on a pre-reinsurance ceded basis.

Therefore, where reinsurance is ceded, the Alternative Methodology must be modified to

reflect the reinsurance costs and reinsurance recoveries under the reinsurance treaties in

the determination of the aggregate reserve post-reinsurance ceded. In addition, the

Alternative Methodology, unadjusted for reinsurance, shall be applied to the contracts

falling under the scope of these requirements to determine the aggregate reserve prior to

reinsurance.

4. Additional Standard Projection Amount

Where reinsurance is ceded, the additional standard projection amount shall be calculated

as described in Section 6 to reflect the reinsurance costs and reinsurance recoveries under

the reinsurance treaties. The additional standard projection amount shall also be calculated

pre-reinsurance ceded using the methods described in Section 6 but ignoring the effects of

the reinsurance ceded.

Section 6: Requirements for the Additional Standard Projection Amount

A. Overview

1. Determining the Additional Standard Projection Amount

a. For valuation dates before January 1, 2025, the additional standard projection

amount shall be the larger of zero and an amount determined in aggregate for all

contracts falling under the scope of these requirements, excluding those contracts

to which the Alternative Methodology is applied, by calculating the Prescribed

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Projections Amount by one of two methods, the Company-Specific Market Path

(CSMP) method or the CTE with Prescribed Assumptions (CTEPA) method. The

company shall assess the impact of aggregation on the additional standard

projection amount.

b. For valuation dates on or after January 1, 2025, the additional standard projection

amount shall be the larger of zero and an amount determined in aggregate for all

contracts falling under the scope of these requirements, excluding those contracts

to which the Alternative Methodology is applied, by calculating the Prescribed

Projections Amount by the CTEPA method. The company shall assess the impact

of aggregation on the additional standard projection amount.

Guidance Note: The following outlines one method that may be used to assess the impact of

aggregation. If a company plans to use a different method, they should discuss that method with

their domiciliary commissioner.

If a company uses the CSMP method, the benefit of aggregation is determined using the following

steps, based on Path A, and using prescribed assumptions and discount rates used to calculate

prescribed amount A:

1. Calculate the present value of each contract’s accumulated deficiency up through

the duration of the aggregate GPVAD. When determining the contract

accumulated deficiency: (a) contract starting assets equal CSV; (b) contract level

starting assets include both separate account and general account assets, and

exclude any hedge assets; (c) discount rate for the PVAD is the NAER; and (d) for

a contract that terminates prior to the duration of the GPVAD, there will no longer

be liability cash flows, but assets (positive or negative) continue to accumulate.

2. The impact of aggregation is the sum of the absolute value of the negative amounts

from step 1 above.

If a company uses the CTEPA method, it should apply steps 1 and 2 above to each model point,

using the same scenario used for the cumulative decrement analysis, and using that scenario’s

NAER as the discount rates for discounting the accumulated deficiency from the time of the

GPVAD. For GMWBs and hybrid GMIBs that use the Withdrawal Delay Cohort Method as

specified in VM-21 Section 6.C.5, cash flows for each contract or for each model point shall be

determined as the aggregate across all of the constituent cohorts of the contract or model point.

c. The additional standard projection amount shall be calculated based on the

scenario reserves, as discussed in Section 4.B, with certain prescribed assumptions

replacing the company prudent estimate assumptions. As is the case in the

projection of a scenario in the calculation of the SR, the scenario reserves used to

calculate the additional standard projection amount are based on an analysis of

asset and liability cash flows produced along certain equity and interest rate

scenario paths.

B. Additional Standard Projection Amount

1. General

Where not inconsistent with the guidance given here, the process and methods used to

determine the additional standard projection amount under either the CSMP method or the

CTEPA method shall be the same as required in the calculation of the SR as described in

Section 3.D of these requirements. Any additional assumptions needed to determine the

additional standard projection amount shall be explicitly documented.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

2. The company shall determine the Prescribed Projections Amount by following either the

CSMP Method or the CTEPA Method below. A company may not change the method used

from one valuation to the next without the approval of the domiciliary commissioner.

3. Calculation Methodology

a. CSMP Method:

i. Calculate the scenario reserve, as defined in VM-01 and discussed further

in Section 4.B, for each of the prescribed market paths outlined in Section

6.B.6 using the same method and assumptions as those that the company

uses to calculate scenario reserves for the purposes of determining the

CTE70 (adjusted),

as outlined in Section 9.C. These scenario reserves

shall collectively be referred to as a Company Standard Projection Set.

ii. Identify the market path from the Company Standard Projection Set such

that the scenario reserve is closest to the CTE70 (adjusted), designated as

Path A. This scenario reserve shall be referred to as Company Amount A.

iii. Identify the following four market paths:

• Two paths with the same starting interest rate as Path A, but equity

shocks +/– 5% from that of Path A.

• Two paths with the same equity fund returns as Path A, but the next

higher and next lower interest rate shocks.

From the four paths, identify Path B whose reserve value is:

• If Company Amount A is lower than CTE70 (adjusted), the smallest

reserve value that is greater than CTE70 (adjusted).

• If Company Amount A is greater than CTE70 (adjusted), the greatest

reserve value that is less than CTE70 (adjusted).

If none of the four paths satisfy the stated condition, discard the identified

Path A, and redo steps (ii) and (iii) using the next closest scenario to

CTE70 (adjusted) to be the new Path A in step (ii).

For the path designated as Path B, the scenario reserve shall be referred to

as Company Amount B.

iv. Recalculate the scenario reserves for Path A and Path B using the same

method as outlined in step (i) above, but substitute the assumptions

prescribed in Section 6.C and use a seriatim in force. These scenario

reserves shall be referred to as Prescribed Amount A and Prescribed

Amount B, respectively.

Throughout this Section 6, references to CTE70 (adjusted) shall also mean the SR for a

company that does not have a future hedging strategy supporting the contracts that does

not solely offset index credits as discussed in Section 4.A.4.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

v. Calculate the Prescribed Projections Amount as:

Prescribed Projections Amount

=Prescribed Amount A + (CTE70 (adjusted) − Company Amount A)

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b. CTEPA Method:

i. If the company used a model office to calculate the CTE Amount, then the

company may continue to use the same model office, or one that is no less

granular than the model office that was used to determine the CTE

Amount, provided that the company shall maintain consistency in the

grouping method used from one valuation to the next.

ii. Calculate the Prescribed Projections Amount as the CTE70 (adjusted)

using the same method as that outlined in Section 9.C (which is the same

as the SR following Section 4.A.4.a for a company that does not have a

future hedging strategy supporting the contracts) but substituting the

assumptions prescribed by Section 6.C. The calculation of this Prescribed

Projections Amount also requires that the scenario reserve for any given

scenario be equal to or in excess of the cash surrender value in aggregate

on the valuation date for the group of contracts modeled in the projection.

c. Once the Prescribed Projections Amount is determined by one of the two

methodologies above, then the company shall reduce the Prescribed Projections

Amount by the CTE70 (adjusted). The difference shall be referred to as the

Unbuffered Additional Standard Projection Amount.

d. Reduce the Unbuffered Additional Standard Projection Amount by an amount

equal to the difference between (i) and (ii), where (i) and (ii) are calculated in the

following manner:

i. Calculate the Unfloored CTE70 (adjusted), using the same procedure as

CTE70 (adjusted) but without requiring that the scenario reserve for any

scenario be no less than the cash surrender value in aggregate on the

valuation date.

ii. Calculate the Unfloored CTE65 (adjusted), which is calculated in the same

way as Unfloored CTE70 (adjusted) but averaging the 35% (instead of

30%) largest values.

e. The additional standard projection amount shall subsequently be the larger of the

quantity calculated in Section 6.B.3.d and zero.

4. Modeled Reinsurance

Cash flows associated with reinsurance shall be projected in the same manner as that used in

the calculation of the SR as described in Section 3.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

5. Modeled Hedges

Cash flows associated with hedging shall be projected in the same manner as that used in

the calculation of the CTE70 (adjusted) as discussed in Section 9.C or Section 4.A.4.a for

a company without a future hedging strategy supporting the contracts.

6. Market Paths for CSMP Method

If the company elects the CSMP method described in Section 6.B.3.a, the additional

standard projection amount shall be determined from the scenario reserves calculated for

the prescribed market paths defined below. Each prescribed market path shall be defined

by an initial equity fund stress and an initial interest rate stress, after which equity fund

returns steadily recover and interest rates revert to the same long-term mean.

All combinations of prescribed equity fund return scenarios and interest rate scenarios shall

be considered prescribed Standard Projection market paths. Accordingly, each company

shall calculate scenario reserves for a minimum of 40 market paths.

a. Equity Fund Returns

Eight equity fund return market paths shall be used. These market paths differ only

in the prescribed gross return in the first projection year.

The eight prescribed gross returns for equity funds in the first projection year shall

be negative 25% to positive 10%, at 5% intervals. These gross returns shall be

projected to occur linearly over the full projection year. After the first projection

year, all prescribed equity fund return market paths shall assume total gross returns

of 3% per annum.

If the eight prescribed equity fund market paths are insufficient for a company to

calculate the additional standard projection amount via steps (i) through (v)

outlined in Section 6.B.3.a, then the company shall include additional equity fund

market paths that increase or decrease the prescribed gross returns in the first

projection year by 5% increments at a time.

b. Interest Rates

Five interest rate market paths shall be used.

The five prescribed interest rate market paths shall differ in the starting Treasury

Department rates used to generate the mean interest rate path. Specifically, the

following five sets of starting Treasury Department rates shall be used:

i. The actual Treasury Department rates as of the valuation date.

ii. The actual Treasury Department rates as of the valuation date, reduced at

each point on the term structure by 25% of the difference between the

Treasury Department rate as of the valuation date and 0.01%.

iii. The actual Treasury Department rates as of the valuation date, reduced at

each point on the term structure by 50% of the difference between the

Treasury Department rate as of the valuation date and 0.01%.

iv. The actual Treasury Department rates as of the valuation date, reduced at

each point on the term structure by 75% of the difference between the

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Treasury Department rate as of the valuation date and 0.01%.

v. The actual Treasury Department rates as of the valuation date, increased

at each point on the term structure by 25% of the difference between the

Treasury Department rate as of the valuation date and 0.01%.

For each of these five sets of starting Treasury Department rates, the prescribed

interest rate market path is defined as the interest rate path generated by the

prescribed interest rate scenario generator (described in Section 8.B) when the

applicable set of starting rates is the initial yield curve for the generator and all

random variables in the generator are set to zero across all time periods. The

starting Treasury Department rates should not change any prescribed parameters

in the generator, including the mean reversion parameter. After creating each

vector of rates, the time 0 (valuation date) values should be set back to actual

Treasury Department rates as of the valuation date so that the model will validate

to current market values.

If the five prescribed interest rate market paths are insufficient for a company to

calculate the Additional Standard Projection Amount via steps (i) through (v)

outlined in Section 6.B.3.a, then the company shall include additional interest rate

market paths that increase or decrease the prescribed starting Treasury Department

rates at each point on the term structure by increments equal to 25% of the

difference between the Treasury Department rate as of the valuation date and

0.01%. The lowest interest rate to be used in this analysis is 0.01%.

For projecting swap rates along the prescribed interest rate market paths,

companies shall assume that the swap-to-Treasury spread term structure in effect

as of the valuation date persists throughout each market path. The lowest swap rate

to be used in this analysis is 0.01%.

c. Indices and Returns That Are Not Scenario-Specific

The following market indicators and fund returns are constructed in a consistent

manner across all prescribed market paths:

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Table 6.1: Returns and Indicators

Returns &

indicators

All projection years

Bond fund returns

Equal to the five-year trailing average of the five-year Treasury

Department rate, plus an earned spread of 100 bps per annum.

In the first projection year, adjust the projected return by an amount

equal to 20% of the prescribed gross equity fund return—with the

same directionality, reflected in a linear fashion over the full

projection year.

Money market

fund returns

Follow the three-month Treasury Department rate projected in the

prescribed scenario.

Balanced fund

returns

Reflect the equity and bond allocations as of the valuation date and

any expected asset rebalancing in the projection consistent with

fund operations.

General account

reinvestment rate

Consistent with the manner in which general account assets—

including starting assets, reinvestment assets, and additional

invested assets as defined in Section 4.B.3—are reflected via the

method outlined in Section 4.D.4 and Section 4.D.5, including the

requirement in Section 4.D.5.a for fixed income assets.

Fixed account

returns

At the option of the company, either (i) follow the company’s

documented crediting practices; or (ii) equal to the larger of the

contract’s minimum guaranteed crediting rate and the general

account earned rate less 200 bps.

For reinsurers that do not have visibility into the ceding company’s

general account earned rate, the company shall project the ceding

company’s general account earned rate as the five-year trailing

average of the five-year Treasury Department rate, plus an earned

spread of 100 bps per annum.

Implied and

realized volatility

Follow the forward volatilities implied by the implied volatility

term structure in effect as of the valuation date.

Foreign exchange

rates

Follow the exchange rates implied by spot exchange rates as of the

valuation date and the relevant interest rate term structures.

C. Prescribed Assumptions

1. Assignment of Guaranteed Benefit Type

a. Assumptions shall be set for each contract in accordance with the contract’s

guaranteed benefit type, where a number of common benefit types is specifically

defined in VM-01 (e.g., GMDB, GMIB, GMWB, etc.). In addition, a simple 403(b)

VA contract shall be defined as a variable annuity contract that:

i. Is issued within a 403(b) retirement savings plan.

ii. Does not have a VAGLB.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

b. Certain VAGLB products have features that can be described by multiple types of

guaranteed benefits. If the VAGLB can be described by more than one of the

definitions in VM-01 for the purpose of determining the additional standard

projection amount, the company shall select the guaranteed benefit type that it

deems best applicable and shall be consistent in its selection from one valuation to

the next. For instance, if a VAGLB has both lifetime GMWB and non-lifetime

GMWB features and the company determines that the lifetime GMWB is the most

prominent component; assumptions for all contracts with such a VAGLB shall be

set as if the VAGLB were only a lifetime GMWB and did not contain any of the

non-lifetime GMWB features. If the company determines that the non-lifetime

GMWB is the most prominent component; assumptions for all contracts with such

a VAGLB shall be set as if the VAGLB were only a non-lifetime GMWB and did

not contain any of the lifetime GMWB features.

c. If a contract cannot be classified into any categories within a given assumption,

the company shall determine the defined benefit type with the most similar benefits

and risk profile as the company’s benefit and utilize the assumption prescribed for

this benefit.

2. Maintenance Expenses

Maintenance expense assumptions shall be determined as the sum of (a) plus (b) if the

company is responsible for the administration or (c) if the company is not responsible for

the administration of the contract:

a. Each contract for which the company is responsible for administration incurs an

annual expense equal to $100 in the first projection year, increased by an assumed

annual inflation rate of 2% for subsequent projection years.

b. Seven basis points of the projected account value for each year in the projection.

c. Each contract for which the company is not responsible for administration (e.g., if

the contract were assumed by the company in a reinsurance transaction in which

only the risks associated with a guaranteed benefit rider were transferred) incurs

an annual expense equal to $35 in the first projection year, increased by an assumed

annual inflation rate of 2% for subsequent projection years.

Guidance Note: The framework adopted by the Variable Annuities Issues (E) Working Group

includes the review and possible update of these assumptions every three to five years.

3. Guarantee Actuarial Present Value

The Guarantee Actuarial Present Value (GAPV) is used in the determination of the

Withdrawal Delay Cohort Method (Section 6.C.5), full surrender rates (Section

6.C.6), annuitization rates (Section 6.C.7), and other voluntary contract

terminations (Section 6.C.11). The GAPV represents the actuarial present value of

the lump sum or income payments associated with a guaranteed benefit. For the

purpose of calculating the GAPV, such payments shall include the portion that is

paid out of the contract holder’s Account Value.

The GAPV shall be calculated in the following manner:

Requirements for Principle-Based Reserves for Variable Annuities VM-21

a. If a guaranteed benefit is exercisable immediately, then the GAPV shall

be determined assuming immediate or continued exercise of that benefit

unless otherwise specified in a subsequent subsection of Section 6.C.3.

b. If a guaranteed benefit is not exercisable immediately (e.g., because of

minimum age or contract year requirements), then the GAPV shall be

determined assuming exercise of the guaranteed benefit at the earliest

possible time unless otherwise specified in a subsequent subsection of

Section 6.C.3.

c. Determination of the GAPV of a guaranteed benefit that is exercisable or

payable at a future projection interval shall take account of any guaranteed

growth in the basis for the guarantee (e.g., where the basis grows according

to an index or an interest rate), as well as survival to the date of exercise

using the mortality table specified in Section 6.C.3.h.

d. Once a GMWB is exercised, the contract holder shall be assumed to

withdraw in each subsequent contract year an amount equal to 100% of

the GMWB’s guaranteed maximum annual withdrawal amount in that

contract year.

e. If account value growth is required to determine projected benefits or

product features, then the account value growth shall be assumed to be 0%

net of all fees chargeable to the account value.

f. If a market index is required to determine projected benefits or product

features, then the required index shall be assumed to remain constant at its

value during the projection interval.

g. The GAPV for a GMDB that terminates at a certain age or in a certain

contract year shall be calculated as if the GMDB does not terminate.

Benefit features such as guaranteed growth in the GMDB benefit basis

may be calculated so that no additional benefit basis growth occurs after

the GMDB termination age or date defined in the contract.

h. The mortality assumption used shall follow the 2012 IAM Basic Mortality

Table, improved to Dec. 31, 2017, using Projection Scale G2 but not

applying any additional mortality improvement in the projection.

Guidance Note: Projecting mortality to a specific date rather than the valuation date in the above

step is a practical expedient to streamline calculations. This date should be considered an

experience assumption to be periodically reviewed and updated as the Life Actuarial (A) Task

Force reviews and updates the assumptions used in the Standard Projection.

i. The discount rate used shall be the 10-year Treasury Department bond rate

on the valuation date unless otherwise specified in a subsequent subsection

of Section 6.C.3.

j. For hybrid GMIBs, two types of GAPVs shall be calculated: the

Annuitization GAPV and the Withdrawal GAPV. The Annuitization

GAPV is determined as if the hybrid GMIB were a traditional GMIB such

that the only benefit payments used in the GAPV calculation are from

annuitization. The Withdrawal GAPV is determined as if the hybrid GMIB

were a lifetime GMWB with the same guaranteed benefit growth features

and, at each contract holder age, a guaranteed maximum withdrawal

Requirements for Principle-Based Reserves for Variable Annuities VM-21

amount equal to the partial withdrawal amount below which partial

withdrawals reduce the benefit by the same dollar amount as the partial

withdrawal amount and above which partial withdrawals reduce the

benefit by the same proportion that the withdrawal reduces the account

value.

4. Partial Withdrawals

Partial withdrawals required contractually or previously elected (e.g., a contract

operating under an automatic withdrawal provision, or that has voluntarily enrolled

in an automatic withdrawal program, on the valuation date) are to be deducted from

the Account Value in each projection interval consistent with the projection

frequency used, as described in Section 4.F, and according to the terms of the

contract. However, if a GMWB or hybrid GMIB contract’s automatic withdrawals

results in partial withdrawal amounts in excess of the GMWB’s guaranteed

maximum annual withdrawal amount or the maximum amount above which

withdrawals reduce the GMIB basis by the same dollar amount as the withdrawal

amount (the “dollar-for-dollar maximum withdrawal amount”), such automatic

withdrawals shall be revised such that they equal the GMWB’s guaranteed

maximum annual withdrawal amount or the GMIB’s dollar-for-dollar maximum

withdrawal amount. However, for tax qualified contracts with ages greater than or

equal to the federal required minimum distribution (RMD) age, if the prescribed

withdrawal amount is below the RMD amount, the withdrawal amount may be

reset to the RMD amount.

Guidance Note: Companies are expected to model withdrawal amounts consistent

with the RMD amount where applicable and where practically feasible; however,

it is understood that this level of modeling sophistication may not be available for

all companies.

For any contract not on an automatic withdrawal provision as described in the

preceding paragraph, depending on the guaranteed benefit type, other partial

withdrawals shall be projected as follows but shall not exceed the free partial

withdrawal amount above which surrender charges are incurred and may be

floored at the RMD amount for tax qualified contracts with ages greater than or

equal to the federal RMD age:

a. For simple 403(b) VA contracts, the partial withdrawal amount each year

shall equal the following percentages, based on the contract holder’s

attained age:

Table 6.2: Partial Withdrawals, 403(b)

Attained Age

Percent of account value

59 and under

0.5%

60 – 69

2.0%

70 – 74

3.0%

75 and over

4.0%

b. For contracts that do not have VAGLBs but that have GMDBs that offer

guaranteed growth—i.e., benefit growth that does not depend on the

performance of the Account Value—in the benefit basis, the partial

withdrawal amount each year shall equal 2% of the Account Value.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

c. For contracts that do not have VAGLBs but that have GMDBs that do not

offer guaranteed growth in the benefit basis, the partial withdrawal amount

each year shall equal 3.5% of the Account Value.

d. For contracts with (1) traditional GMIBs that do not offer guaranteed

growth in the benefit basis; or (2) GMABs, the partial withdrawal amount

each year shall equal to 2.0% of the Account Value.

e. For contracts with traditional GMIBs that offer guaranteed growth in the

benefit basis, the partial withdrawal amount each year shall equal 1.5% of

the Account Value.

f. For contracts with GMWBs and Account Values of zero, the partial

withdrawal amount shall be the guaranteed maximum annual withdrawal

amount.

g. For contracts with Lifetime GMWBs or hybrid GMIBs that, in the contract

year immediately preceding that during the valuation date, withdrew a

non-zero amount not in excess of the GMWB’s guaranteed annual

withdrawal amount or the GMIB’s dollar-for-dollar maximum withdrawal

amount, the partial withdrawal amount shall be 90% of the guaranteed

annual withdrawal amount or the GMIB’s dollar-for-dollar maximum

withdrawal amount each year until the contract Account Value reaches

zero.

h. For other contracts with Lifetime GMWBs or hybrid GMIBs, no partial

withdrawals shall be projected until the projection interval (the “initial

withdrawal period”) determined using the “withdrawal delay cohort

method” as described in Section 6.C.5. During the initial withdrawal

period and thereafter, the partial withdrawal amount shall be 90% of the

GMWB’s guaranteed annual withdrawal amount or the GMIB’s dollar-

for-dollar maximum withdrawal amount each year until the contract

Account Value reaches zero.

i. For contracts with Non-lifetime GMWBs that, in the contract year

immediately preceding that during the valuation date, withdrew a non-zero

amount not in excess of the GMWB’s guaranteed annual withdrawal

amount, the partial withdrawal amount shall be 70% of the GMWB’s

guaranteed annual withdrawal amount each year until the contract Account

Value reaches zero.

j. For other contracts with Non-lifetime GMWBs, no partial withdrawals

shall be projected until the projection interval (the “initial withdrawal

period”) determined using the “withdrawal delay cohort method” as

described in Section 6.C.5. During the initial withdrawal period and

thereafter, the partial withdrawal amount shall be 70% of the guaranteed

annual withdrawal amount each year until the contract Account Value

reaches zero.

k. For contracts with no minimum guaranteed benefits, the partial withdrawal

amount each year shall equal 3.5% of the Account Value.

l. There may be instances where the company has certain data limitations,

(e.g., with respect to policies that are not enrolled in an automatic

withdrawal program but have exercised a non-excess withdrawal in the

Requirements for Principle-Based Reserves for Variable Annuities VM-21

contract year immediately preceding the valuation date [Section 6.C.4.g

and Section 6.C.4.i]). The company may employ an appropriate proxy

method if it does not result in a material understatement of the reserve.

5. Withdrawal Delay Cohort Method

To model the initial withdrawal for certain GMWBs and hybrid GMIBs as

discussed in Section 6.C.4.h and Section 6.C.4.j, the actuary shall adopt a modeling

approach whereby a contract is split into several copies (referred to as “cohorts”),

each of which is subsequently modeled as a separate contract with a different initial

withdrawal period. The contract Account Value, bases for guaranteed benefits, and

other applicable characteristics shall be allocated across the cohorts based on

different weights that are determined using the method discussed below in this

section.

For example, assume that the method discussed below results in the creation of

two cohorts: the first, weighted 70%, has an initial withdrawal period of two years

after the valuation date; and the second, weighted 30%, has an initial withdrawal

period of ten years after the valuation date. The contract shall therefore be split

into two copies; the first copy shall have Account Value and guaranteed benefit

bases equal to 70% of those of the original contract, and the second copy shall have

Account Value and guaranteed benefit bases equal to 30% of those of the original

contract. The first copy shall be projected to begin withdrawing in two years, while

the second shall be projected to begin withdrawing in 10 years. The cash flows

from both copies shall thereafter be aggregated to yield the final cash flows of the

overall contract.

The following steps shall be used to construct the cohorts and determine the

weights attributed to each cohort. These steps shall be conducted for each issue

age for each GMWB and hybrid GMIB product that the company possesses in the

modeled in force.

a. Calculate the GMWB GAPV or the Withdrawal GAPV (for hybrid

GMIBs) for each potential age of initiating withdrawals (“initial

withdrawal age”) until the end of the projection period or the contract

holder reaches age 120 if sooner. In each of these GAPV calculations:

i. The calculation shall ignore the instructions of Section 6.C.3.d and

instead assume that the contract holder takes no partial

withdrawals until the initial withdrawal age.

ii. The calculation shall ignore the instructions of Section 6.C.3.i and

instead use a discount rate assuming a 10-year Treasury

Department bond rate of 3.0%.

iii. The GAPV for each initial withdrawal age shall be expressed in

present value terms taking into account survival from issue to the

initial withdrawal age, as well as time value of money during that

period. For instance, if the issue age is 55, then the GAPV for an

initial withdrawal age of 60 shall take into account survival of the

annuitant or owner to age 60 using the mortality table specified in

Section 6.C.3.h as well as the time value of money from age 55 to

age 60.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

b. Raise each of the GAPV to the second power and multiply all of the

resultant GAPV

values corresponding to initial withdrawal ages below 60

by 50%.

c. For tax qualified GMWB contracts, scale each of the adjusted GAPV

values by a single multiplier such that the sum of the scaled GAPV

values

equals 0.95.

d. For non-qualified GMWB contracts, scale each of the adjusted GAPV

values by a single multiplier such that the sum of the scaled GAPV

values

equals 0.80.

e. For tax-qualified hybrid GMIB contracts, scale each of the adjusted

GAPV

values by a single multiplier such that the sum of the scaled

GAPV

values equals 0.85.

f. For non-qualified hybrid GMIB contracts, scale each of the adjusted

GAPV

values by a single multiplier such that the sum of the scaled

GAPV

values equals 0.60.

g. For contracts that offer guaranteed growth in the benefit basis or one-time

bonuses to the benefit basis, add the following to the adjusted and scaled

GAPV

values corresponding to the initial withdrawal age that occurs

immediately after the termination of the guaranteed growth or the one-time

bonus. If there is more than one such initial withdrawal age, the addition

shall be made to the initial withdrawal age with the higher GAPV.

0.35 ×











0.95   GAPV

,



  

 

, if contract is a tax qualified GMWB

0.80   GAPV

,



  

 

, if contract is a non qualified GMWB

0.85   GAPV

,



  

 

, if contract is a tax qualified hybrid GMIB

0.60   GAPV

,



  

 

, if contract is a non qualified hybrid GMIB

h. Scale the adjusted and scaled GAPV

values at all future initial withdrawal

ages—i.e., all ages greater than the initial withdrawal age that occurs

immediately after the termination of the guaranteed growth or the one-time

bonus with the greatest GAPV, as identified in the preceding step—such

that the sum of the revised GAPV

values equals 0.95 for tax-qualified

GMWB contracts, 0.80 for non-qualified GMWB contracts, 0.85 for tax-

qualified hybrid GMIB contracts, and 0.60 for non-qualified hybrid GMIB

contracts.

i. For tax-qualified contracts, add the following to the revised GAPV

corresponding to an initial withdrawal age of the federal RMD age.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

0.50 ×











0.95   GAPV

,









  









, if contract is a tax qualified GMWB

0.85   GAPV

,









  









, if contract is a tax qualified hybrid GMIB

j. Scale the revised GAPV

values at all future initial withdrawal ages—i.e.,

all ages greater than the federal RMD age, as identified in the preceding

step—such that the sum of the revised GAPV

values equals 0.95 for tax-

qualified GMWB contracts and 0.85 for tax-qualified hybrid GMIB

contracts again.

k. For ease of calculation, the company may discard certain withdrawal ages

and use others as representative. For example, for odd-numbered issue

ages, discard the initial withdrawal ages that are odd-numbered; and for

even-numbered issue ages, discard initial withdrawal ages that are even-

numbered. One cohort shall subsequently be constructed for each of the

remaining initial withdrawal ages.

Guidance Note: The instructions in Section 6.C.5 are meant to improve computational tractability

for companies that have large in force portfolios; accordingly, companies may also elect not to

discard any initial withdrawal ages in constructing the withdrawal cohorts. Additionally, if

necessary to avoid unmanageable computational intensity, companies may discard more initial

withdrawal ages in constructing withdrawal cohorts or assign only a small number of withdrawal

cohorts to each contract via random sampling.

l. The weight assigned to each of the cohorts constructed in Section 6.C.5

shall equal the revised GAPV

value of the corresponding initial

withdrawal age less the revised GAPV

value of the initial withdrawal age

in the preceding cohort; i.e., two years smaller for the example given in

Section 6.C.5.k.

m. Construct a final cohort that is modeled not to take a partial withdrawal in

the contract lifetime. This final cohort (“never withdraw cohort”) shall be

assigned a weight of 0.05 for tax-qualified GMWB contracts and 0.20 for

non-qualified GMWB contracts, 0.15 for tax-qualified hybrid GMIB

contracts, and 0.40 for non-qualified hybrid GMIB contracts.

n. The cohorts and their associated weights as determined in Section 6.C.5.a

through Section 6.C.5.k are for a contract with attained age equal to its

issue age. Because the discount rate used in this determination is fixed,

generally these calculations only need to be performed once for a given set

of contracts with a certain issue age, guaranteed benefit product, and tax

status.

Guidance Note: Cohorts and their associated weights may need to be revised if prescribed

assumptions are updated.

o. For a contract with a contract holder attained age exceeding its issue age

and that must still follow the Withdrawal Delay Cohort Method, cohorts

with initial withdrawal ages less than the attained age on the valuation date

shall be discarded. The remaining cohorts shall be scaled such that the sum

Requirements for Principle-Based Reserves for Variable Annuities VM-21

of their re-scaled weights equals 1. For example, for a sample contract with

issue age 58 and attained age 64 on the valuation date, the cohorts with

initial withdrawal ages less than 64 should be discarded, and the weights

of all remaining cohorts shall be re-scaled by dividing by the difference

between 1 and the weight of the original cohort with initial withdrawal age

of 64.

6. Full Surrenders

The full surrender rate for all contracts shall be calculated based on the Standard

Table for Full Surrenders as detailed below in Table 6.3, except for simple 403(b)

VA contracts. The Standard Table for Full Surrender prescribes different full

surrender rates depending on the contract year and the in-the-moneyness (“ITM”)

of the contract’s guaranteed benefit.

The ITM of a contract’s guaranteed benefit shall be calculated based on the ratio

of the guaranteed benefit’s GAPV to the contract’s account value. Depending on

the guaranteed benefit type, the ratio shall be adjusted via the following

calculations:

a. For GMDBs, the ITM shall be calculated as 75% of the ratio between the

GMDB GAPV and the contract account value.

b. For GMABs, the ITM shall be calculated as 150% of the ratio between the

GMAB GAPV and the contract account value.

c. For traditional GMIBs and all GMWBs, the ITM shall be calculated as

100% of the ratio between the GMIB or GMWB GAPV, calculated as

described in Section 6.C.3, and the contract account value.

d. For hybrid GMIBs, the ITM shall be calculated as 100% of the ratio

between:

i. The larger of its Annuitization GAPV and its Withdrawal GAPV,

calculated as described in Section 6.C.3 and Section 6.C.5, and

ii. The contract account value.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Table 6.3 – Standard Table for Full Surrenders

ITM

In surrender charge period,

or in policy years 1–3 for

contracts without surrender

charges

First year after the

surrender charge period

Subsequent years, or

in policy years 4

and onwards for

contracts without

surrender charges

Under 50% 4.0% 25.0% 15.0%

50–75% 3.0% 18.0% 10.0%

75–100% 2.5% 12.0% 7.0%

100–125% 2.5% 8.0% 4.5%

125–150% 2.5% 6.0% 3.0%

150–175% 2.5% 5.0% 2.5%

175–200% 2.5% 4.5% 2.0%

Over 200% 2.5% 4.0% 2.0%

For contracts that have both a VAGLB and a GMDB, the full surrender rate

projected shall be the lower of the full surrender rate obtained from the Standard

Table for Full Surrender using the GMDB’s ITM and that using the VAGLB’s

ITM.

For GMAB contracts, the full surrender rate of the remaining contract shall be

modeled in accordance with that prescribed for any remaining benefits in the

contract, except that for a contract with no other living benefits, the projected full

surrender rate shall be 50% in the contract year immediately following the maturity

of the guaranteed benefit.

For GMWB or hybrid GMIB contracts, for all contract years in which a withdrawal

is projected, the full surrender rate obtained from the Standard Table for Full

Surrender shall be multiplied by 60%.

For contracts with no minimum guaranteed benefits, ITM is 0%; and the row in

the table for ITM < 50% would apply.

Notwithstanding all of the instructions above, the full surrender rate for a GMWB

contract shall be 0% if the account value is zero.

e. For simple 403(b) VA contracts, the full surrender rate projected shall be

the lower of:

i. The full surrender rate obtained from the Standard Table for Full

Surrender based on the ITM of the contract’s GMDB, and

ii. The applicable full surrender rate from the following table:

Table 6.4: Full Surrender Incidence Rates, 403(b)

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Full Surrender for simple 403(b) VA contracts

Attained Age

In surrender

charge period

First policy year

after the surrender

charge period

Subsequent

policy years, or

contracts

without a

surrender

charge period

59 and under

2.0%

4.0%

60 – 69

4.0%

11.0%

8.0%

70 – 74

4.0%

11.0%

8.0%

75 and over

2.0%

5.0%

7. Annuitizations

a. The annuitization rate for contracts that do not have a GMIB shall be 0%

at all projection intervals. For GMIB contracts, the annuitization rate shall

be synonymous with the benefit exercise rate. As such, the annuitization

rate is 0% in projection intervals during which the GMIB is not

exercisable.

b. The annual annuitization rate for a traditional GMIB contract that is

immediately exercisable in the projection interval and that has an account

value greater than zero, shall follow the Standard Table for Traditional

GMIB Annuitization as detailed below in Table 6.5. The Standard Table

for Annuitization prescribes different annuitization rates depending on

whether the contract is in the first contract year in which the GMIB is

exercisable or in a subsequent contract year.

Table 6.5: Standard Table for Traditional GMIB Annuitization

Annuitization GAPV

First year of exercisability

Subsequent years

0–100% of Account Value

0.0%

100–125% of Account Value

5.0%

2.5%

125–150% of Account Value

10.0%

5.0%

150–175% of Account Value

15.0%

7.5%

175–200% of Account Value

20.0%

10.0%

200%+ of Account Value

25.0%

12.5%

c. The annual annuitization rate for a hybrid GMIB contract that is

immediately exercisable in the projection interval and that has an Account

Value greater than zero shall be determined via the following steps:

i. If the GMIB’s Withdrawal GAPV exceeds its Annuitization

GAPV, the GMIB’s Annuitization GAPV exceeds the

contract’s account value, and the contract is not in the last

three years in which the GMIB is exercisable, then the annual

annuitization rate shall be 0.25%.

ii. If the GMIB’s Annuitization GAPV exceeds or equals its

Withdrawal GAPV, and the contract is not in the last three

years in which the GMIB is exercisable, then the annual

annuitization rate shall follow the Standard Table A for

Hybrid GMIB Annuitization as detailed below in Table 6.6.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

iii. If the contract is in the last three years in which the GMIB is

exercisable, then the annual annuitization rate shall follow the

Standard Table B for Hybrid GMIB Annuitization as detailed

below in Table 6.7.

iv. Otherwise, the annual annuitization rate shall be zero.

Table 6.6: Standard Table A for Hybrid

GMIB Annuitization

Annuitization GAPV

Annual annuitization rate

0–100% of Account Value

0.0%

100–125% of Account Value

0.5%

125–150% of Account Value

1.0%

150–175% of Account Value

1.5%

175–200% of Account Value

2.0%

200%+ of Account Value

2.5%

Table 6.7: Standard Table B for Hybrid

GMIB Annuitization

Annuitization GAPV

Annual annuitization rate

0–100% of Account Value

0.0%

100–125% of Account Value

5.0%

125–150% of Account Value

10.0%

150–175% of Account Value

15.0%

175–200% of Account Value

20.0%

200–225% of Account Value

25.0%

225–250% of Account Value

30.0%

250%+ of Account Value

35.0%

d. If during any projection interval, the GAPV of another guarantee on the

contract (e.g., a GMDB) exceeds the Annuitization GAPV, the annual

annuitization rate in that projection interval shall be further adjusted to

equal 50% of the annual annuitization rate determined via the calculations

detailed above, but not to exceed 12.5%. For these calculations, the

Annuitization GAPV and Withdrawal GAPV shall follow the definition

described in Section 6.C.3.

e. The annuitization rate for all GMIB contracts shall be 100% immediately after

the Account Value reaches zero. As discussed in Section 6.C.10, contractual

features that terminate the GMIB upon account value depletion shall be voided

such that the account value depletion event does not terminate the GMIB.

8. Account Transfers and Future Deposits

a. No transfers between funds shall be assumed in the projection unless

required by the contract (e.g., transfers from a dollar cost averaging fund

or contractual rights given to the insurer to implement a contractually

specified portfolio insurance management strategy or a contract operating

under an automatic re-balancing option). When transfers must be modeled,

to the extent not inconsistent with contract language, the allocation of

Requirements for Principle-Based Reserves for Variable Annuities VM-21

transfers to funds must be in proportion to the contract’s current allocation

to funds.

b. Except for simple 403(b) VA contracts, no future deposits to account value

shall be assumed unless required by the terms of the contract to prevent

contract or guaranteed benefit lapse, in which case they must be modeled.

When future deposits must be modeled, to the extent not inconsistent with

contract language, the allocation of the deposit to funds must be in

proportion to the contract’s current allocation to such funds.

c. For simple 403(b) VA contracts, total deposits to account value in any

projected future policy year shall be modeled as a percentage of the total

deposits from the immediately preceding policy year. The percentage shall

be determined based on the following table:

Table 6.48: Deposit Rates, 403(b)

Attained Age

Percent of prior year’s deposits

54 and under

90%

55 through 69

80%

70 and over

9. Mortality

The mortality rate for a contract holder with age x in year (2012 + n) shall be

calculated using the following formula, where q

denotes mortality from the 2012

IAM Basic Mortality Table multiplied by the appropriate factor (F

) from Table

6.9 and G2

denotes mortality improvement from Projection Scale G2:









= 





(1 2



)







Table 6.9

Attained Age (x)

for VA with GLB

for All Other

<=65

80.0%

100.0%

81.5%

102.0%

83.0%

104.0%

84.5%

106.0%

86.0%

108.0%

87.5%

110.0%

89.0%

112.0%

90.5%

114.0%

92.0%

116.0%

93.5%

118.0%

95.0%

120.0%

96.5%

119.0%

98.0%

118.0%

99.5%

117.0%

Requirements for Principle-Based Reserves for Variable Annuities VM-21

101.0%

116.0%

102.5%

115.0%

104.0%

114.0%

105.5%

113.0%

107.0%

112.0%

108.5%

111.0%

110.0%

109.0%

108.0%

107.0%

106.0%

100

105.0%

101

104.0%

102

103.0%

103

102.0%

104

101.0%

>=105

100.0%

10. Account Value Depletions

The following assumptions shall be used when a contract’s Account Value reaches

zero:

a. If the contract has a GMWB, the contract shall take partial withdrawals

that are equal in amount each year to the guaranteed maximum annual

withdrawal amount.

b. If the contract has a GMIB, the contract shall annuitize immediately. If the

GMIB contractually terminates upon account value depletion, such

termination provision is assumed to be voided in order to approximate the

contract holder’s election to annuitize immediately before the depletion of

the account value.

c. If the contract has any other guaranteed benefits, including a GMDB, the

contract shall remain in-force. If the guaranteed benefits contractually

terminate upon account value depletion, such termination provisions are

assumed to be voided in order to approximate the contract holder’s

retaining adequate Account Value to maintain the guaranteed benefits in-

Requirements for Principle-Based Reserves for Variable Annuities VM-21

force. At the option of the company, fees associated with the contract and

guaranteed benefits may continue to be charged and modeled as collected

even if the account value has reached zero. While the contract must remain

in-force, benefit features may still be terminated according to contractual

terms other than account value depletion provisions.

d. If the contract has no minimum guaranteed benefits, the contract should

be terminated according to contractual terms.

11. Other Voluntary Contract Terminations

For contracts that have other elective provisions that allow a contract holder to

terminate the contract voluntarily, the termination rate shall be calculated based on

the Standard Table for Full Surrenders as detailed above in Table 6.3 with the

following adjustments:

a. If the contract holder is not yet eligible to terminate the contract under the

elective provisions, the termination rate shall be zero.

b. After the contract holder becomes eligible to terminate the contract under

the elective provisions, the termination rate shall be determined using the

“Subsequent years” column of Table 6.3.

c. In using Table 6.3, the ITM of a contract’s guaranteed benefit shall be

calculated based on the ratio of the guaranteed benefit’s GAPV to the

termination value of the contract. The termination value of the contract

shall be calculated as the GAPV of the payment stream that the contract

holder is entitled to receive upon termination of the contract; if the contract

holder has multiple options for the payment stream, the termination value

shall be the highest GAPV of these options.

d. For GMWB or hybrid GMIB contracts, for all contract years in which a

withdrawal is projected, the termination rate obtained from Table 6.3 shall

be additionally multiplied by 60%.

For calculating the ITM of a hybrid GMIB, the guaranteed benefit’s

GAPV shall be the larger of the Annuitization GAPV or the Withdrawal

GAPV.

e. For contracts with no minimum guaranteed benefits, the ITM is 0%; for

all contract years in which a withdrawal is projected, the termination rate

obtained from Table 6.3 shall be the row in the table for ITM < 50% using

the “Subsequent years” column of Table 6.3.

Section 7: Alternative Methodology

A. General Methodology

1. General Methodology Description

a. For variable deferred annuity contracts that either contain no guaranteed benefits

or only GMDBs, including “earnings enhanced death benefits,” (i.e., no

VAGLBs), the reserve may be determined by using the method outlined below

Requirements for Principle-Based Reserves for Variable Annuities VM-21

rather than by using the approach described in Section 3.C and Section 3.D—i.e.,

based on projections—provided the approach described in Section 3.D has not

been used in prior valuations or else approval has been obtained from the

domiciliary commissioner.

b. The reserve determined using the Alternative Methodology for a group of contracts

with GMDBs shall be determined as the sum of amounts obtained by applying

factors to each contract in force as of a valuation date and adding this to the

contract’s cash surrender value.

c. The amount that is added to an individual contract’s cash surrender value may be

negative, zero or positive, thus resulting in a reserve for a given contract that could

be less than, equal to or greater than the cash surrender value. The resulting reserve

in aggregate shall not be less than the greater of the cash surrender value or the

reserve determined by applying Actuarial Guideline XXXIII—Determining

CARVM Reserves for Annuity Contracts with Elective Benefits (AG 33) in VM-C,

each in aggregate for the group of contracts to which the Alternative Methodology

is applied.

d. The reserve determined using the Alternative Methodology for a group of contracts

that contain no guaranteed benefits shall be determined using an application of AG

33 in VM-C, as described below.

Guidance Note: The term “contracts that contain no guaranteed benefits” means that there are no

guaranteed benefits at any time during the life of the contract (past, present or future).

e. For purposes of performing the Alternative Methodology, materially similar

contracts within the group may be combined together into subgroups to facilitate

application of the factors. Specifically, all contracts comprising a “subgroup” must

display substantially similar characteristics for those attributes expected to affect

reserves (e.g., definition of guaranteed benefits, attained age, contract duration,

years-to-maturity, market-to-guaranteed value, asset mix, etc.). Grouping shall be

the responsibility of the actuary but may not be done in a manner that intentionally

understates the resulting reserve.

f. The Alternative Methodology, as described in this section, produces a pre-

reinsurance-ceded reserve. The post-reinsurance-ceded reserve is discussed in

Section 5.3.

g. Instructions and factors for the Alternative Method can be found on the website of

the Academy at: www.actuary.org/content/c3-phase-ii-rbc-and-reserves-project

2. Definitions of Terms Used in This Section

a. Annualized Account Charge Differential: This term is the charge as percentage

account value (revenue for the company) minus the expense as percentage of

account value.

b. Asset Exposure: Asset exposure refers to the greatest possible loss to the insurance

company from the value of assets underlying general or separate account contracts

falling to zero.

c. Benchmark: Benchmarks have similar risk characteristics to the entity (e.g., asset

class, index or fund) to be modeled.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

d. Deterministic Calculations: In a deterministic calculation, a given event (e.g., asset

returns going up by 7% and then down by 5%) is assumed to occur with certainty.

In a stochastic calculation, events are assigned probabilities.

e. Foreign Securities: These are securities issued by entities outside the U.S.

f. Grouped Fund Holdings: Grouped fund holdings relate to guarantees that apply

across multiple deposits or for an entire contract instead of on a deposit-by-deposit

basis.

g. Guaranteed Value: The guaranteed value is the benefit base or a substitute for the

account value (if greater than the account value) in the calculation of living benefits

or death benefits. The methodology for setting the guaranteed value is defined in

the variable annuity contract.

h. High-Yield Bonds: High-yield bonds are below investment grade, with NAIC

ratings (if assigned) of 3, 4, 5 or 6. Compared to investment grade bonds, these

bonds have higher risk of loss due to credit events. Funds predominately containing

securities that are not NAIC rated as 1 or 2 (or similar agency ratings) are

considered to be high-yield.

i. Investment Grade Fixed Income Securities: Securities with NAIC ratings of 1 or 2

are investment grade. Funds containing securities predominately with NAIC

ratings of 1 or 2 or with similar agency ratings are considered to be investment

grade.

j. Liquid Securities: These securities can be sold and converted into cash at a price

close to its true value in a short period of time.

k. Margin Offset: Margin offset is the portion of charges plus any revenue-sharing

allowed under Section 4.A.5 available to fund claims and amortization of the

unamortized surrender charges allowance.

l. Multi-Point Linear Interpolation: This methodology is documented in

mathematical literature and calculates factors based on multiple attributes

categorized with discrete values where the attributes’ actual values may be

between the discrete values.

m. Model Office: A model office converts many contracts with similar features into

one contract with specific features for modeling purposes.

n. Quota-Share Reinsurance: In this type of reinsurance treaty, the same proportion

is ceded on all cessions. The reinsurer assumes a set percentage of risk for the same

percentage of the premium, minus an allowance for the ceding company’s

expenses.

o. Resets: A reset benefit results in a future minimum guaranteed benefit being set

equal to the contract’s account value at previous set date(s) after contract inception.

p. Risk Mitigation Strategy: A risk mitigation strategy is a device to reduce the

probability and/or impact of a risk below an acceptable threshold.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

q. Risk Profile: Risk profile in these requirements relates to the prescribed asset class

categorized by the volatility of returns associated with that class.

r. Risk Transfer Arrangements: A risk transfer arrangement shifts risk exposures

(e.g., the responsibility to pay at least a portion of future contingent claims) away

from the original insurer.

s. Roll-Up: A roll-up benefit results in the guaranteed value associated with a

minimum contractual guarantee increasing at a contractually defined interest rate.

t. Volatility: Volatility refers to the annualized standard deviation of asset returns.

3. Contract-by-Contract Application for Contracts That Contain No Guaranteed Living or

Death Benefits

The Alternative Methodology reserve for each contract that contains no guaranteed living

or death benefits shall be determined by applying AG 33 in VM-C. The application shall

assume a return on separate account assets equal to the valuation interest rate for a non-

variable annuity with similar features issued during the first calendar quarter of the same

calendar year less appropriate asset-based charges. It also shall assume a return for any

fixed separate account and general account options equal to the rates guaranteed under the

contract.

4. Contract-by-Contract Application for Contracts That Contain GMDBs Only

For each contract, factors are used to determine a dollar amount, equal to



(





)



(as described below), that is to be added to that contract’s cash

surrender value as of the valuation date. The dollar amount to be added for any given

contract may be negative, zero or positive. The factors that are applied to each contract

shall reflect the following attributes as of the valuation date.

a. The contractual features of the variable annuity product.

b. The actual issue age, period since issue, attained age, years-to-maturity and gender

applicable to the contract.

c. The account value and composition by type of underlying variable or fixed fund.

d. Any surrender charges.

e. The GMDB and the type of adjustment made to the GMDB for partial withdrawals

(e.g., proportional or dollar-for-dollar adjustment).

f. Expenses to be incurred and revenues to be received by the company as estimated

on a prudent estimate basis and complying with the requirements for revenue

sharing as described in Section 4.A.5.

5. Factor Components

Factors shall be applied to determine each of the following components.

CA = Provision for amortization of the unamortized surrender charges calculated by the

insurer based on each contract’s surrender charge schedule, using prescribed

Requirements for Principle-Based Reserves for Variable Annuities VM-21

assumptions, except that lapse rates shall be based on the insurer’s prudent

estimate, but with no provision for federal income taxes or mortality.

FE = Provision for fixed dollar expenses less fixed dollar revenue calculated using

prescribed assumptions, the contract’s actual expense charges, the insurer’s

anticipated actual expenses and lapse rates, both estimated on a prudent estimate

basis, and with no provision for federal income taxes or mortality.

GC = Provision for the costs of providing the GMDB less net available spread-based

charges determined by the formula

F×GV-G×AV×R

, where GV and AV are as

defined in Section 7.C.1.

R = A scaling factor that is a linear function of the ratio of the margin offset to total

account charges (W) and takes the form 

(





, 



)

= 



+ 



× . The intercept

and slope factors for this linear function may vary according to:

• Product type.

• Pro-rata or dollar-for-dollar reductions in guaranteed value following

partial withdrawals.

• Fund class.

• Attained age.

• Contract duration.

• Asset-based charges.

• 90% of the ratio of account value to guaranteed value, determined in the

aggregate for all contracts sharing the same product characteristics.

Tables of factors for F, G, β

and β

values reflecting a 65% confidence interval and

ignoring federal income tax are available from the NAIC. In calculating



(





, 



)

directly from the linear function provided above, the margin ratio W must be

constrained to values greater than or equal to 0.2 and less than or equal to 0.6.

Interpolated values of F, G and R (calculated using the linear function described above) for

all contracts having the same product characteristics and asset class shall be derived from

the pre-calculated values using multi-point linear interpolation over the following four

contract-level attributes:

a. Attained age.

b. Contract duration.

c. Ratio of account value to GMDB.

d. The total of all asset-based charges, including any fund management fees or

allowances based on the underlying variable annuity funds received by the insurer.

The gross asset-based charges for a product shall equal the sum of all contractual

asset-based charges plus fund management fees or allowances based on the

underlying variable annuity funds received by the insurer determined on a prudent

estimate basis and revenue sharing described in Section 4.A.5. Net asset-based

Requirements for Principle-Based Reserves for Variable Annuities VM-21

charges equal gross asset-based charges less any company expenses assumed to be

incurred expressed as a percentage of account value. All expenses that would be

assumed if a SR was being computed as described in Section 4.A.1 should be

reflected either in the calculation of the net asset-based charges or in the expenses

reflected in the calculation of the amount FE.

No adjustment is made for federal income taxes in any of the components listed

above.

For purposes of determining the reserve using the Alternative Methodology, any

interpretation and application of the requirements of these requirements shall

follow the principles discussed in Section 1.B.

B. Calculation of CA and FE

1. General Description

Components CA and FE shall be calculated for each contract, thus reflecting the actual

account value and GMDB, as of the valuation date, which is unique to each contract.

Components CA and FE are defined by deterministic “single-scenario” calculations that

account for asset growth, interest and inflation at prescribed rates. Mortality is ignored for

these two components. Lapse rates shall be determined on a prudent estimate basis. Lapse

rates shall be adjusted by the formula shown below (the dynamic lapse multiplier), which

bases the relationship of the GMDB (denoted as GV in the formula) to the account value

(denoted as AV in the formula) on the valuation date. Thus, projected lapse rates are

smaller when the GMDB is greater than the account value and larger when the GMDB is

less than the account value.

= , , 1 × 





, where U=1, L=0.5, M=1.25, and D=1.1.

Present values shall be computed over the period from the valuation date to contract

maturity at a discount rate of 5.75%.

Projected fund performance underlying the account values is as shown in the table below.

Unlike the GC component, which requires the entire account value to be mapped, using the

fund categorization rules set forth in Section 7.D, to a single “equivalent” asset class (as

described in Section 7.D.3), the CA and FE calculation separately projects each variable

subaccount (as mapped to the eight prescribed categories shown in Section 7.D using the

net asset returns shown in the following table). If surrender charges are based wholly on

deposits or premiums as opposed to account value, use of this table may not be necessary.

Table 7.1: Guaranteed Rates by Asset Class

Asset Class/Fund

Net Annualized Return

Fixed Account Guaranteed Rate

Money Market 0%

Fixed Income (Bond) 0%

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Balanced -1%

Diversified Equity -2%

Diversified International Equity -3%

Intermediate Risk Equity -5%

Aggressive or Exotic Equity -8%

2. Component CA

Component CA is computed as the present value of the projected change in surrender

charges plus the present value of an implied borrowing cost of 25 bps at the beginning of

each future period applied to the surrender charge at such time.

This component can be interpreted as the “amount needed to amortize the unamortized

surrender charge allowance for the persisting policies plus the implied borrowing cost.”

By definition, the amortization for non-persisting lives in each time period is exactly offset

by the collected surrender charge revenue (ignoring timing differences and any waiver

upon death). The unamortized balance must be projected to the end of the surrender charge

period using the net asset returns and Dynamic Lapse Multiplier, both as described above,

and the year-by-year amortization discounted also as described above. For simplicity,

mortality is ignored in the calculations. Surrender charges and free partial withdrawal

provisions are as specified in the contract. Lapse and withdrawal rates are determined on a

prudent estimate basis and may vary according to the attributes of the business being valued

including, but not limited to, attained age, contract duration, etc.

3. Component FE

Component FE establishes a provision for fixed dollar expenses (e.g., allocated costs,

including overhead expressed as “per contract” and those expenses defined on a “per

contract” basis) less any fixed dollar revenue (e.g., annual administrative charges or

contract fees) through the earlier of contract maturity or 30 years. FE is computed as the

present value of the company’s assumed fixed expenses projected at an assumed annual

rate of inflation starting in the second projection year. This rate grades uniformly from the

current inflation rate (CIR) into an ultimate inflation rate of 3% per annum in the 8th year

after the valuation date. The CIR is the greater of 3% and the inflation rate assumed for

expenses in the company’s most recent asset adequacy analysis for similar business.

C. Calculation of the GC Component

1. GC Factors

GC is calculated as F×GV-G×AV×R, where GV is the amount of the GMDB and AV is the

contract account value, both as of the valuation date. F, G and the slope and intercept for

the linear function used to determine R (identified symbolically as

and β

) are pre-

calculated factors available from the NAIC and known herein as the “pre-calculated

factors.” The factors shall be interpolated as described in Section 7.C.6 and modified as

necessary as described in Section 7.C.7 and Section 7.C.8.

2. Five Steps

There are five major steps in determining the GC component for a given contract:

a. Classifying the asset exposure, as specified in Section 7.C.3.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

b. Determining the risk attributes, as specified in Section 7.C.4 and Section 7.C.5.

c. Retrieving the appropriate nodal factors from the factor grid, as described in

Section 7.C.5.

d. Interpolating the nodal factors, where applicable (optional), as described in Section

7.C.6.

e. Applying the factors to the contract values.

3. Classifying Asset Exposure

For purposes of calculating GC (unlike what is done for components CA and FE), the entire

account value for each contract must be assigned to one of the eight prescribed fund classes

shown in Section 7.D, using the fund categorization rules in Section 7.D.

4. Product Designs

Factors F, G and 

(





, 



)

are available with the pre-calculated factors for the following

GMDB product designs:

a. Return of premium (ROP).

b. Premiums less withdrawals accumulated at 3% per annum, capped at 2.5 times

premiums less withdrawals, with no further increase beyond age 80 (ROLL3).

c. Premiums less withdrawals accumulated at 5% per annum, capped at 2.5 times

premiums less withdrawals, with no further increase beyond age 80 (ROLL5).

d. An annual ratchet design (maximum anniversary value), for which the guaranteed

benefit never decreases and is increased to equal the previous contract anniversary

account value, if larger, with no further increases beyond age 80 (MAV).

e. A design having a guaranteed benefit equal to the larger of the benefits in designs

c and d, above (HIGH).

f. An enhanced death benefit (EDB) equal to 40% of the net earnings on the account

(i.e., 40% of account value less total premiums paid plus withdrawals made), with

this latter benefit capped at 40% of premiums less withdrawals.

5. Other Attributes

Factors F, G and



(





, 



)

are available within the pre-calculated factors for the following

set of attributes:

a. Two partial withdrawal rules—one for contracts having a pro-rata reduction in the

GMDB and another for contracts having a dollar-for-dollar reduction.

b. The eight asset classes described in Section 7.D.2.

c. Eight attained ages, with a five-year age setback for females.

d. Five contract durations.

e. Seven values of GV/AV.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

f. Three levels of asset-based income.

6. Interpolation of F, G and 

(





, 



)

a. Apply to a contract having the product characteristics listed in Section 7.E.1 and

shall be determined by selecting values for the appropriate partial withdrawal rule

and asset class and then using multipoint linear interpolation among published

values for the last four attributes shown in Section 7.C.5.

b. Interpolation over all four dimensions is not required, but if not performed over

one or more dimensions, the factor used must result in a conservative (higher)

value of GC. However, simple linear interpolation using the AV÷GV ratio is

mandatory. In this case, the company must choose nodes for the other three

dimensions according to the following rules: next highest attained age, nearest

duration and nearest annualized account charge differential, as listed in Section

7.E.3 (i.e., capped at +100 and floored at –100 bps).

c. For 

(





, 



)

, the interpolation should be performed on the scaling factors R

calculated using β

, β

, using the ratio of margin offset to total asset charges (W),

not on the factors β

and β

themselves.

d. The instructions referenced in Section 7.A.1.f above include guidance on

determining the correct values and performing the multipoint linear interpolation.

Alternatively, published documentation can be referenced on performing

multipoint linear interpolation and the required 16 values determined using a key

that is documented in the table Components of Key Used for GC Factor Look-Up

located in Table 7.6.

7. Adjustments to GC for Product Variations and Risk Mitigation/Transfer

In some cases, it may be necessary to make adjustments to the published factors due to:

a. A variation in product form wherein the definition of the guaranteed benefit is

materially different from those for which factors are available. (See Section 7.C.8.)

b. A risk mitigation or other management strategy, other than a hedging strategy, that

cannot be accommodated through a straightforward and direct adjustment to the

published values.

Adjustments may not be made to GC for hedging strategies.

Any adjustments to the published factors must be fully documented and supported

through stochastic analysis. Such analysis may require stochastic simulations but

would not ordinarily be based on full in-force projections. Instead, a representative

“model office” should be sufficient. Use of these adjusted factors must be

supported by a periodic review of the appropriateness of the assumptions and

methods used to perform the adjustments, with changes made to the adjustments

when deemed necessary by such review.

Note that minor variations in product design do not necessarily require additional

effort. In some cases, it may be reasonable to use the factors/formulas for a

different product form (e.g., for a roll-up GMDB near or beyond the maximum

reset age or amount, the ROP GMDB factors/formulas shall be used, possibly

adjusting the guaranteed value to reflect further resets, if any). In other cases, the

reserves may be based on two different guarantee definitions and the results

Requirements for Principle-Based Reserves for Variable Annuities VM-21

interpolated to obtain an appropriate value for the given contract/cell. Likewise, it

may be possible to adjust the Alternative Methodology results for certain risk

transfer arrangements without significant additional work (e.g., quota-share

reinsurance without caps, floors or sliding scales would normally be reflected by a

simple pro-rata adjustment to the “gross” GC results).

However, if the contract design is sufficiently different from those provided and/or

the risk mitigation strategy is nonlinear in its impact on the reserve, and there is no

practical or obvious way to obtain a good result from the prescribed

factors/formulas, any adjustments or approximations must be supported using

stochastic modeling. Notably this modeling need not be performed on the whole

portfolio, but can be undertaken on an appropriate set of representative policies.

8. Adjusting F and G for Product Design Variations

This subsection describes the typical process for adjusting F and G factors due to a

variation in product design. Note that R (as determined by the slope and intercept terms in

the factor table) would not be adjusted.

a. Select a contract design among those described in Section 7.C.4 that is similar to the

product being valued. Execute cash-flow projections using the documented

assumptions (see table of Liability Modeling Assumptions & Product

Characteristics in Section 7.E.1 and table of Asset-Based Fund Charges in Section

7.E.2) and the scenarios from the prescribed generator for a set of representative cells

(combinations of attained age, contract duration, asset class, AV/GMDB ratio and

asset-based charges). These cells should correspond to nodes in the table of

precalculated factors. Rank (order) the sample distribution of results for the present

value of net cost. Determine those scenarios that comprise CTE (65).

Guidance Note: Present value of net cost = PV [guaranteed benefit claims in excess of account

value] – PV [margin offset]. The discounting includes cash flows in all future years (i.e., to the

earlier of contract maturity and the end of the horizon).

b. Using the results from step 1, average the present value of cost for the CTE (65)

scenarios and divide by the current guaranteed value. For the J

cell, denote this

value by F

. Similarly, average the present value of the margin offset revenue for

the same subset of scenarios and divide by account value. For the J

cell, denote

this value by G

c. Extract the corresponding precalculated factors. For each cell, calibrate to the

published tables by defining a “model adjustment factor” (denoted by asterisk)

separately for the “cost” and “margin offset” components:





















and





















d. Execute “product specific” cash-flow projections using the documented

assumptions and scenarios from the prescribed generator for the same set of

representative cells. Here, the company should model the actual product design.

Rank (order) the sample distribution of results for the present value of net cost.

Determine those scenarios that comprise CTE (65).

e. Using the results from step d, average the present value of cost for the CTE (65)

scenarios and divide by the current guaranteed value. For the J

cell, denote this

Requirements for Principle-Based Reserves for Variable Annuities VM-21

value by 





. Similarly, average the present value of margin offset revenue for the

same subset of scenarios and divide by account value. For the J

cell, denote this

value by 





f. To calculate the reserve for the specific product in question, the company should

implement the Alternative Methodology as documented, but use 





× 





in place

of F and 





× 





instead of G. The same R factors as appropriate for the product

evaluated in step 1 shall be used for this step (i.e., the product used to calibrate the

cash-flow model).

9. Adjusting GC for Mortality Experience

The factors that have been developed for use in determining GC assume male mortality at

100% of the 1994 Variable Annuity MGDB ALB Mortality Table. Females use a five-year

age setback. Companies electing to use the Alternative Methodology that have not

conducted an evaluation of their mortality experience shall use these factors, or they shall

adjust the factors using the methodology below to apply the mortality defined in Section

11.C. for products without VAGLB. Other companies should use the procedure described

below to adjust for the actuary’s prudent estimate of mortality. The development of prudent

estimate mortality shall follow the requirements and guidance of Section 11. Once a

company uses the modified method for a block of business, the option to use the unadjusted

factors is no longer available for that part of its business. In applying the factors to actual

in-force business, a five-year age setback should be used for female annuitants.

a. Develop a set of mortality assumptions based on prudent estimate assumptions. In

setting these assumptions, the actuary shall be guided by the definition of prudent

estimate and the principles discussed in Sections 10 and 11. (This step only applies

to companies which have conducted an evaluation of their mortality experience).

b. Calculate two sets of NSPs at each attained age:

i. One using 100% of the 1994 Variable Annuity MGDB Age Last Birthday

(ALB) Mortality Table (with the aforementioned five-year age setback for

females); and

ii. A second using either:

(a) The prudent estimate mortality if that has been established by the

company.

(b) For companies that have not established a prudent estimate mortality

assumption, the appropriate percentage of the 2012 IAM Basic Table

with Projection Scale G2 ALB (as described in Section 12.B.3).

These calculations shall assume an interest rate of 3.75% and a lapse rate of 7%

per year.

c. The GC factor is multiplied by the ratio, for the specific attained age being valued,

of the NSP calculated using the prudent estimate mortality for blocks with those

assumptions or the NSP calculated using the adjusted 2012 IAM Basic Table for

blocks without a prudent estimate assumption to the NSP calculated using the 1994

Variable Annuity MGDB ALB Mortality Table. The base factors for females use

the values (with the aforementioned five-year age setback).

Requirements for Principle-Based Reserves for Variable Annuities VM-21

D. Fund Categorization

1. Criteria

The following criteria should be used to select the appropriate factors, parameters and

formulas for the exposure represented by a specified guaranteed benefit. When available,

the volatility of the long-term annualized total return for the fund(s)—or an appropriate

benchmark—should conform to the limits presented. For this purpose, “long-term” is

defined as twice the average projection period that would be applied to test the product in

a stochastic model (generally, at least 30 years).

Where data for the fund or benchmark are too sparse or unreliable, the fund exposure

should be moved to the next higher volatility class than otherwise indicated. In reviewing

the asset classifications, care should be taken to reflect any additional volatility of returns

added by the presence of currency risk, liquidity (bid – ask) effects, short selling and

speculative positions.

2. Asset Classes

Variable subaccounts must be categorized into one of the following eight asset classes. For

purposes of calculating CA or FE, each contract will have one or more of the following

asset classes represented, whereas for component GC, all subaccounts will be mapped into

a single asset class.

a. Fixed account: This class is credited interest at guaranteed rates for a specified

term or according to a “portfolio rate” or “benchmark” index. This class offers a

minimum positive guaranteed rate that is periodically adjusted according to

company policy and market conditions.

b. Money market/short-term: This class is invested in money market instruments with

an average remaining term-to-maturity of less than 365 days.

c. Fixed income: This class is invested primarily in investment grade fixed income

securities. Up to 25% of the funds within this class may be invested in diversified

equities or high-yield bonds. The expected volatility of the returns for this class

will be lower than the balanced fund class.

d. Balanced: This class is a combination of fixed income securities with a larger

equity component. The fixed income component should exceed 25% of the

portfolio. Additionally, any aggressive or “exotic” equity component should not

exceed one-third (33.3%) of the total equities held. Should the fund violate either

of these constraints, it should be categorized as an equity fund. This class usually

has a long-term volatility in the range of 8%–13%.

e. Diversified equity: This class is invested in a broad-based mix of U.S. and foreign

equities. The foreign equity component (maximum 25% of total holdings) must be

comprised of liquid securities in well-developed markets. Funds in this class would

exhibit long-term volatility comparable to that of the S&P 500. These funds should

usually have a long-term volatility in the range of 13%–18%.

f. Diversified international equity: This class is similar to the diversified equity class,

except that the majority of fund holdings are in foreign securities. This class should

usually have a long-term volatility in the range of 14%–19%.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

g. Intermediate risk equity: This class has a mix of characteristics from both the

diversified and aggressive equity classes. This class has a long-term volatility in

the range of 19%–25%.

h. Aggressive or exotic equity: This class comprises more volatile funds where risk

can arise from: underdeveloped markets, uncertain markets, high volatility of

returns, narrow focus (e.g., specific market sector), etc. This class (or market

benchmark) either does not have sufficient history to allow for the calculation of a

long-term expected volatility, or the volatility is very high. This class would be

used whenever the long-term expected annualized volatility is indeterminable or

exceeds 25%.

3. Selecting Appropriate Investment Classes

The selection of an appropriate investment type should be done at the level for which the

guarantee applies. For guarantees applying on a deposit-by-deposit basis, the fund selection

is straightforward. However, where the guarantee applies across deposits or for an entire

contract, the approach can be more complicated. In such instances, the approach is to

identify for each contract where the “grouped holdings” fit within the categories listed and

to classify the associated assets on this basis.

A seriatim process is used to identify the “grouped” fund holdings, to assess the risk profile

of the current fund holdings (possibly calculating the expected long-term volatility of the

funds held with reference to the indicated market proxies) and to classify the entire “asset

exposure” into one of the specified choices. Here, “asset exposure” refers to the underlying

assets (separate and/or general account investment options) on which the guarantee will be

determined. For example, if the guarantee applies separately for each deposit year within

the contract, then the classification process would be applied separately for the exposure

of each deposit year.

In summary, mapping the benefit exposure (i.e., the asset exposure that applies to the

calculation of the guaranteed minimum death benefits) to one of the prescribed asset classes

is a multistep process:

a. Map each separate and/or general account investment option to one of the

prescribed asset classes. For some funds, this mapping will be obvious, but for

others, it will involve a review of the fund’s investment policy, performance

benchmarks, composition and expected long-term volatility.

b. Combine the mapped exposure to determine the expected long-term “volatility of

current fund holdings.” This will require a calculation based on the expected long-

term volatility for each fund and the correlations between the prescribed asset

classes as given in the table “Correlation Matrix for Prescribed Asset Classes” in

Section 6.D.4.

c. Evaluate the asset composition and expected volatility (as calculated in step b) of

current holdings to determine the single asset class that best represents the

exposure, with due consideration to the constraints and guidelines presented earlier

in this section.

d. In step a, the company should use the fund’s actual experience (i.e., historical

performance, inclusive of reinvestment) only as a guide in determining the

expected long-term volatility. Due to limited data and changes in investment

objectives, style and/or management (e.g., fund mergers, revised investment

policy, different fund managers, etc.), the company may need to give more weight

Requirements for Principle-Based Reserves for Variable Annuities VM-21

to the expected long-term volatility of the fund’s benchmarks. In general, the

company should exercise caution and not be overly optimistic in assuming that

future returns will consistently be less volatile than the underlying markets.

e. In step b, the company should calculate the “volatility of current fund holdings”

(for the exposure being

categorized) by the following formula:

=

































Using the volatilities and correlations in the following table, where

∑

is the relative value of fund i expressed as a proportion of total contract value, 



is the correlation

between asset classes i and j, and 



is the volatility of asset class i. An example is provided after

Table 7.3.

Correlation Matrix for Prescribed Asset Classes

Table 7.2: Correlation Matrix for Prescribed Asset Classes

Annual

Volatility

Fixed

Account

Money

Market

Fixed

Income

Balanced

Diverse

Equity

Intl Equity

Interm

Equity

Aggr

Equity

1.0%

Fixed

Account

0.50

0.15

1.5%

Money

Market

0.50

0.20

5.0%

Fixed

Income

0.15

0.20

0.30

0.10

0.05

10.0%

Balanced

0.30

0.95

0.60

0.75

0.60

15.5%

Diverse

Equity

0.10

0.95

0.60

0.80

0.70

17.5%

Intl Equity

0.10

0.60

0.50

0.60

21.5%

Interm

Equity

0.10

0.75

0.80

0.50

0.70

26.0%

Aggr

Equity

0.05

0.60

0.70

0.60

0.70

5. Fund Categorization Example

As an example, suppose three funds (fixed income, diversified U.S. equity and aggressive

equity) are offered to clients on a product with a contract level guarantee (i.e., across all

funds held within the contract). The current fund holdings (in dollars) for five sample

contracts are shown in the following table:

Table 7.3: Fund Categorization Example

Requirements for Principle-Based Reserves for Variable Annuities VM-21

MV Fund X (Fixed Income)

5,000

4,000

8,000

5,000

MV Fund Y (Diversified Equity)

9,000

7,000

2,000

,000

MV Fund Z (Aggressive Equity)

1,000

4,000

,000

5,000

Total Market Value

15,000

10,000

Total Equity Market Value

10,000

11,000

2,000

10,000

5,000

Fixed Income % (A)

33%

27%

80%

50%

Fixed Income Test (A > 75%)

Yes

Aggressive % of Equity (B)

10%

36%

n/a

100%

Balanced Test (A > 25% &

B < 33.3%)

Yes

n/a

Volatility of Current Fund Holdings

10.9%

13.2%

5.3%

19.2%

13.4%

Fund Classification

Balanced

Diversified

Fixed Income

Intermediate

Diversified

As an example, the “volatility of current fund holdings” for contract #1 is calculated as



+  where:

( )

( ) ( )

26.0155.07.0

226.005.005.0

2155.005.01.0

26.0

155.0

05.0

××













⋅⋅+××













⋅⋅+××













⋅⋅=













×+













×+













×=

A = 0.0092 and B = 0.0026: So, the volatility for contract #1 =



0.0092 + 0.0026 = 0.109 or 10.9%

Although the volatility suggests “balanced fund,” the balanced fund criteria were not met. Therefore, this

“exposure” is moved “up” to diversified equity. For those funds classified as diversified equity, additional analysis

would be required to assess whether they should be instead designated as “diversified international equity.”

Requirements for Principle-Based Reserves for Variable Annuities VM-21

E. Tables

1. Liability Modeling Assumptions and Product Characteristics used for GC Factors

Table 7.4: Liability Modeling Assumptions and Product Characteristics Used for GC Factors

Asset Based Charges

(MER)

Vary by fund class. See Section 7.E.2.

Base Margin Offset 100 bps per annum.

GMDB Description

1. ROP = return of premium.

2. ROLL3 = 3% roll-up, capped at 2.5×premium, frozen at age 80.

3. ROLL5 = 5% roll-up, capped at 2.5×premium, frozen at age 80.

4. MAV = annual ratchet (maximum anniversary value), frozen at age 80.

5. HIGH = higher of 5% roll-up and annual ratchet.

EDB = 40% enhanced death benefit (capped at 40% of deposit). Note that the pre-

calculated factors were originally calculated with a combined ROP benefit, but they

have been adjusted to remove the effect of the ROP. Thus, the factors for this

benefit five are solely for the EDB.

Adjustment to GMDB

Upon Partial Withdrawal

Separate factors for “pro-rata by market value” and “dollar-for-dollar.”

Surrender Charges Ignored (i.e., zero). Included in the CA component.

Single Premium/Deposit $100,000. No future deposits; no intra-contract fund rebalancing.

Base Contract Lapse Rate

(Total Surrenders)

Pro-rata by MV: 10% p.a. at all contact durations (before dynamics).

Dollar-for-dollar: 2% p.a. at all contract durations (no dynamics).

Partial Withdrawals

Pro-rata by MV: None (i.e., zero).

Dollar-for-dollar:

Flat 8% p.a. at all contract durations (as a % of AV).

No dynamics or anti-selective behavior.

Mortality

100% of the 1994 Variable Annuity MGDB Mortality Table (MGDB 94 ALB). For

reference, 1000q

rates at ages 65 and 70 for 100% of MGDB 94 ALB Male are

18.191 and 29.363, respectively. Note: Section 7.

C.9 allows modification to this

assumption.

Gender/Age Distribution

100% male. Methodology accommodates different attained ages. A five-

year age

setback will be used for female annuitants.

Max. Annuitization Age All policies terminate at age 95.

Fixed Expenses Ignored (i.e., zero). Included in the FE component.

Annual Fee and Waiver Ignored (i.e., zero). Included in the FE component.

Discount Rate 5.75% pre-tax.

Dynamic Lapse Multiplier

(Applies only to policies

where GMDB is adjusted

“pro-

rata by MV” upon

withdrawal)

= , , 1 × 







U = 1, L = 0.5, M = 1.25, D = 1.1

 Applied to the “Base Contract Lapse Rate.”

 Does not apply to partial withdrawals.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

2. Asset-Based Fund Charges (bps per annum)

Table 7.5: Asset-Based Fund Charges (bps per annum)

Asset Class/Fund

Account Value Charge

Fixed Account

Money Market

110

Fixed Income (Bond)

200

Balanced

250

Diversified Equity

250

Diversified International Equity

250

Intermediate Risk Equity

265

Aggressive or Exotic Equity

275

3. Components of Key Used for GC Factor Look-Up

Table 7.6: Components of Key Used for GC Factor Look-Up

(First Digit always “1”)

Contract Attribute

Key: Possible Values and Description

Product Definition, P

0 : 0 Return-of-premium.

1 : 1 Roll-up (3% per annum).

2 : 2 Roll-up (5% per annum).

3 : 3 Maximum anniversary value (MAV).

4 : 4 High of MAV and 5% roll-up.

5 : 5 Enhanced death benefit

(excludes the ROP GMDB,

which would have to be added separately if the contract

in question has an ROP).

GV Adjustment Upon Partial

Withdrawal, A

0 : 0 Pro-rata by market value.

1 : 1 Dollar-for-dollar.

Fund Class, F

0 : 0 Fixed Account.

1 : 1 Money Market.

2 : 2 Fixed Income (Bond).

3 : 3 Balanced Asset Allocation.

4 : 4 Diversified Equity.

5 : 5 International Equity.

6 : 6 Intermediate Risk Equity.

7 : 7 Aggressive/Exotic Equity.

Attained Age (Last Birthday), X

0 : 35 4 : 65

1 : 45 5 : 70

2 : 55 6 : 75

3 : 60 7 : 80

Contract Duration (years-since-issue),

0 : 0.5 3 : 9.5

1 : 3.5 4 : 12.5

2 : 6.5

Account Value-to-Guaranteed Value

Ratio, φ

0 : 0.25 4 : 1.25

1 : 0.50 5 : 1.50

2 : 0.75 6 : 2.00

3 : 1.00

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Annualized Account Charge

Differential from Section 7.E.2

Assumptions

0 : −100 bps

1 : +0

2 : +100

Section 8: Scenario Generation

A. General

1. This section outlines the requirements for the stochastic cash-flow models used to simulate

interest rates, fund returns, and implied volatility to be used in the modeled projections.

Specifically, it prescribes scenario generators and the associated parameters for interest

rates, as well as investment returns for general account equity assets and separate account

fund returns. In addition, this section sets certain standards that must be satisfied by fund

returns, implied volatility scenarios, and non-prescribed scenario generators. It also

discusses general modeling considerations, such as the number of scenarios and projection

frequency.

Guidance Note: For more details on the development of these scenario generators, see the

Academy recommendations on the development of the Equity Generator (Recommended Approach

for Setting Regulator Risk-Based Capital Requirements for Variable Annuities and Similar

Products presented to NAIC Capital Adequacy Task Force in June 2005) and the Interest Rate

Generator (Report from the American Academy of Actuaries’ Economic Scenario Work Group to

the NAIC Life Risk-Based Capital (E) Working Group and Life and Health Actuarial (B) Task

Force ‐ December 2008).

2. The scenarios discussed in this section are applicable to gross investment returns (before

the deduction of any fees or charges). To determine the net returns appropriate for the

projections required by these requirements, the company shall reflect applicable fees and

contract holder charges in the development of projected account values. The projections

also shall include the costs of managing the investments and converting the assets into cash

when necessary.

3. As a general rule, funds with higher expected returns should have higher expected

volatilities, and in the absence of well-documented mitigating factors (e.g., a highly reliable

and favorable correlation to other fund returns), they should lead to higher total asset

requirements.

Guidance Note: While the model need not strictly adhere to “mean-variance efficiency,” prudence

dictates some form of consistent risk/return relationship between the proxy investment funds. In

general, it would be inappropriate to assume consistently “superior” expected returns (i.e.,

risk/return point above the frontier).

4. For non-prescribed generators, the interest rate, equity, and implied volatility scenarios

used to determine reserves must be available in an electronic spreadsheet to facilitate any

regulatory review.

B. Prescribed Interest Rate Scenario Generator

1. Treasury Department interest rate curves shall be determined on a stochastic basis using

the prescribed interest rate scenario generator with prescribed parameters, or a non-

prescribed generator that meets the requirements described in Section 8.E.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

2. The prescribed interest rate scenario generator can be found on the SOA’s website address,

www.soa.org/tables-calcs-tools/research-scenario/. The prescribed parameters for the

prescribed interest rate scenario generator shall be those included in the prescribed interest

rate scenario generator, and they shall use the mean reversion point for the 20-year

Treasury Department bond rate based on the following formula, with the result rounded to

the nearest 0.25%:

20% of the median 20-year Treasury Department bond rate over the last 600 months.

+ 30% of the average 20-year Treasury Department bond rate over the last 120 months.

+ 50% of the average 20-year Treasury Department bond rate over the last 36 months.

The mean reversion point for use in the generator changes once per calendar year in

January, and it is based on historical rates through the end of the prior calendar year. While

the mean reversion point is dynamic depending on the start date of a scenario, it remains

constant (rather than dynamic) across all time periods after the scenario start date for the

purposes of generating the scenario.

3. For this formula, the historical 20-year Treasury Department bond rate for each month shall

be the rate reported for the last business day of the month. Treasury Department interest

rates can be found at the website:

www.treas.gov/offices/domestic-finance/debt-

management/interest-rate/yield_historical_main.shtml.

C. Prescribed Total Investment Return Scenario Generator for Equity Assets and Separate Account

Funds

1. Total investment return paths for general account equity assets and separate account fund

returns shall be determined on a stochastic basis using the prescribed economic scenario

generator with prescribed parameters.

Guidance Note: In lieu of the prescribed economic generators, the company may substitute

scenarios from a non-prescribed economic generator that meets the requirements described in

Section 8.E.

2. The prescribed economic scenario generator can be found on the SOA’s website address,

www.soa.org/tables-calcs-tools/research-scenario/. The prescribed parameters for the

prescribed economic scenario generator shall be those included in the prescribed economic

scenario generator. A more complete description of the generator and development of

assumptions is contained in the Academy report referenced in the Guidance Note following

Section 8.A.1 above.

3. The company shall map each of the proxy funds defined in Section 4.A.2 to the fund returns

projected by the prescribed economic scenario generator. This mapping process may

involve blending the accumulation factors from two or more of the prescribed fund returns

to create the projected returns for each proxy fund. If a proxy fund cannot be appropriately

mapped to some combination of the prescribed returns, the company shall determine an

appropriate return using a non-prescribed scenario generator and disclose the methodology

underlying the non-prescribed scenario generator.

4. In using non-prescribed scenario generators to determine the return for proxy funds that

cannot be mapped to the prescribed economic generator, the scenarios so generated must

be consistent with the general relationships between risk and return observed in the fund

returns from the prescribed scenario generator. This does not imply a strict functional

Requirements for Principle-Based Reserves for Variable Annuities VM-21

relationship between the model parameters for various markets/funds, but it would

generally be inappropriate to assume that a market or fund consistently “outperforms”

(lower risk, higher expected return relative to the efficient frontier) over the long term.

5. When parameters are fit to historic data without consideration of the economic setting in

which the historic data emerged, the market price of risk may not be consistent with a

reasonable long-term model of market equilibrium. One possibility for establishing

“consistent” parameters (or scenarios) across all funds would be to assume that the market

price of risk is constant (or nearly constant) and governed by some functional (e.g., linear)

relationship. That is, higher expected returns can only be garnered by assuming greater

risk.

Guidance Note: As an example, the standard deviation of log returns often is used as a measure of

risk. Specifically, two return distributions Rx and Ry would satisfy the following relationship:













−













E r][r-]

Risk of Price

Market

Where 

[



]

nd σ are respectively the (unconditional) expected returns and volatilities, and r is

the expected risk-free rate over a suitably long holding period commensurate with the projection

horizon. One approach to establish consistent scenarios would set the model parameters to maintain

a near-constant market price of risk.

6. A closely related method would assume some form of “mean-variance” efficiency to

establish consistent model parameters. Using the historic data, the mean-variance

(alternatively, “drift-volatility”) frontier could be constructed from a plot of (mean,

variance) pairs from a collection of world market indices. The frontier could be assumed

to follow some functional form, with the coefficients determined by standard curve fitting

or regression techniques. Recognizing the uncertainty in the data, a “corridor” could be

established for the frontier. Model parameters would then be adjusted to move the proxy

market (fund) inside the corridor.

Guidance Note: The function forms quadratic polynomials, and logarithmic functions tend to work

well.

7. Clearly, there are many other techniques that could be used to establishing consistency

between the scenarios. While appealing, the above approaches do have drawbacks, and the

company should not be overly optimistic in constructing the model parameters or the

scenarios.

Guidance Note: For example, mean-variance measures ignore the asymmetric and fat-tailed

profile of most equity market returns.

8. For each proxy fund not within the scope of the prescribed economic generator, the

company must consider the following:

a. The Market Price of Risk, as defined in the Guidance Note found in Section 8.C.5,

implied in the projected fund returns when compared against the Market Price of

Risk for all funds generated by the prescribed scenario generator should produce

reasonable relationships. In calculating the Market Price of Risk, the company

shall use an expected risk-free rate consistent with the long-term risk-free rate used

Requirements for Principle-Based Reserves for Variable Annuities VM-21

in determining the Market Price of Risk or equivalent quantities in the calibration

of the prescribed scenario generator.

b. The average correlations, across all scenarios and all time periods, of the projected

fund returns with the fund returns generated by the prescribed scenario generator

should be in a reasonable range.

The company may also consider any other information that provides assurance that the

returns for proxy funds not generated using a prescribed scenario generator do not

consistently outperform over the long term if the company believes that the Market Price

of Risk and correlations described above are misleading or not relevant.

9. It is not necessary to assume that all markets are perfectly positively correlated, but an

assumption of independence (zero correlation) between the equity markets would

inappropriately exaggerate the benefits of diversification. An examination of the historic

data suggests that correlations are not stationary and that they tend to increase during times

of high volatility or negative returns. As such, the company should take care not to

underestimate the correlations in those scenarios used for the reserve calculations.

D. Implied Volatility Scenarios

The projection of implied volatility scenarios for interest rates, equities, or other asset classes is left

to the judgment of the company, but the scenarios so generated must satisfy the following

properties:

1. At each projection time step, all projected implied volatility surfaces must be arbitrage free

after considering appropriate transaction costs.

2. Relationships between the projected implied volatility scenarios, the scenarios for the

underlying asset investment returns, and the realized volatility of the scenarios for the

underlying asset returns should be consistent with relationships observed in historical data.

For instance, projected implied volatility should generally exhibit positive correlation with

the realized volatility of the scenarios for the underlying asset returns over the same time

period. In addition, it would also be appropriate to assume that projected implied volatility

generally exhibits negative correlation with the short-term performance of the underlying

asset over the same time period.

3. For a company not using the safe harbor described in Section 9.B.5,

any implied volatility

scenarios generated using a non-prescribed scenario generator shall not result in a TAR

less than that obtained by assuming that the implied volatility level – at all ITM levels – at

a given time step in a given scenario is equal to the realized volatility of the underlying

asset scenario over the same time period. In other words, the TAR shall not be reduced by

assumptions of any realizable spread between implied volatility and realized volatility. For

the purposes of demonstrating compliance with this standard, a company may rely on only

the values from the stochastic calculations and exclude impacts from the additional

standard projection and the alternative methodology.

E. Use of Non-Prescribed Scenario Generators

At the option of the company, interest rates and total investment return scenarios for equity assets

and separate account fund returns may be generated in part or in full using non-prescribed scenario

generators in lieu of the prescribed economic generators, provided that the scenarios thus generated

do not result in a TAR that is materially lower than the TAR resulting from the use of the scenarios

from the prescribed economic generators as defined in B. and C. above. For purposes of

Requirements for Principle-Based Reserves for Variable Annuities VM-21

demonstrating compliance with this standard, a company may rely on only the values from the

stochastic calculations and exclude impacts from the additional standard projection and the

alternative methodology

F. Number of Scenarios and Efficiency in Estimation

1. For straight Monte Carlo simulation (with equally probable “paths” of fund returns), the

number of scenarios should typically equal or exceed 1000. The appropriate number will

depend on how the scenarios will be used and the materiality of the results. The company

should use a number of scenarios that will provide an acceptable level of precision.

2. Fewer than 1,000 scenarios may be used provided that the company has determined through

prior testing (perhaps on a subset of the portfolio) that the CTE values so obtained materially

reproduce the results from running a larger scenario set.

3. Variance reduction and other sampling techniques are intended to improve the accuracy of

an estimate more efficiently than simply increasing the number of simulations. Such

methods can be used provided the company can demonstrate that they do not lead to a

material understatement of results. Many of the techniques are specifically designed for

estimating means, not tail measures, and could in fact reduce accuracy (and efficiency)

relative to straight Monte Carlo simulation.

Guidance Note: With careful implementation, many variance reduction techniques can work well

for CTE estimators. For example, see Manistre, B.J., and Hancock, G. (2003), “Variance of the

CTE Estimator,” 2003 Stochastic Modeling Symposium, Toronto, September 2003.

4. The above requirements and warnings are not meant to preclude or discourage the use of

valid and appropriate sampling methods, such as Quasi Random Monte Carlo (QRMC),

importance sampling or other techniques designed to improve the efficiency of the

simulations (relative to pseudo-random Monte Carlo methods).

Section 9: Modeling of Hedges under a Future Non-Index Credit Hedging Strategy

A. Initial Considerations

1. This section applies to modeling of hedges other than situations where the company only

hedges index credits.

2. Subject to Section 9.C.2, the appropriate costs and benefits of hedging instruments that are

currently held by the company in support of the contracts falling under the scope of these

requirements shall be included in the calculation of the SR, determined in accordance with

Section3.D and Section 4.D.

3. If the company is following one or more future hedging strategies supporting the contracts,

in accordance with an investment policy adopted by the board of directors, or a committee

of board members, the company shall take into account the costs and benefits of hedge

positions expected to be held by the company in the future along each scenario based on

the execution of the hedging strategy, and it is eligible to reduce the amount of the SR using

projections otherwise calculated. The investment policy must clearly articulate the

company’s hedging objectives, including the metrics that drive rebalancing/trading. This

specification could include maximum tolerable values for investment losses, earnings,

volatility, exposure, etc. in either absolute or relative terms over one or more investment

horizons vis-à-vis the chance of occurrence. Company management is responsible for

developing, documenting, executing and evaluating the investment strategy, including the

hedging strategy, used to implement the investment policy.

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4. For this purpose, the investment assets refer to all the assets, including derivatives

supporting covered products and guarantees. This also is referred to as the investment

portfolio. The investment strategy is the set of all asset holdings at all points in time in all

scenarios. The hedging portfolio, which also is referred to as the hedging assets, is a subset

of the investment assets. The hedging strategy is the hedging asset holdings at all points in

time in all scenarios. There is no attempt to distinguish what is the hedging portfolio and

what is the investment portfolio in this section. Nor is the distinction between investment

strategy and hedging strategy formally made here. Where necessary to give effect to the

intent of this section, the requirements applicable to the hedging portfolio or the hedging

strategy are to apply to the overall investment portfolio and investment strategy.

5. This particularly applies to restrictions on the reasonableness or acceptability of the models

that make up the stochastic cash-flow model used to perform the projections, since these

restrictions are inherently restrictions on the joint modeling of the hedging and non-

hedging portfolio. To give effect to these requirements, they must apply to the overall

investment strategy and investment portfolio.

B. Modeling Approaches

1. The analysis of the impact of the hedging strategy on cash flows is typically performed

using either one of two types of methods as described below. Although a hedging strategy

normally would be expected to reduce risk provisions, the nature of the hedging strategy

and the costs to implement the strategy may result in an increase in the amount of the SR

otherwise calculated. Particular attention should be given to VM-21, Section 1.B, Principle

5 for the modeling of future hedging strategies.

2. The fundamental characteristic of the first type of method, referred to as the “explicit

method,” is that hedging positions and their resulting cash flows are included in the

stochastic cash-flow model used to determine the scenario reserve, as discussed in Section

3.D, for each scenario.

3. The fundamental characteristic of the second type of method, referred to as the “implicit

method,” is that the effectiveness of the current hedging strategy on future cash flows is

evaluated, in part or in whole, outside of the stochastic cash-flow model. There are multiple

ways that this type of modeling can be implemented. In this case, the reduction to the SR

otherwise calculated should be commensurate with the degree of effectiveness of the

hedging strategy in reducing accumulated deficiencies otherwise calculated.

4. Regardless of the methodology used by the company, the ultimate effect of the current

hedging strategy (including currently held hedge positions) on the SR needs to recognize

all risks, associated costs, imperfections in the hedges and hedging mismatch tolerances

associated with the hedging strategy. The risks include, but are not limited to: basis, gap,

price, parameter estimation and variation in assumptions (mortality, persistency,

withdrawal, annuitization, etc.). Costs include, but are not limited to: transaction, margin

(opportunity costs associated with margin requirements) and administration. In addition,

the reduction to the SR attributable to the hedging strategy may need to be limited due to

the uncertainty associated with the company’s ability to implement the hedging strategy in

a timely and effective manner. The level of operational uncertainty varies indirectly with

the amount of time that the new or revised strategy has been in effect or mock tested.

Guidance Note: No hedging strategy is perfect. A given hedging strategy may eliminate or reduce

some but not all risks, transform some risks into others, introduce new risks, or have other

imperfections. For example, a delta-only hedging strategy does not adequately hedge the risks

Requirements for Principle-Based Reserves for Variable Annuities VM-21

measured by the “Greeks” other than delta. Another example is that financial indices underlying

typical hedging instruments typically do not perform exactly like the separate account funds, and

hence the use of hedging instruments has the potential for introducing basis risk

5. A safe harbor approach is permitted for the reflection of future hedging strategies

supporting the contracts for those companies whose modeled hedge assets comprise only

linear instruments not sensitive to implied volatility. For companies with option-based

hedge strategies, electing this approach would require representing the option-based

portion of the strategy as a delta-rho two-Greek hedge program. The normally modeled

option portfolio would be replaced with a set of linear instruments that have the same first-

order Greeks as the original option portfolio.

C. Calculation of SR (Reported)

1. The company shall calculate CTE70 (best efforts)—the results obtained when the CTE70

is based on incorporating the future hedging strategies supporting the contracts (including

both currently held and future hedge positions) into the stochastic cash-flow model on a

best efforts basis, including all of the factors and assumptions needed to execute the future

hedging strategies supporting the contracts (e.g., stochastic implied volatility). The

determination of CTE70 (best efforts) may utilize either explicit or implicit modeling

techniques.

2. The company shall calculate a CTE70 (adjusted) by recalculating the CTE70 assuming the

company has no future hedging strategies supporting the contracts except hedge purchases

solely related to strategies to hedge index credits, therefore following the requirements of

Section 4.A.4.a and 4.A.4.b.i.

However, for a company with a future hedging strategy supporting the contracts, existing

hedging instruments

, except hedging instruments solely related to strategies to hedge index

credits, that are currently held by the company in support of the contracts falling under the

scope of these requirements may be considered in one of two ways for the CTE70

(adjusted):

a) Include the asset cash flows from any contractual payments and maturity values in the

projection model.

b) No hedge positions, in which case, the hedge positions held on the valuation date are

replaced with cash and/or other general account assets in an amount equal to the

aggregate market value of these hedge positions.

Guidance Note: If the hedge positions held on the valuation date are replaced with cash, then as

with any other cash, such amounts may then be invested following the company’s investment

strategy.

A company may switch from method a) to method b) at any time, but it may only change from b)

to a) with the approval of the domiciliary commissioner.

3. Because most models will include at least some approximations or idealistic assumptions,

CTE70 (best efforts) may overstate the impact of the hedging strategy. To compensate for

potential overstatement of the impact of the hedging strategy, the value for the SR is given

by:

Requirements for Principle-Based Reserves for Variable Annuities VM-21

SR = CTE70 (best efforts) + E × max[0, CTE70 (adjusted) – CTE70 (best efforts)]

4. The company shall specify a value for E (the “error factor”) in the range from 5% to 100%

to reflect the company’s view of the potential error resulting from the level of

sophistication of the stochastic cash-flow model and its ability to properly reflect the

parameters of the hedging strategy (i.e., the Greeks being covered by the strategy), as well

as the associated costs, risks and benefits. The greater the ability of the stochastic model to

capture all risks and uncertainties, the lower the value of E. The value of E may be as low

as 5% only if the model used to determine the CTE70 (best efforts) effectively reflects all

of the parameters used in the hedging strategy. If certain economic risks are not hedged,

yet the model does not generate scenarios that sufficiently capture those risks, E must be

in the higher end of the range, reflecting the greater likelihood of error. Likewise, simplistic

hedge cash-flow models shall assume a higher likelihood of error.

5. The company shall conduct a formal back-test, based on an analysis of at least the most

recent 12 months, to assess how well the model is able to replicate the hedging strategy in

a way that supports the determination of the value used for E.

6. Such a back-test shall involve one of the following analyses:

a. For companies that model hedge cash flows directly (“explicit method”), replace

the stochastic scenarios used in calculating the CTE70 (best efforts) with a single

scenario that represents the market path that actually manifested over the selected

back-testing period and compare the projected hedge asset gains and losses against

the actual hedge asset gains and losses

—both realized and unrealized— observed

over the same time period. For this calculation, the model assumptions may be

replaced with parameters that reflect actual experience during the back-testing

period. In order to isolate the comparison between the modeled hedge strategy and

actual hedge results for this calculation, the projected liabilities should accurately

reflect the actual liabilities throughout the back-testing period; therefore,

adjustments that facilitate this accuracy (e.g., reflecting actual experience instead

of model assumptions, including new business, etc.) are permissible.

To support the choice of a low value of E, the company should ascertain that the

projected hedge asset gains and losses are within close range of 100% (e.g., 80–

125%) of the actual hedge asset gains and losses. The company may also support

the choice of a low value of E by achieving a high R-squared (e.g., 0.80 or higher)

when using a regression analysis technique.

b. For companies that model hedge cash flows implicitly by quantifying the cost and

benefit of hedging using the fair value of the hedged item (an “implicit method” or

“cost of reinsurance method”), calculate the delta, rho and vega coverage ratios in

each month over the selected back-testing period in the following manner:

i. Determine the hedge asset gains and losses—both realized and

unrealized—incurred over the month attributable to equity, interest rate,

and implied volatility movements.

ii. Determine the change in the fair value of the hedged item over the month

attributable to equity, interest rate, and implied volatility movements. The

hedged item should be defined in a manner that reflects the proportion of

risks hedged (e.g., if a company elects to hedge 50% of a contract’s market

risks, it should quantify the fair value of the hedged item as 50% of the

fair value of the contract).

Requirements for Principle-Based Reserves for Variable Annuities VM-21

iii. Calculate the delta coverage ratio as the ratio between (i) and (ii)

attributable to equity movements.

iv. Calculate the rho coverage ratio as the ratio between (i) and (ii) attributable

to interest rate movements.

v. Calculate the vega coverage ratio as the ratio between (i) and (ii)

attributable to implied volatility movements.

vi. To support the company’s choice of a low value of E, the company should

be able to demonstrate that the delta and rho coverage ratios are both

within close range of 100 % (e.g., 80–125%) consistently across the back-

testing period.

vii. In addition, the company should be able to demonstrate that the vega

coverage ratio is within close range of 100 % in order to use the prevailing

implied volatility levels as of the valuation date in quantifying the fair

value of the hedged item for the purpose of calculating CTE70 (best

efforts). Otherwise, the company shall quantify the fair value of the hedged

item for the purpose of calculating CTE70 (best efforts) in a manner

consistent with the realized volatility of the scenarios captured in the CTE

(best efforts).

c. Companies that do not model hedge cash flows explicitly, but that also do not use

the implicit method as outlined in Section 9.C.6.b above, shall conduct the formal

back-test in a manner that allows the company to clearly illustrate the

appropriateness of the selected method for reflecting the cost and benefit of

hedging, as well as the value used for E.

7. A company that does not have 12 months of experience to date shall set E to a value that

reflects the amount of experience available, and the degree and nature of any change to the

hedge program. For a material change in strategy, with less than 12 months of experience

and without robust mock testing, E should be 1.0. For a material change in strategy, with

less than three months of history, E should be 1.0. However, when a material change in

hedging strategy with less than three months of history is the introduction of hedging for a

newly introduced product or newly acquired block of business and is supplemented by

robust mock testing, E should instead be at least 0.3. Moreover, with prior approval from

the domestic regulator, material changes in hedge strategy with less than three months of

history but with robust mock testing may have error factors less than 1.0, though still

subject to the minimum error factor specified in Section 9.C.4 and with an appropriate

prudent estimate to account for additional uncertainty in anticipated hedging experience

beyond that of a robust hedging program already in existence. E may also be lower than

1.0 if the change in strategy is a minor refinement rather than a material change in strategy,

though still subject to the minimum error factor specified in Section 9.C.4 and with an

appropriate prudent estimate to account for any additional uncertainty associated with the

refinement.

The following examples are provided as guidance for determining the E factor when there

has been a change to the hedge program. These examples are not intended to be exhaustive,

and a company must support the determination of whether a hedge methodology change

is material based on a review of the company’s specific change in methodology.

• The error factor should be temporarily 100% for material changes in hedge

methodology (e.g., moving from a fair-value based strategy to a stop-loss strategy)

without robust mock testing.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

• An increase in the error factor may not always be needed for minor refinements

to the hedge strategy (e.g., moving from swaps to Treasury futures).

8. The company shall set the value of E reflecting the extent to which the hedging program is

clearly defined. To support a value of E below 1.0, there should be very robust

documentation outlining all future hedging strategies. To the extent that documentation

outlining any of the future hedging strategies is incomplete, the value of E shall be

increased. In particular, the value of E shall be 1.0 if documentation is materially

incomplete for any of the individual CDHS attributes (a) through (j), as listed in VM-01.

Any increases required to the value of E to reflect that documentation is not available to

support that the future hedging strategies are clearly defined shall be in addition to

increases to the value of E to reflect a lack of historical experience or to reflect the back-

testing results, subject to an overall ceiling of 1.0 for E.

Guidance Note: Companies must use judgment both in determining an E factor and in

applying this requirement in the case where there are multiple future hedging strategies,

particularly where some may be CDHS and some may not be CDHS. In this case, the SR

should be ensured to be no less than the CTE70, reflecting the future hedging strategies

that are CDHS and not reflecting those that are not CDHS. Companies with multiple future

hedging strategies with very different levels of effectiveness or with multiple future

hedging strategies that include both CDHS and non-CDHS should discuss with their

domestic regulator.

D. Additional Considerations for CTE70 (best efforts)

If the company is following one or more future hedging strategies supporting the contracts, the fair

value of the portfolio of contracts falling within the scope of these requirements shall be computed

and compared to the CTE70 (best efforts) and CTE70 (adjusted). If the CTE70 (best efforts) is

below both the fair value and CTE70 (adjusted), the company should be prepared to explain why

that result is reasonable.

For the purposes of this analysis, the SR and fair value calculations shall be done without requiring

the scenario reserve for any given scenario to be equal to or in excess of the cash surrender value

in aggregate for the group of contracts modeled in the projection.

E. Specific Considerations and Requirements

1. As part of the process of choosing a methodology and assumptions for estimating the future

effectiveness of the current hedging strategy (including currently held hedge positions) for

purposes of reducing the SR, the company should review actual historical hedging

effectiveness. The company shall evaluate the appropriateness of the assumptions on future

trading, transaction costs, other elements of the model, the strategy, the mix of business

and other items that are likely to result in materially adverse results. This includes an

analysis of model assumptions that, when combined with the reliance on the hedging

strategy, are likely to result in adverse results relative to those modeled. The parameters

and assumptions shall be adjusted (based on testing contingent on the strategy used and

other assumptions) to levels that fully reflect the risk based on historical ranges and

foreseeable future ranges of the assumptions and parameters. If this is not possible by

parameter adjustment, the model shall be modified to reflect them at either anticipated

experience or adverse estimates of the parameters.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

2. A discontinuous hedging strategy is a hedging strategy where the relationships between the

sensitivities to equity markets and interest rates (commonly referred to as the Greeks)

associated with the guaranteed contract holder options embedded in the variable annuities

and other in-scope products and these same sensitivities associated with the hedging assets

are subject to material discontinuities. This includes, but is not limited to, a hedging

strategy where material hedging assets will be obtained when the variable annuity account

balances reach a predetermined level in relationship to the guarantees. Any hedging

strategy, including a delta hedging strategy, can be a discontinuous hedging strategy if

implementation of the strategy permits material discontinuities between the sensitivities to

equity markets and interest rates associated with the guaranteed contract holder options

embedded in the variable annuities and other in-scope products and these same sensitivities

associated with the hedging assets. There may be scenarios that are particularly costly to

discontinuous hedging strategies, especially where those result in large discontinuous

changes in sensitivities (Greeks) associated with the hedging assets. Where discontinuous

hedging strategies contribute materially to a reduction in the SR, the company must

evaluate the interaction of future trigger definitions and the discontinuous hedging strategy,

in addition to the items mentioned in the previous paragraph. This includes an analysis of

model assumptions that, when combined with the reliance on the discontinuous hedging

strategy, may result in adverse results relative to those modeled.

3. A strategy that has a strong dependence on acquiring hedging assets at specific times that

depend on specific values of an index or other market indicators may not be implemented

as precisely as planned.

4. The combination of elements of the stochastic cash-flow model—including the initial

actual market asset prices, prices for trading at future dates, transaction costs and other

assumptions—should be analyzed by the company as to whether the stochastic cash-flow

model permits hedging strategies that make money in some scenarios without losing a

reasonable amount in some other scenarios. This includes, but is not limited to:

a. Hedging strategies with no initial investment that never lose money in any scenario

and in some scenarios make money.

b. Hedging strategies that, with a given amount of initial money, never make less than

accumulation at the one-period risk-free rates in any scenario but make more than

this in one or more scenarios.

5. If the stochastic cash-flow model allows for such situations, the company should be

satisfied that the results do not materially rely directly or indirectly on the use of such

strategies. If the results do materially rely directly or indirectly on the use of such strategies,

the strategies may not be used to reduce the SR otherwise calculated.

6. In addition to the above, the method used to determine prices of financial instruments for

trading in scenarios should be compared to actual initial market prices. In addition to

comparisons to initial market prices, there should be testing of the pricing models that are

used to determine subsequent prices when scenarios involve trading financial instruments.

This testing should consider historical relationships. For example, if a method is used

where recent volatility in the scenario is one of the determinants of prices for trading in

that scenario, then that model should approximate actual historic prices in similar

circumstances in history.

7. The company may also consider historical experience for similar current or past hedging

programs on similar products to support the error factor or index credit hedge margin

determined for the projection.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

Section 10: Contract Holder Behavior Assumptions

A. General

Contract holder behavior assumptions encompass actions such as lapses, withdrawals, transfers,

recurring deposits, benefit utilization, option election, etc. Contract holder behavior is difficult to

predict accurately, and variance in behavior assumptions can significantly affect the results. In the

absence of relevant and fully credible empirical data, the company should set behavior assumptions

as guided by Principle 3 in Section 1.B and Section 12.

In setting behavior assumptions, the company should examine, but not be limited by, the following

considerations:

1. Behavior can vary by product, market, distribution channel, fund performance,

time/product duration, etc.

2. Options embedded in the product may affect behavior.

3. Utilization of options may be elective or non-elective in nature. Living benefits often are

elective, and death benefit options are generally non-elective.

4. Elective contract holder options may be more driven by economic conditions than non-

elective options.

5. As the value of a product option increases, there is an increased likelihood that contract

holders will behave in a manner that maximizes their financial interest (e.g., lower lapses,

higher benefit utilization, etc.).

6. Behavior formulas may have both rational and irrational components (irrational behavior

is defined as situations where some contract holders may not always act in their best

financial interest). The rational component should be dynamic, but the concept of

rationality need not be interpreted in strict financial terms and might change over time in

response to observed trends in contract holder behavior based on increased or decreased

financial efficiency in exercising their contractual options.

7. Options that are ancillary to the primary product features may not be significant drivers of

behavior. Whether an option is ancillary to the primary product features depends on many

things, such as:

a. For what purpose was the product purchased?

b. Is the option elective or non-elective?

c. Is the value of the option well-known?

8. External influences may affect behavior.

B. Aggregate vs. Individual Margins

1. Prudent estimate assumptions are developed by applying a margin for uncertainty to the

anticipated experience assumption. The issue of whether the level of the margin applied to

the anticipated experience assumption is determined in aggregate or independently for each

and every behavior assumption is discussed in Principle 3 in Section 1.B.

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2. Although this principle discusses the concept of determining the level of margins in

aggregate, it notes that the application of this concept shall be guided by evolving practice

and expanding knowledge. From a practical standpoint, it may not always be possible to

completely apply this concept to determine the level of margins in aggregate for all

behavior assumptions.

3. Therefore, the company shall determine prudent estimate assumptions independently for

each behavior (e.g., mortality lapses and benefit utilization), using the requirements and

guidance in this section and throughout these requirements, unless the company can

demonstrate that an appropriate method was used to determine the level of margin in

aggregate for two or more behaviors.

C. Sensitivity Testing

The impact of behavior can vary by product, time period, etc. Sensitivity testing of assumptions is

required and shall be more complex than, for example, base lapse assumption minus 1% across all

contracts. A more appropriate sensitivity test in this example might be to devise parameters in a

dynamic lapse formula to reflect more out-of-the-money contracts lapsing and/or more holders of

in-the-money contracts persisting and eventually using the guarantee. The company should apply

more caution in setting assumptions for behaviors where testing suggests that stochastic modeling

results are sensitive to small changes in such assumptions. For such sensitive behaviors, the

company shall use higher margins when the underlying experience is less than fully relevant and

credible.

D. Specific Considerations and Requirements

1. Within materiality considerations, the company should consider all relevant forms of

contract holder behavior and persistency, including, but not limited to, the following:

a. Mortality (additional guidance and requirements regarding mortality is contained

in Section 11).

b. Surrenders.

c. Partial withdrawals (systematic and elective).

d. Fund transfers (switching/exchanges).

e. Resets/ratchets of the guaranteed amounts (automatic and elective).

f. Future deposits.

2. It may be acceptable to ignore certain items that might otherwise be explicitly modeled in

an ideal world, particularly if the inclusion of such items reduces the calculated provisions.

For example:

a. The impact of fund transfers (intra-contract fund “switching”) might be ignored,

unless required under the terms of the contract (e.g., automatic asset re-

allocation/rebalancing, dollar cost averaging accounts, etc.).

b. Future deposits might be excluded from the model, unless required by the terms of

the contracts under consideration and then only in such cases where future

premiums can reasonably be anticipated (e.g., with respect to timing and amount).

3. However, the company should exercise caution in assuming that current behavior will be

indefinitely maintained. For example, it might be appropriate to test the impact of a shifting

Requirements for Principle-Based Reserves for Variable Annuities VM-21

asset mix and/or consider future deposits to the extent they can reasonably be anticipated

and increase the calculated amounts.

4. Normally, the underlying model assumptions would differ according to the attributes of the

contract being valued. This would typically mean that contract holder behavior and

persistency may be expected to vary according to such characteristics as (this is not an

exhaustive list):

a. Gender.

b. Attained age.

c. Issue age.

d. Contract duration.

e. Time to maturity.

f. Tax status.

g. Fund value.

h. Investment option.

i. Guaranteed benefit amounts.

j. Surrender charges, transaction fees or other contract charges.

k. Distribution channel.

5. Unless there is clear evidence to the contrary, behavior assumptions should be no less

conservative than past experience. Margins for contract holder behavior assumptions shall

assume, without relevant and credible experience or clear evidence to the contrary, that

contract holders’ efficiency will increase over time.

6. In determining contract holder behavior assumptions, the company shall use actual

experience data directly applicable to the business segment (i.e., direct data) if it is

available. In the absence of direct data, the company should then look to use data from a

segment that is similar to the business segment (i.e., other than direct experience), whether

or not the segment is directly written by the company. If data from a similar business

segment are used, the assumption shall be adjusted to reflect differences between the two

segments. Margins shall reflect the data uncertainty associated with using data from a

similar but not identical business segment.

7. Where relevant and fully credible empirical data do not exist for a given contract holder

behavior assumption, the company shall set the contract holder behavior assumption to

reflect the increased uncertainty such that the contract holder behavior assumption is

shifted towards the conservative end of the plausible range of expected experience that

serves to increase the SR. If there are no relevant data, the company shall set the contract

holder behavior assumption to reflect the increased uncertainty such that the contract

holder behavior assumption is at the conservative end of the range. Such adjustments shall

be consistent with the definition of prudent estimate, with the principles described in

Section 1.B, and with the guidance and requirements in this section.

8. Ideally, contract holder behavior would be modeled dynamically according to the

simulated economic environment and/or other conditions. It is important to note, however,

Requirements for Principle-Based Reserves for Variable Annuities VM-21

that contract holder behavior should neither assume that all contract holders act with 100%

efficiency in a financially rational manner nor assume that contract holders will always act

irrationally. These extreme assumptions may be used for modeling efficiency if the result

is more conservative.

E. Dynamic Assumptions

1. Consistent with the concept of prudent estimate assumptions described earlier, the liability

model should incorporate margins for uncertainty for all risk factors that are not dynamic

(i.e., the non-scenario tested assumptions) and are assumed not to vary according to the

financial interest of the contract holder.

2. The company should exercise care in using static assumptions when it would be more

natural and reasonable to use a dynamic model or other scenario-dependent formulation

for behavior. With due regard to considerations of materiality and practicality, the use of

dynamic models is encouraged, but not mandatory. Risk factors that are not scenario tested

but could reasonably be expected to vary according to a stochastic process, or future states

of the world (especially in response to economic drivers) may require higher margins

and/or signal a need for higher margins for certain other assumptions.

3. Risk factors that are modeled dynamically should encompass the plausible range of

behavior consistent with the economic scenarios and other variables in the model, including

the non-scenario tested assumptions. The company shall test the sensitivity of results to

understand the materiality of making alternate assumptions and follow the guidance

discussed above on setting assumptions for sensitive behaviors.

F. Consistency with the CTE Level

1. All behaviors (i.e., dynamic, formulaic and non-scenario tested) should be consistent with

the scenarios used in the CTE calculations (generally, the top 30% of the loss distribution).

To maintain such consistency, it is not necessary to iterate (i.e., successive runs of the

model) in order to determine exactly which scenario results are included in the CTE

measure. Rather, in light of the products being valued, the company should be mindful of

the general characteristics of those scenarios likely to represent the tail of the loss

distribution and consequently use prudent estimate assumptions for behavior that are

reasonable and appropriate in such scenarios. For variable annuities, these “valuation”

scenarios would typically display one or more of the following attributes:

a. Declining and/or volatile separate account asset values.

b. Market index volatility, price gaps and/or liquidity constraints.

c. Rapidly changing interest rates.

2. The behavior assumptions should be logical and consistent both individually and in

aggregate, especially in the scenarios that govern the results. In other words, the company

should not set behavior assumptions in isolation, but give due consideration to other

elements of the model. The interdependence of assumptions (particularly those governing

customer behaviors) makes this task difficult and by definition requires professional

judgment, but it is important that the model risk factors and assumptions:

a. Remain logically and internally consistent across the scenarios tested.

b. Represent plausible outcomes.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

c. Lead to appropriate, but not excessive, asset requirements.

4. The company should remember that the continuum of “plausibility” should not be confined

or constrained to the outcomes and events exhibited by historic experience.

5. Companies should attempt to track experience for all assumptions that materially affect

their risk profiles by collecting and maintaining the data required to conduct credible and

meaningful studies of contract holder behavior.

G. Additional Considerations and Requirements for Assumptions Applicable to Guaranteed

Living Benefits

Experience for contracts without guaranteed living benefits may be of limited use in setting a lapse

assumption for contracts with in-the-money or at-the-money guaranteed living benefits. Such

experience may only be used if it is appropriate (e.g., lapse experience on contracts without a living

benefit may have relevance to the early durations of contracts with living benefits) and relevant to

the business.

Section 11: Guidance and Requirements for Setting Prudent Estimate Mortality Assumptions

A. Overview

1. Intent

The guidance and requirements in this section apply to setting prudent estimate mortality

assumptions when determining either the SR or the reserve for any contracts determined

using the Alternative Methodology. The intent is for prudent estimate mortality

assumptions to be based on facts, circumstances and appropriate actuarial practice, with

only a limited role for unsupported actuarial judgment. (Where more than one approach to

appropriate actuarial practice exists, the company should select the practice that the

company deems most appropriate under the circumstances.)

2. Description

Prudent estimate mortality assumptions shall be determined by first developing expected

mortality curves based on either available experience or published tables. Where necessary,

margins shall be applied to the experience to reflect data uncertainty. The expected

mortality curves shall then be adjusted based on the credibility of the experience used to

determine the expected mortality curve. Section 11.B addresses guidance and requirements

for determining expected mortality curves, and Section 11.C addresses guidance and

requirements for adjusting the expected mortality curves to determine prudent estimate

mortality.

Finally, the credibility-adjusted tables shall be adjusted for mortality improvement (where

such adjustment is permitted or required) using the guidance and requirements in Section

11.D.

3. Business Segments

For purposes of setting prudent estimate mortality assumptions, the products falling under

the scope of these requirements shall be grouped into business segments with different

mortality assumptions. The grouping, at a minimum, should differentiate whether the

contracts contain VAGLBs, where the no-VAGLB segments would include both contracts

with no guaranteed benefits and contracts with only GMDBs. The grouping should also

Requirements for Principle-Based Reserves for Variable Annuities VM-21

generally follow the pricing, marketing, management and/or reinsurance programs of the

company.

4. Margin for Data Uncertainty

The expected mortality curves that are determined in Section 11.B may need to include a

margin for data uncertainty. The margin could be in the form of an increase or a decrease in

mortality, depending on the business segment under consideration. The margin shall be

applied in a direction (i.e., increase or decrease in mortality) that results in a higher reserve.

A sensitivity test may be needed to determine the appropriate direction of the provision for

uncertainty to mortality. The test could be a prior year mortality sensitivity analysis of the

business segment or an examination of current representative cells of the segment.

For purposes of this section, if mortality must be increased (decreased) to provide for

uncertainty, the business segment is referred to as a plus (minus) segment.

It may be necessary, because of a change in the mortality risk profile of the segment, to

reclassify a business segment from a plus (minus) segment to a minus (plus) segment to

the extent compliance with this section requires such a reclassification.

B. Determination of Expected Mortality Curves

1. Experience Data

In determining expected mortality curves, the company shall use actual experience data

directly applicable to the business segment (i.e., direct data) if it is available. In the absence

of direct data, the company should then look to use data from a segment that is similar to

the business segment (i.e., other than direct experience). See Section 11.B.2. for additional

considerations. Finally, if there is no data, the company shall use the applicable table, as

required in Section 11.B.3.

2. Data Other Than Direct Experience

Adjustments shall be applied to the data to reflect differences between the business

segments, and margins shall be applied to the adjusted expected mortality curves to reflect

the data uncertainty associated with using data from a similar but not identical business

segment.

To the extent the mortality of a business segment is reinsured, any mortality charges that

are consistent with the company’s own pricing and applicable to a substantial portion of

the mortality risk also may be a reasonable starting point for the determination of the

company’s expected mortality curves.

3. No Data Requirements

When little or no experience or information is available on a business segment, the

company shall use expected mortality curves that would produce expected deaths no less

than the appropriate percentage (F

) from Table 1 of the 2012 IAM Basic Table with

Projection Scale G2 for contracts with no VAGLBs and expected deaths no greater than

the appropriate percentage (F

) from Table 1 of the 2012 IAM Basic Mortality Table with

Projection Scale G2 for contracts with VAGLBs. If mortality experience on the business

segment is expected to be atypical (e.g., demographics of target markets are known to have

higher [lower] mortality than typical), these “no data” mortality requirements may not be

adequate.

Requirements for Principle-Based Reserves for Variable Annuities VM-21









= 





(1 2



)







Table 11.1

Attained Age (x)

for VA with GLB

for All Other

<=65

80.0%

100.0%

81.5%

102.0%

83.0%

104.0%

84.5%

106.0%

86.0%

108.0%

87.5%

110.0%

89.0%

112.0%

90.5%

114.0%

92.0%

116.0%

93.5%

118.0%

95.0%

120.0%

96.5%

119.0%

98.0%

118.0%

99.5%

117.0%

101.0%

116.0%

102.5%

115.0%

104.0%

114.0%

105.5%

113.0%

107.0%

112.0%

108.5%

111.0%

110.0%

109.0%

108.0%

107.0%

106.0%

100

105.0%

101

104.0%

102

103.0%

103

102.0%

104

101.0%

Requirements for Principle-Based Reserves for Variable Annuities VM-21

>=105

100.0%

4. Additional Considerations Involving Data

The following considerations shall apply to mortality data specific to the business segment

for which assumptions are being determined (i.e., direct data discussed in Section 11.B.1

or other than direct data discussed in Section 11.B.2).

a. Underreporting of Deaths

Mortality data shall be examined for possible underreporting of deaths.

Adjustments shall be made to the data if there is any evidence of underreporting.

Alternatively, exposure by lives or amounts on contracts for which death benefits

were in the money may be used to determine expected mortality curves.

Underreporting on such exposures should be minimal; however, this reduced

subset of data will have less credibility.

b. Experience by Contract Duration

Experience of a plus segment shall be examined to determine if mortality by

contract duration increases materially due to selection at issue. In the absence of

information, the company shall assume that expected mortality will increase by

contract duration for an appropriate select period. As an alternative, if the company

determines that mortality is affected by selection, the company could apply

margins to the expected mortality in such a way that the actual mortality modeled

does not depend on contract duration.

c. Modification and Relevance of Data

Even for a large company, the quantity of life exposures and deaths are such that

a significant amount of smoothing may be required to determine expected

mortality curves from mortality experience. Expected mortality curves, when

applied to the recent historic exposures (e.g., three to seven years), should not

result in an estimate of aggregate number of deaths less (greater) than the actual

number deaths during the exposure period for plus (minus) segments.

In determining expected mortality curves (and the credibility of the underlying

data), older data may no longer be relevant. The “age” of the experience data used

to determine expected mortality curves should be documented.

d. Other Considerations

In determining expected mortality curves, consideration should be given to factors

that include, but are not limited to, trends in mortality experience, trends in

exposure, volatility in year-to-year A/E mortality ratios, mortality by lives relative

to mortality by amounts, changes in the mix of business and product features that

could lead to mortality selection.

C. Adjustment for Credibility to Determine Prudent Estimate Mortality

1. Adjustment for Credibility

The expected mortality curves determined in Section 11.B shall be adjusted based on the

credibility of the experience used to determine the curves in order to arrive at prudent

Requirements for Principle-Based Reserves for Variable Annuities VM-21

estimate mortality. The adjustment for credibility shall result in blending the expected

mortality curves with a mortality table consistent with a statutory valuation mortality table.

For contracts with no VAGLBs, the table shall be consistent with the appropriate

percentage (F

) from Table 1 of the 2012 IAM Basic Table with Projection Scale G2; and

for contracts with VAGLBs, the table shall be consistent with the appropriate percentage

) from Table 1 of the 2012 IAM Basic Mortality Table with Projection Scale G2. The

approach used to adjust the curves shall suitably account for credibility.

Guidance Note: For example, when credibility is zero, an appropriate approach should result in a

mortality assumption consistent with 100% of the statutory valuation mortality table used in the

blending.

2. Adjustment of Statutory Valuation Mortality for Improvement

For purposes of the adjustment for credibility, the statutory valuation mortality table for a

plus segment may be and the statutory valuation mortality table for a minus segment must

be adjusted for mortality improvement. Such adjustment shall reflect Projection Scale G2

from the effective date of the respective statutory valuation mortality table to the

experience weighted average date underlying the data used to develop the expected

mortality curves (discussed in Section 11.B).

3. Credibility Procedure

The credibility procedure used shall:

a. Produce results that are reasonable.

b. Not tend to bias the results in any material way.

c. Be practical to implement.

d. Give consideration to the need to balance responsiveness and stability.

e. Take into account not only the level of aggregate claims but the shape of the

mortality curve.

f. Contain criteria for full credibility and partial credibility that have a sound

statistical basis and be appropriately applied.

4. Further Adjustment of the Credibility-Adjusted Table for Mortality Improvement

The credibility-adjusted table used for plus segments may be and the credibility adjusted

table used for minus segments must be adjusted for mortality improvement using

Projection Scale G2 from the experience weighted average date underlying the company

experience used in the credibility process to the valuation date.

Any adjustment for mortality improvement beyond the valuation date is discussed in

Section 11.D.

D. Future Mortality Improvement

The mortality assumption resulting from the requirements of Section 11.C shall be adjusted for

mortality improvements beyond the valuation date if such an adjustment would serve to increase

the resulting SR. If such an adjustment would reduce the SR, such assumptions are permitted, but

not required. In either case, the assumption must be based on current relevant data with a margin

Requirements for Principle-Based Reserves for Variable Annuities VM-21

for uncertainty (increasing assumed rates of improvement if that results in a higher reserve or

reducing them otherwise).

Section 12: Other Guidance and Requirements for Assumptions

A. Overview

This section provides guidance and requirements in general for setting prudent estimate

assumptions when determining either the SR or the reserve for any contracts determined using the

Alternative Methodology. It also provides specific guidance and requirements for expense

assumptions.

B. General Assumption Requirements

1. The company shall use prudent estimate assumptions for risk factors that are not stochastically

modeled by applying margins to the anticipated experience assumptions if such risk factors

have been categorized as material risks by following Section 1.B, Principle 3 and requirements

in Section 12.C.

2. The company shall establish the prudent estimate assumptions for risk factors in compliance

with the requirements in Section 12 of Model #820 and must periodically review and update

the assumptions, as appropriate, in accordance with these requirements.

3. The company shall model the following risk factors stochastically unless the company elects

the Alternative Methodology defined in Section 7:

a. Interest rate movements; i.e., Treasury interest rate curves.

b. Equity performance (e.g., Standard & Poor’s 500 index [S&P 500] returns and returns of

other equity investments).

4. If the company elects to stochastically model risk factors in addition to the economic scenarios,

the requirements in this section for determining prudent estimate assumptions for these risk

factors do not apply.

It is expected that companies will not stochastically model risk factors other than the economic

scenarios, such as contract holder behavior or mortality, until VM-21 has more specific

guidance and requirements available. Companies shall discuss with domiciliary regulators if

they wish to stochastically model other risk factors.

5. The company shall use its own experience, if relevant and credible, to establish an anticipated

experience assumption for any risk factor. To the extent that company experience is not

available or credible, the company may use industry experience or other data to establish the

anticipated experience assumption, making modifications, as needed, to reflect the

circumstances of the company.

a. For risk factors, such as mortality, to which statistical credibility theory may be

appropriately applied, the company shall establish anticipated experience assumptions for

the risk factor by combining relevant company experience with industry experience data,

tables, or other applicable data in a manner that is consistent with credibility theory and

accepted actuarial practice.

b. For risk factors, such as utilization of guaranteed living benefits, that do not lend

themselves to the use of statistical credibility theory, and for risk factors, such as some of

the lapse assumptions, to which statistical credibility theory can be appropriately applied

Requirements for Principle-Based Reserves for Variable Annuities VM-21

but cannot currently be applied due to lack of industry data, the company shall establish

anticipated experience assumptions in a manner that is consistent with accepted actuarial

practice and reflects any available relevant company experience, any available relevant

industry experience, or any other experience data that are available and relevant. Such

techniques include:

i. Adopting standard assumptions published by professional, industry, or regulatory

organizations to the extent that they reflect any available relevant company

experience or reasonable expectations.

ii. Applying factors to relevant industry experience tables or other relevant data to

reflect any available relevant company experience and differences in expected

experience from that underlying the base tables or data due to differences between

the risk characteristics of the company experience and the risk characteristics of

the experience underlying the base tables or data.

iii. Blending any available relevant company experience with any available relevant

industry experience and/or other applicable data using weightings established in a

manner that is consistent with accepted actuarial practice and that reflects the risk

characteristics of the underlying contracts and/or company practices.

c. For risk factors that have limited or no experience or other applicable data to draw upon,

the assumptions shall be established using sound actuarial judgment and the most relevant

data available, if such data exists.

d. For any assumption that is set in accordance with the requirements of Section 12.B.5.c, the

qualified actuary to whom responsibility for this group of contracts is assigned shall use

sensitivity testing and disclose the analysis performed to ensure that the assumption is set

at the conservative end of the plausible range.

e. The qualified actuary, to whom responsibility for this group of contracts is assigned, shall

annually review relevant emerging experience for the purpose of assessing the

appropriateness of the anticipated experience assumption. If the results of statistical or

other testing indicate that previously anticipated experience for a given factor is inadequate,

then the qualified actuary shall set a new, adequate, anticipated experience assumptions for

the factor.

6. The company shall sensitivity test material risk factors that are not stochastically modeled and

examine the impact on the SR. The company shall update the sensitivity tests periodically, as

appropriate. The company may update the tests less frequently, but no less than every three

years, when the tests show less sensitivity of the SR to changes in the assumptions being tested

or the experience is not changing rapidly. Providing that there is no material impact on the

results of the sensitivity testing, the company may perform sensitivity testing:

a. Using samples of the contracts in force rather than performing the entire valuation for each

alternative assumption set.

b. Using data from prior periods.

Guidance Note: Sensitivity testing every risk factor on an annual basis is not required. For some

risk factors, it may be reasonable, in lieu of testing, to employ statistical measures for margins, such

as adding one or more standard deviations to the anticipated experience assumptions.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

7. The company shall vary the prudent estimate assumptions from scenario to scenario within the

SR calculation in an appropriate manner to reflect the scenario-dependent risks.

C. Assumption Margins

The company shall include margins to provide for adverse deviations and estimation error in the

prudent estimate assumptions for all risk factors that are not stochastically modeled or prescribed,

subject to the following:

1. The level of margin applied to the anticipated experience assumptions may be determined in

aggregate or independently as discussed in Section 1.B, Principle 3. It is not permissible to set

a margin less toward the conservative end of the spectrum to recognize, in whole or in part,

implicit or prescribed margins that are present, or are believed to be present, in other risk

factors.

Risks that are stochastically modeled (e.g., interest rates, equity returns) or have prescribed

margins or guardrails (e.g., assets, revenue sharing) shall be considered material risks. Other

risks generally considered to be material include, but are not limited to, mortality, contract

holder behavior, maintenance and overhead expenses, inflation and implied volatility. In some

cases, the list of material risks may also include acquisition expenses, partial withdrawals,

policy loans, annuitizations, account transfers and deposits, and/or option elections that contain

an element of anti-selection.

2. The greater the uncertainty in the anticipated experience assumption, the larger the required

margin, with the margin added or subtracted as needed to produce a larger modeled TAR than

would otherwise result. For example, the company shall use a larger margin when:

a. The experience data have less relevance or lower credibility.

b. The experience data are of lower quality, such as incomplete, internally inconsistent, or not

current.

c. There is doubt about the reliability of the anticipated experience assumption, such as, but

not limited to, recent changes in circumstances or changes in company policies.

d. There are constraints in the modeling that limit an effective reflection of the risk factor.

3. In complying with the sensitivity testing requirements in Section 12.B.6 above, greater analysis

and more detailed justification are needed to determine the level of uncertainty when

establishing margins for risk factors that produce greater sensitivity on the SR.

4. A margin is permitted, but not required, for assumptions that do not represent material risks.

5. A margin should reflect the magnitude of fluctuations in historical experience of the company

for the risk factor, as appropriate.

6. The company shall apply the method used to determine the margin consistently on each

valuation date, but it is permitted to change the method from the prior year if the rationale for

the change and the impact on the SR is disclosed.

D. Expense Assumptions

Requirements for Principle-Based Reserves for Variable Annuities VM-21

1. General Prudent Estimate Expense Assumption Requirements

In determining prudent estimate expense assumptions, the company:

a. May spread certain IT development costs and other capital expenditures over a reasonable

number of years in accordance with accepted statutory accounting principles, as defined in

the SSAPs.

Guidance Note: Care should be taken regarding the potential interaction with the inflation

assumption below.

b. Shall assume that the company is a going concern.

c. Shall choose an appropriate expense basis that properly aligns the actual expense to the

assumption. If values are not significant, they may be aggregated into a different base

assumption.

Guidance Note: For example, death benefit expenses should be modeled with an expense

assumption that is per death incurred.

d. Shall reflect the impact of inflation.

e. Shall not assume future expense improvements.

f. Shall not include assumptions for federal income taxes (and expenses paid to provide

fraternal benefits in lieu of federal income taxes) and foreign income taxes.

g. Shall use assumptions that are consistent with other related assumptions.

h. Shall use fully allocated expenses.

Guidance Note: Expense assumptions should reflect the direct costs associated with the block of

contracts being modeled, as well as indirect costs and overhead costs that have been allocated to

the modeled contracts.

i. Shall allocate expenses using an allocation method that is consistent across company lines

of business. Such allocation must be determined in a manner that is within the range of

actuarial practice and methodology and consistent with applicable ASOPs. Allocations

may not be done for the purpose of decreasing the SR.

j. Shall reflect expense efficiencies that are derived and realized from the combination of

blocks of business due to a business acquisition or merger in the expense assumption only

when any future costs associated with achieving the efficiencies are also recognized.

Guidance Note: For example, combining two similar blocks of business on the same

administrative system may yield some expense savings on a per unit basis, but any future cost of

the system conversion should be considered in the final assumption. If all costs for the conversion

are in the past, then there would be no future expenses to reflect in the valuation.

k. Shall reflect the direct costs associated with the contracts being modeled, as well as an

appropriate portion of indirect costs and overhead (i.e., expense assumptions representing

fully allocated expenses should be used), including expenses categorized in the annual

statement as “taxes, licenses and fees” (Exhibit 3 of the annual statement) in the expense

assumption.

Requirements for Principle-Based Reserves for Variable Annuities VM-21

l. Shall include acquisition expenses associated with business in force as of the valuation date

and significant non-recurring expenses expected to be incurred after the valuation date in

the expense assumption.

m. For contracts sold under a new policy form or due to entry into a new product line, the

company shall use expense factors that are consistent with the expense factors used to

determine anticipated experience assumptions for contracts from an existing block of

mature contracts taking into account:

i. Any differences in the expected long-term expense levels between the block of new

contacts and the block of mature contracts.

ii. That all expenses must be fully allocated, as required under Section 12.D.1.h above.

2. Margins for Prudent Estimate Expense Assumptions

The company shall determine margins for expense assumptions following Section 12.C.

Section 13: Allocation of the Aggregate Reserve to the Contract Level

Section 2.F states that the aggregate reserve shall be allocated to the contracts falling within the scope of

these requirements. That allocation should be done for both the pre- and post-reinsurance ceded reserves.

The contract-level reserve for each contract shall be the sum of the following:

A. The contract’s cash surrender value.

B. An allocated portion of the excess of the aggregate reserve over the aggregate cash

surrender value.

1. For a variable payout annuity or other contracts without a defined cash surrender

value, the “cash surrender value” to use in this calculation shall be the amount

defined in Section 3.G. which is used to determine the minimum general account

reserve.

2. The excess of the aggregate reserve over the aggregate cash surrender value shall

be allocated to each contract based on a measure of the risk of that product relative

to its cash surrender value in the context of the company’s in force contracts. The

measure of risk should consider the impact of risk mitigation programs, including

hedge programs and reinsurance, that would affect the risk of the product. The

specific method of assessing that risk and how it contributes to the company’s

aggregate reserve shall be defined by the company. The method should provide for

an equitable allocation based on risk analysis. For contracts valued under the

alternative methodology, the alternative methodology calculations provide a

contract level calculation that may be a reasonable basis for allocation.

3. As an example, consider a company with the results of the following three

contracts:

Table 12.1: Sample Allocation of Aggregate Reserve

Contract (i) 1 2 3 Total

Cash Surrender Value, C 28 40 52 120

Risk adjusted measure, R 38 52 50

Requirements for Principle-Based Reserves for Variable Annuities VM-21

In this example, the Aggregate Reserve exceeds the aggregate Cash Surrender Value by 20. The 20

is allocated proportionally across the three contracts based on the allocation basis of the larger of

(i) zero; and (ii) a risk adjusted measure based on reserve principles. Therefore, contracts 1 and 2

receive 45% (9/22) and 55% (11/22), respectively, of the excess Aggregate Reserve. As Contract

3 presents no risk in excess of its cash surrender value, it does not receive an allocation of the

excess Aggregate Reserve.

Aggregate Reserve 140

Allocation Basis for the excess of the

Aggregate Reserve over the Cash Surrender

Value

Ai = Max(Ri-Ci, 0)

10 12 0 22

Allocation of the excess of the Aggregate

Reserve over the Cash Surrender Value

Li = (Ai)/ΣAi*[Aggregate Reserve - ΣCi]

9.09 10.91 0.00 20

Contract-level reserve Ci+ Li 37.09 50.91 52.00 140.00

Requirements for Principle-Based Reserves for Variable Annuities VM-21

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VM-22

VM-22: STATUTORY MAXIMUM VALUATION INTEREST RATES FOR INCOME ANNUITIES

Table of Contents

Section 1. Purpose and Scope

................................................................................................... 22-1

Section 2. Definitions ................................................................................................................ 22-2

Section 3. Determination of the Statutory Maximum Valuation Interest Rate ......................... 22-3

Section 1: Purpose and Scope

A. These requirements define for single premium immediate annuity contracts and other similar contracts,

certificates and contract features the statutory maximum valuation interest rate that complies with Model

#820. These are the maximum interest rate assumption requirements to be used in the CARVM and for

certain contracts, the CRVM. These requirements do not preclude the use of a lower valuation interest

rate assumption by the company if such assumption produces statutory reserves at least as great as those

calculated using the maximum rate defined herein.

B. The following categories of contracts, certificates and contract features, 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, are covered by VM-22:

1. Immediate annuity contracts issued after Dec. 31, 2017;

2. Deferred income annuity contracts issued after Dec. 31, 2017;

3. Structured settlements in payout or deferred status issued after Dec. 31, 2017;

4. Fixed payout annuities resulting from the exercise of settlement options or annuitizations of host

contracts issued after Dec. 31, 2017;

5. Fixed payout annuities resulting from the exercise of settlement options or annuitizations of host

contracts issued during 2017, for fixed payouts commencing after Dec. 31, 2018, or, at the

option of the company, for fixed payouts commencing after Dec. 31, 2017;

6. Supplementary contracts, excluding contracts with no scheduled payments (such as retained

asset accounts and settlements at interest), issued after Dec. 31, 2017;

7. Fixed income payment streams, attributable to contingent deferred annuities (CDAs) issued

after Dec. 31, 2017, once the underlying contract funds are exhausted;

8. Fixed income payment streams attributable to guaranteed living benefits associated with

deferred annuity contracts issued after Dec. 31, 2017, once the contract funds are exhausted;

and

9. Certificates with premium determination dates after Dec. 31, 2017, emanating from non-

variable group annuity contracts specified in Model #820, Section 5.C.2, purchased for the

purpose of providing certificate holders benefits upon their retirement.

Guidance Note: For Section 1.B.4, Section 1.B.5, Section 1.B.6 and Section 1.B.8 above, there is no

restriction on the type of contract that may give rise to the benefit.

C. Exemptions:

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

1. With the permission of the domiciliary commissioner, for the categories of annuity contracts,

certificates and/or contract features in scope as outlined in Section 1.B.4, Section 1.B.5, Section

1.B.6, Section 1.B.7 or Section 1.B.8, the company may use the same maximum valuation

interest rate used to value the payment stream in accordance with the guidance applicable to the

host contract. In order to obtain such permission, the company must demonstrate that its

investment policy and practices are consistent with this approach.

D. The maximum valuation interest rates for the contracts, certificates and contract features within the

scope of VM-22 supersede those described in Appendix VM-A and Appendix VM-C, but they do not

otherwise change how those appendices are to be interpreted. In particular, Actuarial Guideline IX-B—

Clarification of Methods Under Standard Valuation Law for Individual Single Premium Immediate

Annuities, Any Deferred Payments Associated Therewith, Some Deferred Annuities and Structured

Settlements Contracts (AG-9-B) (see VM-C) provides guidance on valuation interest rates and is,

therefore, superseded by these requirements for contracts, certificates and contract features in scope.

Likewise, any valuation interest rate references in Actuarial Guideline IX-C—Use of Substandard

Annuity Mortality Tables in Valuing Impaired Lives Under Individual Single Premium Immediate

Annuities (AG-9-C) (see VM-C) are also superseded by these requirements.

Section 2: Definitions

A. The term “reference period” means the length of time used in assigning the Valuation Rate Bucket for

the purpose of determining the statutory maximum valuation interest rate and is determined as follows:

1. For contracts, certificates or contract features with life contingencies and substantially similar

payments, the reference period is the length of time, rounded to the nearest year, from the

premium determination date to the earlier of: i) the date of the last non-life-contingent payment

under the contract, certificate or contract feature; and ii) the date of the first life-contingent

payment under the contract, certificate or contract feature, or

2. For contracts, certificates or contract features with no life-contingent payments and substantially

similar payments, the reference period is the length of time, rounded to the nearest year, from

the premium determination date to the date of the last non-life-contingent payment under the

contract, certificate or contract feature, or

3. For contracts, certificates or contract features where the payments are not substantially similar,

the actuary should apply prudent judgment and select the Valuation Rate Bucket with Macaulay

duration that is a best fit to the Macaulay duration of the payments in question.

Guidance Note: Contracts with installment refunds or similar features should consider the length of the

installment period calculated from the premium determination date as the non-life contingent period for

the purpose of determining the reference period.

Guidance Note: The determination in Section 2.A.3 above shall be made based on the materiality of

the payments that are not substantially similar relative to the life-contingent payments.

B. The term “jumbo contract” means a contract with an initial consideration equal to or greater than

$250 million. Considerations for contracts issued by an insurer to the same contract holder within

90 days shall be combined for purposes of determining whether the contracts meet this threshold.

Guidance Note: If multiple contracts meet this criterion in aggregate, then each contract is a jumbo

contract.

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

C. The term “non-jumbo contract” means a contract that does not meet the definition of a jumbo contract.

D. The term “premium determination date” means the date as of which the valuation interest rate for the

contract, certificate or contract feature being valued is determined.

E. The term “initial age” means the age of the annuitant as of his or her age last birthday relative to the

premium determination date. For joint life contracts, certificates or contract features, the “initial age”

means the initial age of the younger annuitant. If a contract, certificate or contract feature for an annuitant

is being valued on a standard mortality table as an impaired annuitant, “initial age” means the rated age.

If a contract, certificate or contract feature is being valued on a substandard mortality basis, “initial age”

means an equivalent rated age.

F. The term “Table X spreads” means the prescribed VM-22 current market benchmark spreads for the

quarter prior to the premium determination date, as published on the Industry tab of the NAIC website.

The process used to determine Table X spreads is the same as that specified in VM-20 Appendix 2.D

for Table F, except that JP Morgan and Bank of America bond spreads are averaged over the quarter

rather than the last business day of the month.

G. The term “expected default cost” means a vector of annual default costs by weighted average life. This

is calculated as a weighted average of the VM-20 Table A prescribed annual default costs published on

the Industry tab of the NAIC website in effect for the quarter prior to the premium determination date,

using the prescribed portfolio credit quality distribution as weights.

H. The term “expected spread” means a vector of spreads by weighted average life. This is calculated as a

weighted average of the Table X spreads, using the prescribed portfolio credit quality distribution as

weights.

I. The term “prescribed portfolio credit quality distribution” means the following credit rating distribution:

1. 5% Treasuries

2. 15% Aa bonds (5% Aa1, 5% Aa2, 5% Aa3)

3. 40% A bonds (13.33% A1, 13.33% A2, 13.33% A3)*

4. 40% Baa bonds (13.33% Baa1, 13.33% Baa2, 13.33% Baa3)*

*40%/3 is used unrounded in the calculations.

Section 3: Determination of the Statutory Maximum Valuation Interest Rate

A. Valuation Rate Buckets

1. For the purpose of determining the statutory maximum valuation interest rate, the contract, certificate

or contract feature being valued must be assigned to one of four Valuation Rate Buckets labeled A

through D.

2. If the contract, certificate or contract feature has no life contingencies, the Valuation Rate Bucket is

assigned based on the length of the reference period (RP), as follows:

Table 3-1: Assignment to Valuation Rate Bucket by Reference Period Only

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

RP ≤ 5 Years

5Y < RP ≤

10Y

10Y < RP ≤

15Y

RP > 15Y

3. If the contract, certificate or contract feature has life contingencies, the Valuation Rate Bucket is

assigned based on the length of the RP and the initial age of the annuitant, as follows:

Table 3-2: Assignment to Valuation Rate Bucket by Reference Period and Initial Age

Initial Age

RP ≤ 5Y

5Y < RP ≤

10Y

10Y < RP ≤

15Y

RP > 15Y

90+

80–89

70–79

< 70

B. Premium Determination Dates

1. The following table specifies the decision rules for setting the premium determination date for

each of the contracts, certificates and contract features listed in Section 1:

Table 3-3: Premium Determination Dates

Section

Item Description

Premium determination date

1.B.1

Immediate annuity

Date consideration is determined and

committed to by contract holder

1.B.2

Deferred income annuity

Date consideration is determined and

committed to by contract holder

1.B.3

Structured settlements

Date consideration is determined and

committed to by contract holder

1.B.4 and 1.B.5

Fixed payout annuities resulting from

settlement options or annuitizations

from host contracts

Date consideration for benefit is

determined and committed to by

contract holder

1.B.6

Supplementary contracts

Date of issue of supplementary contract

1.B.7

Fixed income payment streams from

CDAs, AV becomes 0

Date on which AV becomes 0

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

Guidance Note: For the purposes of the items in the table above, the phrase “date consideration is

determined and committed to by the contract holder” should be interpreted by the company in a manner

that is consistent with its standard practices. For some products, that interpretation may be the issue date

or the date the premium is paid.

2. Immaterial Change in Consideration

If the premium determination date is based on the consideration, and if the consideration

changes by an immaterial amount (defined as a change in present value of less than 10% and

less than $1 million) subsequent to the original premium determination date, such as due to a

data correction, then the original premium determination date shall be retained. In the case of a

group annuity contract where a single premium is intended to cover multiple certificates,

certificates added to the contract after the premium determination date that do not trigger the

company’s right to reprice the contract shall be treated as if they were included in the contract

as of the premium determination date.

C. Statutory Maximum Valuation Interest Rate

1. For a given contract, certificate or contract feature, the statutory maximum valuation interest

rate is determined based on its assigned Valuation Rate Bucket (Section 3.A) and its Premium

Determination Date (Section 3.B) and whether the contract associated with it is a jumbo contract

or a non-jumbo contract.

2. Statutory maximum valuation interest rates for jumbo contracts are determined and published

daily by the NAIC on the Industry tab of the NAIC website. For a given premium determination

date, the statutory maximum valuation interest rate is the daily statutory maximum valuation

interest rate published for that premium determination date.

3. Statutory maximum valuation interest rates for non-jumbo contracts are determined and

published quarterly by the NAIC on the Industry tab of the NAIC website by the third business

day of the quarter. For a given premium determination date, the statutory maximum valuation

interest rate is the quarterly statutory maximum valuation interest rate published for the quarter

in which the premium determination date falls.

4. Quarterly Valuation Rate:

For each Valuation Rate Bucket, the quarterly valuation rate is defined as follows:

= R + S – D – E

1.B.8

Fixed income payment streams from

guaranteed living benefits, AV becomes

Date on which AV becomes 0

1.B.9

Group annuity and related certificates

Date consideration is determined and

committed to by contract holder

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

Where:

a. R is the reference rate for that Valuation Rate Bucket (defined in Section 3.D);

b. S is the spread rate for that Valuation Rate Bucket defined in Section 3.E);

c. D is the default cost rate for that Valuation Rate Bucket (defined in Section 3.F);

and

d. E is the spread deduction defined as 0.25%.

For non-jumbo contracts, the quarterly statutory maximum valuation interest rate is the quarterly

valuation rate (Iq) rounded to the nearest one-fourth of one percent (1/4 of 1%).

5. Daily Valuation Rate:

For each Valuation Rate Bucket, the daily valuation rate is defined as follows:

= I

+ C

d-1

– C

Where:

a. I

is the quarterly valuation rate for the calendar quarter preceding the business day

immediately preceding the premium determination date;

b. C

d-1

is the daily corporate rate (defined in Section 3.G) for the business day

immediately preceding the premium determination date; and

c. C

is the average daily corporate rate (defined in Section 3.H) corresponding to the same

period used to develop I

For jumbo contracts, the daily statutory maximum valuation interest rate is the daily valuation rate (I

)

rounded to the nearest one-hundredth of one percent (1/100 of 1%).

D. Reference Rate

Reference rates are updated quarterly as described below:

1. The “quarterly Treasury rate” is the average of the daily Treasury rates for a given maturity

over the calendar quarter prior to the premium determination date. The quarterly Treasury rate

is downloaded from https://fred.stlouisfed.org

, and is rounded to two decimal places.

2. Download the quarterly Treasury rates for two-year, five-year, 10-year and 30-year U.S.

Treasuries.

3. The reference rate for each Valuation Rate Bucket is calculated as the weighted average of the

quarterly Treasury rates using Table 1 weights (defined in Section 3.I) effective for the calendar

year in which the premium determination date falls.

E. Spread

The spreads for each Valuation Rate Bucket are updated quarterly as described below:

1. Use the Table X spreads from the NAIC website for WALs two, five, 10 and 30 years only

to calculate the expected spread.

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

2. Calculate the spread for each Valuation Rate Bucket, which is a weighted average of the

expected spreads for WALs two, five, 10 and 30 using Table 2 weights (defined in Section 3.I)

effective for the calendar year in which the premium determination date falls.

F. Default costs for each Valuation Rate Bucket are updated annually as described below:

1. Use the VM-20 prescribed annual default cost table (Table A) in effect for the quarter prior to

the premium determination date for WAL two, WAL five and WAL 10 years only to calculate

the expected default cost. Table A is updated and published annually on the Industry tab of

the NAIC website during the second calendar quarter and is used for premium determination

dates starting in the third calendar quarter.

2. Calculate the default cost for each Valuation Rate Bucket, which is a weighted average of

the expected default costs for WAL two, WAL five and WAL 10, using Table 3 weights

(defined in Section 3.I) effective for the calendar year in which the premium determination

date falls.

G. Daily Corporate Rate

Daily corporate rates for each valuation rate bucket are updated daily as described below:

1. Each day, download the Bank of America Merrill Lynch U.S. corporate effective yields as of

the previous business day’s close for each index series shown in the sample below from the

St. Louis Federal Reserve website: https://research.stlouisfed.org/fred2/categories/3234

To access a specific series, search the St. Louis Federal Reserve website for the series name

by inputting the name into the search box in the upper right corner, or input the following web

address: https://research.stlouisfed.org/fred2/series/[replace with series name from the table

below].

Table 3-4: Index Series Names

Maturity Series Name

1Y – 3Y BAMLC1A0C13YEY

3Y – 5Y BAMLC2A0C35YEY

5Y – 7Y BAMLC3A0C57YEY

7Y – 10Y BAMLC4A0C710YEY

10Y – 15Y BAMLC7A0C1015YEY

15Y+ BAMLC8A0C15PYEY

2. Calculate the daily corporate rate for each valuation rate bucket, which is a weighted average

of the Bank of America Merrill Lynch U.S. corporate effective yields, using Table 4 weights

(defined in Section 3.I) effective for the calendar year in which the business date immediately

preceding the premium determination date falls.

H. Average Daily Corporate Rate

Average daily corporate rates are updated quarterly as described below:

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

1. Download the quarterly average Bank of America Merrill Lynch U.S. corporate effective yields

for each index series shown in Section 3.G.1 from the St. Louis Federal Reserve website:

https://research.stlouisfed.org/fred2/categories/3234

8. To access a specific series, search the

St. Louis Federal Reserve website for the series name by inputting the name into the search box

in the upper right corner, or input the following web address:

https://research.stlouisfed.org/fred2/series/[replace with series name from Section 3.G.1].

2. Calculate the average daily corporate rate for each valuation rate bucket, which is a weighted

average of the quarterly average Bank of America Merrill Lynch U.S. corporate effective

yields, using Table 4 weights (defined in Section 3.I) for the same calendar year as the weight

tables (i.e. Tables 1, 2, and 3) used in calculating I

in Section 3.C.5.

I. Weight Tables 1 through 4

The system for calculating the statutory maximum valuation interest rates relies on a set of four tables

of weights that are based on duration and asset/liability cash-flow matching analysis for representative

annuities within each valuation rate bucket. A given set of weight tables is applicable to the calculations

for every day of the calendar year.

In the fourth quarter of each calendar year, the weights used within each valuation rate bucket for

determining the applicable valuation interest rates for the following calendar year will be updated using

the process described below. In each of the four tables of weights, the weights in a given row (valuation

rate bucket) must add to exactly 100%.

Weight Table 1

The process for determining Table 1 weights is described below:

1. Each valuation rate bucket has a set of representative annuity forms. These annuity forms are as

follows:

a. Bucket A:

i. Single Life Annuity age 91 with 0 and five-year certain periods.

ii. Five-year certain only.

b. Bucket B:

i. Single Life Annuity age 80 and 85 with 0, five-year and 10-year certain periods.

ii. 10-year certain only.

c. Bucket C:

i. Single Life Annuity age 70 with 0 and 15-year certain periods.

ii. Single Life Annuity age 75 with 0, 10-year and 15-year certain periods.

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

iii. 15-year certain only.

d. Bucket D:

i. Single Life Annuity age 55, 60 and 65 with 0 and 15-year certain periods.

ii. 25-year certain only.

2. Annual cash flows are projected assuming annuity payments are made at the end of each year.

These cash flows are averaged for each valuation rate bucket across the annuity forms for that

bucket using the statutory valuation mortality table in effect for the following calendar year for

individual annuities for males (ANB).

3. The average daily rates in the third quarter for the two-year, five-year, 10-year and 30-year U.S.

Treasuries are downloaded from https://fred.stlouisfed.org

as input to calculate the present

values in Step 4.

4. The average cash flows are summed into four time period groups: years 1–3, years 4–7, years

8–15 and years 16–30. (Note: The present value of cash flows beyond year 30 are discounted

to the end of year 30 and included in the years 16–30 group. This present value is based on the

lower of 3% and the 30-year Treasury rate input in Step 3.)

5. The present value of each summed cash-flow group in Step 4 is then calculated by using the

Step 3 U.S. Treasury rates for the midpoint of that group (and using the linearly interpolated

U.S. Treasury rate when necessary).

6. The duration-weighted present value of the cash flows is determined by multiplying the present

value of the cash-flow groups by the midpoint of the time period for each applicable group.

7. Weightings for each cash-flow time period group within a valuation rate bucket are calculated

by dividing the duration weighted present value of the cash flow by the sum of the duration

weighted present value of cash flow for each valuation rate bucket.

Weight Tables 2 through 4

Weight Tables 2 through 4 are determined using the following process:

1. Table 2 is identical to Table 1.

2. Table 3 is based on the same set of underlying weights as Table 1, but the 10-year and 30-year

columns are combined since VM-20 default rates are only published for maturities of up to 10

years.

3. Table 4 is derived from Table 1 as follows:

a. Column 1 of Table 4 is identical to column 1 of Table 1.

b. Column 2 of Table 4 is 50% of column 2 of Table 1.

c. Column 3 of Table 4 is identical to column 2 of Table 4.

d. Column 4 of Table 4 is 50% of column 3 of Table 1.

e. Column 5 of Table 4 is identical to column 4 of Table 4.

f. Column 6 of Table 4 is identical to column 4 of Table 1.

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

J. Group Annuity Contracts

For a group annuity purchased under a retirement or deferred compensation plan (Section 1.B.9), the

following apply:

1. The statutory maximum valuation interest rate shall be determined separately for each

certificate, considering its premium determination date, the certificate holder’s initial age, the

reference period corresponding to its form of payout and whether the contract is a jumbo

contract or a non-jumbo contract.

Guidance Note: Under some group annuity contracts, certificates may be purchased on different dates.

2. In the case of a certificate whose form of payout has not been elected by the beneficiary at its

premium determination date, the statutory maximum valuation interest rate shall be based on

the reference period corresponding to the normal form of payout as defined in the contract or as

is evidenced by the underlying pension plan documents or census file. If the normal form of

payout cannot be determined, the maximum valuation interest rate shall be based on the

reference period corresponding to the annuity form available to the certificate holder that

produces the most conservative rate.

Guidance Note: The statutory maximum valuation interest rate will not change when the form of payout

is elected.

Statutory Maximum Valuation Interest Rates for Income Annuities VM-22

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Health Insurance Reserves Minimum Reserve Requirements VM-25

VM-25: HEALTH INSURANCE RESERVES MINIMUM RESERVE REQUIREMENTS

A. Purpose

1. Reserve requirements for individual A&H insurance policies issued on and after the

Valuation Manual operative date and reserve requirements for group A&H insurance

certificates issued on and after the Valuation Manual operative date are applicable

requirements found in the AP&P Manual; Appendix A, which includes A-10; and

applicable requirements found in the AP&P Manual Appendix C, which includes Actuarial

Guideline XXVIII—Statutory Claim Reserves for Group Long-Term Disability Contracts

With a Survivor Income Benefit Provision (AG 28); Actuarial Guideline XLIV—Group

Term Life Waiver of Premium Disabled Life Reserves (AG 44); Actuarial Guideline

XLVII—The Application of Company Experience in the Calculation of Claim Reserves

Under the 2012 Group Long-Term Disability Valuation Table (AG 47); and Actuarial

Guideline L—2013 Individual Disability Income Valuation Table (AG 50).

2. The following requirement in Exhibit 1 paragraph 5 of Appendix A-010 with respect to

claims incurred on or after Jan. 1, 2018:

For claim reserves on policies not requiring contract reserves, the maximum interest rate is

the maximum rate allowed by Appendix A-820 in the valuation of single premium

immediate annuities issued on the same date as the claim incurral date, reduced by 100 bps.

is replaced with:

For claim reserves on policies not requiring contract reserves, the maximum interest rate

(I) shall be the calendar year statutory valuation interest rates as defined by

I = .02 + .8 * (R - .03)

Where R is the average, over a period of 12 months, ending June 30 of the calendar

year of the claim incurral date, of the monthly average of the composite yield on

seasoned corporate bonds, as published by Moody’s Investors Service, Inc. and the

results rounded to the nearer one-quarter of 1%.

3. Unless Appendix A-010, Subsection 7 and Subsection 8 of the Mortality section in Exhibit

1 – Specific Standards for Morbidity, Interest and Mortality of the AP&P Manual applies,

the mortality basis used in calculating contract reserves for all policies, except LTC

individual policies and group certificates, shall be as follows:

a. For policies issued on or after Jan. 1, 2019, but before Jan. 1, 2020, either the

ultimate form of the 2001 CSO Mortality Table with separate rates for male and

female lives, or the ultimate form of the 2017 CSO Mortality Table with separate

rates for male and female lives, shall be used.

b. For policies issued on or after Jan. 1, 2020, the ultimate form of the 2017 CSO

Mortality Table with separate rates for male and female lives shall be used.

c. When using the tables in (a) and (b), separation based on smoking status (or similar

tobacco-based status) is allowed (but not required) with the approval of the

domestic insurance commissioner and only if the premium rates are separated by

the same status.

Health Insurance Reserves Minimum Reserve Requirements VM-25

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VM-26

VM-26: CREDIT LIFE AND DISABILITY RESERVE REQUIREMENTS

Table of Contents

Section 1: Purpose ..........................................................................................................................

26-1

Section 2: Minimum Standard for Valuation of Credit Life Insurance .......................................... 26-1

Section 3: Minimum Standard for Valuation of Credit Disability Insurance ................................. 26-2

Section 4: Additional Reserves for Credit Insurance ..................................................................... 26-4

Section 5: Reinsurance ................................................................................................................... 26-4

Section 1: Purpose

A. The purpose of this section is to define the minimum valuation standard for credit life insurance

and credit disability insurance.

B. The method described in this section shall constitute the CRVM for contracts for which this section

is applicable.

Section 2: Minimum Standard for Valuation of Credit Life Insurance

A. Claim Reserves

1. A company shall hold claim reserves for all incurred but unpaid claims on all credit life

insurance policies as of the valuation date, and shall hold appropriate claim expense

reserves for the estimated expense of settlement of all incurred but unpaid claims.

2. A company shall test all claim reserves for prior valuation years for adequacy and

reasonableness, including consideration of any residual unpaid liability.

3. Assumptions used for setting credit life claim reserves shall be based on the company’s

experience, to the level such experience is credible, or upon other assumptions designed to

place a sound value on the liabilities. Assumptions should be adjusted regularly to maintain

reasonable margins.

4. A generally accepted actuarial reserving method or other reasonable method or a combination

of methods shall be used to estimate credit life insurance claim reserves. The methods used

for estimating liabilities generally may be aggregate methods, or various reserve items may

be separately valued. Approximations based on groupings and averages also may be

employed. Adequacy of the claim reserves must be determined in the aggregate.

B. Contract Reserves

1. If separate benefits are included in a credit life insurance contract, the reserve for each

benefit must comply with these requirements.

2. Reserves must be based on actuarial assumptions that 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. Reserves must be established for all unmatured contractual obligations, which have not

matured, of the company arising out of the provisions of the credit life insurance contract

and must be computed in accordance with presently accepted ASOPs.

Credit Life and Disability Reserve Requirements VM-26

4. The reserve method for use in determining the minimum standard for valuation of credit

life insurance is the CRVM specified in Model #820. If benefits are guaranteed for less

than one year, the method produces a reserve equal to the mortality cost from the valuation

date to the end of the coverage period.

5. The interest rates for use in determining the minimum standard for valuation of credit life

insurance are the calendar year statutory valuation interest rates specified in Model #820.

6. The minimum mortality assumptions for use in determining the minimum standard for

valuation of credit life insurance:

a. For individual policies or certificates of insurance issued to be effective prior to Jan. 1,

2019, the minimum standard for both male and female insured individuals shall be the

2001 CSO Male Composite Ultimate Mortality Table. If a credit life insurance policy

or certificate insures two lives, the minimum standard shall be twice the mortality in

the 2001 CSO Male Composite Ultimate Mortality Table based on the age of the older

insured.

b. For individual policies or certificates of insurance issued to be effective Jan. 1, 2019,

and later:

i) For a credit life insurance policy or certificate insuring a single life, the minimum

standard shall be the 2001 CSO Ultimate Mortality Table using the applicable

gender and smoker, nonsmoker or composite table based on the gender and tobacco

usage criteria upon which premium rates are based. If the premium rates are not

segregated by gender, the minimum standard for both male and female insured

individuals shall be the 2001 CSO Male Ultimate Mortality Table.

ii) For a credit life insurance policy or certificate insuring two lives on a first to die

basis, the minimum standard shall be twice the mortality in the 2001 CSO Male

Ultimate Mortality Table based on the age of the older insured, using the

Composite table if premiums are not distinct based on tobacco usage; the

Nonsmoker table if premium rates for both insureds are based on nonsmoking

criteria; and the Smoker table if the premium rates for either insured is based on

being a tobacco user.

iii) For a credit life insurance policy or certificate insuring two lives on a last-to-die

basis, the minimum standard shall be the mortality in the 2001 CSO Male Ultimate

Mortality Table based on the age of the younger insured, using the Composite table

if premiums are not distinct based on tobacco usage; the Nonsmoker table if

premium rates for both insureds are based on nonsmoking criteria; and the Smoker

table if the premium rate for either insured is based on being a tobacco user.

7. Use of approximations is permitted, such as those involving age groupings; average

amounts of indemnity; grouping of similar contract forms; the computation of the reserve

for one contract benefit as a percentage of, or by other relation to, the aggregate contract

reserves exclusive of the benefit or benefits so valued; and the use of group methods and

approximate averages for fractions of a year or otherwise.

Section 3: Minimum Standard for Valuation of Credit Disability Insurance

A. Claim Reserves

1. A company shall hold claim reserves for all incurred but unpaid claims on all credit

disability insurance policies, which is measured as the present value of future benefits or

Credit Life and Disability Reserve Requirements VM-26

amounts not yet due as of the valuation date that are expected to arise under claims that

have been incurred as of the valuation date, and shall hold appropriate claim expense

reserves for the estimated expense of settlement of all incurred but unpaid claims.

2. A company shall test all claim reserves for prior valuation years for adequacy and

reasonableness using claim runoff schedules in accordance with the statutory financial

statement, including consideration of any residual unpaid liability.

3. The maximum interest rate for use in determining the minimum standard for valuation of

credit disability insurance claim reserves is the maximum rate allowed in Model #820 for the

valuation of whole life insurance issued on the date the credit disability claim was incurred.

4. The morbidity assumption for use in determining the minimum standard for valuation of

credit disability insurance shall be based on the company’s experience, if such experience

is credible, or upon other assumptions designed to place a sound value on the liabilities.

For claim reserves to reflect “sound values” and/or reasonable margins, valuation tables

based on credible experience should be adjusted regularly to maintain reasonable margins.

5. A generally accepted actuarial reserving method or other reasonable method or a

combination of methods shall be used to estimate credit disability insurance claim reserves.

The methods used for estimating liabilities generally may be aggregate methods, or various

reserve items may be separately valued. Approximations based on groupings and averages

also may be employed. Adequacy of the claim reserves must be determined in the

aggregate.

B. Contract Reserves

1. Contract reserves are required for all contractual obligations, which have not matured, of a

company arising out of the provisions of a credit disability insurance contract consistent

with claim reserves and unearned premium reserve, if any, held for their respective

obligations.

2. The methods and procedures for determining contract reserves for credit disability

insurance must be consistent with the methods and procedures for claim reserves for any

contract, unless appropriate adjustment is made to assure provision for the aggregate

liability. The date of incurral must be the same in both determinations.

3. The morbidity assumptions for use in determining the minimum standard for valuation of

single premium credit disability insurance contract reserves are:

a. For plans having less than a 15-day elimination period, the 1985 Commissioners

Individual Disability Table A (85CIDA) with claim incidence rates increased by

12%.

b. For plans having greater than a 14-day elimination period, the 85CIDA for a

14-day elimination period with claim incidence rates increased by 12%.

4. The minimum contract reserve for credit disability insurance, other than single premium

credit disability insurance, is the gross pro-rata unearned premium reserve.

5. The maximum interest rate for use in determining the minimum standard for valuation of

single premium credit disability insurance contract reserves is the maximum rate allowed

in Model #820 for the valuation of whole life insurance issued on the same date as the

credit disability insurance contract.

Credit Life and Disability Reserve Requirements VM-26

6. A company shall not use a separate mortality assumption for valuation of single premium

credit disability insurance contract reserves since premium is refunded upon death of the

insured.

7. Use of approximations is permitted, such as those involving age groupings, average

amounts of indemnity and grouping of similar contract forms; the computation of the

reserve for one contract benefit as a percentage of, or by other relation to, the aggregate

contract reserves exclusive of the benefit or benefits so valued; and the use of group

methods and approximate averages for fractions of a year or otherwise.

8. Annually, a company shall conduct a review of prospective contract liabilities on contracts

valued by tabular reserves to determine the continuing adequacy and reasonableness of the

tabular reserves. The company shall make appropriate increments to such tabular reserves

if such tests indicate that the basis of such reserves is not adequate.

Section 4: Additional Reserves for Credit Insurance

A. For all credit life and disability contracts in the aggregate, if the net premium refund liability

exceeds the aggregate recorded contract reserve, the company must establish an additional reserve

liability. This additional liability is equal to the excess of the net refund liability over the contract

reserve recorded. The net refund liability may include consideration of commission, premium tax

and other expenses recoverable. For example, the insurance company may recover amounts from

the state for premium taxes and from producers for prepaid commissions. In all cases, such amounts

shall be evaluated for probability of recovery.

Section 5: Reinsurance

A. Increases to, or credits against, reserves carried, arising because of reinsurance assumed or

reinsurance ceded, must be determined in a manner consistent with these minimum reserve

standards and with all applicable provisions of the reinsurance contracts that affect the company’s

liabilities.

VM-30

VM-30: ACTUARIAL OPINION AND MEMORANDUM REQUIREMENTS

Table of Contents

Section 1: Scope .............................................................................................................................

30-1

Section 2: General Requirements for Submission of Statement of a Life Actuarial Opinion ........ 30-2

Section 3: Requirements Specific to Life Actuarial Opinions ....................................................... 30-3

Section 1: Scope

A. General

1. The following provisions contain the requirements for the actuarial opinion of reserves and

for supporting actuarial memoranda in accordance with Section 3 of Model #820, and are

collectively referred to as Actuarial Opinion and Memorandum (AOM) requirements. For

purposes of these VM-30 requirements, the term “actuarial opinion” means the opinion of

an appointed actuary regarding the adequacy of reserves and related actuarial items

pursuant to these AOM requirements for companies that file the life, A&H annual

statement or the fraternal annual statement.

2. Actuarial opinion and supporting actuarial memoranda requirements are provided in VM-

30 for companies that file the life, A&H annual statement or the fraternal annual statement.

Companies that file the property/casualty (P/C) annual statement or the health annual

statement will follow the actuarial opinion and supporting actuarial memoranda

requirements pursuant to the instructions for those annual statements. Such companies are

not subject to actuarial opinion and supporting actuarial memoranda requirements in this

VM-30 unless the instructions for the P/C annual statement or the instructions for the health

annual statement provide for requirements in VM-30.

Guidance Note: It is the intent to allow the annual statement instructions to address all issues

relating to the actuarial opinion and memorandum for these two statements (P/C annual statement

and the health annual statement), but not preclude the use of requirements as appropriate in VM-

30 in the instructions for these two statements.

3. The AOM requirements shall be applied in a manner that allows the appointed actuary to

use his or her professional judgment in performing the actuarial analysis and developing

the actuarial opinion and supporting actuarial memoranda, conforming to relevant ASOPs.

However, a state commissioner has the authority to specify methods of analysis and

assumptions when, in the commissioner’s judgment, these specifications are necessary for

the actuary to render an acceptable opinion relative to the adequacy of reserves and related

actuarial items. For purposes of VM-30, the requirements of Actuarial Guideline XLVIII—

Actuarial Opinion and Memorandum Requirements for the Reinsurance of Policies

Required to be Valued Under Sections 6 and 7 of the NAIC Valuation of Life Insurance

Policies Model Regulation (AG 48), of the AP&P Manual, shall be applicable. For

purposes of VM-30, the requirements of Actuarial Guideline LI—The Application of Asset

Adequacy Testing to Long-Term Care Insurance Reserves (AG 51), of the AP&P Manual,

shall be applicable.

4. These AOM requirements are applicable to an annual statement with a year-ending date on

or after the operative date of the Valuation Manual. A statement of actuarial opinion on the

adequacy of the reserves and related actuarial items and a supporting actuarial

memorandum is required each year.

Actuarial Opinion and Memorandum Requirements VM-30

5. The requirements for an opinion apply to each company filing an annual statement, not to

the holding company or group of companies. A single opinion is required for the company.

B. Definitions

1. The term “adverse opinion” means an actuarial opinion in which the appointed actuary

determines that the reserves and liabilities are not adequate. (An adverse opinion does not

meet Section 3.A.7.e.)

2. The term “qualified opinion” means an actuarial opinion in which the appointed actuary

determines the reserves for a certain item(s) are in question because they cannot be

reasonably estimated or the actuary is unable to render an opinion on those items. Such

qualified opinion should state whether the stated reserve amount makes adequate provision

for the liabilities associated with the specified reserves, except for the item(s) to which the

qualification relates. The actuary is not required to issue a qualified opinion if the actuary

reasonably believes that the item(s) in question are not likely to be material. (A qualified

opinion does not meet one or more of the statements in Section 3.A.7.a through Section

3.A.7.d.)

3. The term “inconclusive opinion” means an actuarial opinion in which the appointed actuary

determines the actuary cannot reach a conclusion due to deficiencies or limitations in the

data, analyses, assumptions or related information. The actuary’s ability to give an opinion

is dependent upon data, analyses, assumptions and related information that are sufficient

to support a conclusion. An inconclusive opinion shall include a description of the reasons

why a conclusion could not be reached.

Section 2: General Requirements for Submission of Statement of a Life Actuarial Opinion

A. General

1. The statement of an appointed actuary, entitled “Statement of Actuarial Opinion,” setting

forth an opinion relating to reserves and related actuarial items held in support of policies

and contracts, in accordance with Section 3.A must be included with an annual statement.

2. Within five business days of the appointment of an appointed actuary, the company shall

notify the domiciliary commissioner of the name, title (and, in the case of a consulting

actuary, the name of the firm) and manner of appointment or retention of each person

appointed or retained by the company as an appointed actuary and shall state in the notice

that the person meets the requirements of an appointed actuary. Once these notices are

furnished, no further notice is required with respect to this person unless the actuary ceases

to be appointed or retained or ceases to meet the requirements of an appointed actuary.

3. If an actuary who was the appointed actuary for the immediately preceding filed actuarial

opinion is replaced by an action of the board of directors, the insurer shall within five

business days notify the insurance department of the state of domicile of this event. The

insurer shall also furnish the domiciliary commissioner with a separate letter within 10

business days of the above notification stating whether in the 24 months preceding such

event there were any material disagreements with the former appointed actuary regarding

the content of the opinion. The disagreements required to be reported in response to this

paragraph include both those resolved to the former actuary’s satisfaction and those not

resolved to the former actuary’s satisfaction. The insurer shall also in writing request such

former actuary to furnish a letter addressed to the insurer stating whether the actuary agrees

with the statements contained in the insurer’s letter and, if not, stating the reasons for which

he/she does not agree. Additionally, the insurer shall furnish such responsive letter from

the former actuary to the domiciliary commissioner together with its own.

Actuarial Opinion and Memorandum Requirements VM-30

B. Standards for Asset Adequacy Analysis

1. The asset adequacy analysis must conform to the Standards of Practice as promulgated

from time to time by the ASB and to any additional standards under these AOM

requirements, which standards are to form the basis of the statement of actuarial opinion in

accordance with these AOM requirements.

2. The asset adequacy analysis must be based on methods of analysis as are deemed

appropriate for such purposes by the ASB.

C. Liabilities to Be Covered

1. The statement of actuarial opinion must apply to all in-force business on the annual

statement date, whether directly issued or assumed, regardless of when or where issued.

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 the requirements set forth in the Valuation Manual, the company shall

establish the additional reserve.

3. Additional reserves established under Section 2.C.2 and determined not to be necessary by

the appointed actuary 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.

Section 3: Requirements Specific to Life Actuarial Opinions

A. Statement of Actuarial Opinion Based on an Asset Adequacy Analysis

1. The statement of actuarial opinion shall consist of:

a. A table of key indicators to alert the reader to any changes from the prescribed

language. (See Section 3.A.3.)

b. An identification section identifying the appointed actuary and his or her

qualifications. (See Section 3.A.4.)

c. A scope section identifying the subjects on which an opinion is to be expressed

and describing the scope of the appointed actuary’s work, including a tabulation

delineating the reserves and related actuarial items that have been analyzed for

asset adequacy and the method of analysis (see Section 3.A.5), and identifying the

reserves and related actuarial items covered by the opinion that have not been so

analyzed.

d. A reliance section (see Section 3.A.6) describing those areas, if any, where the

appointed actuary has relied upon other experts for data, assumptions, projections

or analysis (e.g., anticipated cash flows from currently owned assets, including

variation in cash flows according to economic scenarios), supported by a statement

of each such expert in the form prescribed by Section 3.A.12.

e. An opinion section expressing the appointed actuary’s opinion with respect to the

adequacy of the supporting assets to mature the liabilities. (See Section 3.A.7.)

f. A relevant comments section.

2. Each section must be clearly designated. For each section, there is prescribed wording

Actuarial Opinion and Memorandum Requirements VM-30

described in Section 3.A.3 through Section 3.A.7 for that section. If the appointed actuary

changes this wording or adds additional wording to clarify the prescribed wording, the

appropriate box in the table of key indicators must be checked, and the appointed actuary

shall provide the following information for that section in the relevant comments section

of the opinion:

a. A description of the additional or revised wording in the opinion.

b. The rationale for using the additional or revised wording.

c. An explanation of the impact, if any, that the additional or revised wording has on

the opinion.

The prescribed wording should be modified only if needed to meet the circumstances of a

particular case, and the appointed actuary should, in any case, use language that clearly

expresses the actuary’s professional judgment.

3. The table of key indicators is to be at the top of the opinion and is to be completed consistent

with the remainder of the opinion. The only options are those presented below:

Identification Section (Check one box only)

Prescribed Wording Only

Prescribed Wording with Additional Wording

Revised Wording



Scope Section (Check one box only)

Prescribed Wording Only

Prescribed Wording with Additional Wording

Revised Wording



Reliance Section (Check one box only)

Prescribed Wording Only

Prescribed Wording with Additional Wording

Revised Wording



Opinion Section (Check one box only)

Prescribed Wording Only

Prescribed Wording with Additional Wording

Revised Wording



Actuarial Memorandum Section (Check one box only)

The Actuarial Memorandum includes “Deviation from Standard” wording regarding conformity with an

Actuarial Standard of Practice 

The Actuarial Memorandum does not include “Deviation from Standard” wording regarding conformity

with an Actuarial Standard of Practice 

Relevant Comments Section (Check one box only)

Comments are included



Comments are not included 

Category of Opinion

Actuarial Opinion and Memorandum Requirements VM-30

Unqualified



Adverse 

Qualified



Inconclusive 

4. The identification section should specifically indicate the appointed actuary’s relationship

to the company, qualifications for acting as appointed actuary and date of appointment, as

well as specify that the appointment was made by the board of directors, or its equivalent,

or by a committee of the board.

This section should contain only one of the following:

For a member of the Academy who is an employee of the organization, the identification

section of the opinion should contain all of the following sentences if the appointed actuary

is using the prescribed wording:

“I, [name and title], am an employee of [insurance company name] and a member of the

American Academy of Actuaries. I was appointed on [date of appointment] in accordance

with the requirements of the Valuation Manual. I meet the Academy qualification standards

for rendering the opinion.”

For a consultant who is a member of the Academy, the identification section of the opinion

should contain all of the following sentences if the appointed actuary is using the prescribed

wording:

“I, [name and title of consultant], am associated with the firm of [name of consulting firm].

I am a member of the American Academy of Actuaries. I was appointed on [date of

appointment] in accordance with the requirements of the Valuation Manual. I meet the

Academy qualification standards for rendering the opinion.”

Guidance Note: It is not necessary for an appointed actuary to be reappointed under the

Valuation Manual. For purposes of the identification section, appointment in accordance

with the requirements of the Actuarial Opinion and Memorandum Regulation (#822)

qualifies as being in accordance with the Valuation Manual.

5. The scope section should contain only the following statement (including all specified lines

even if the value is zero) if the appointed actuary is using the prescribed wording:

“I have examined the assumptions and 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, 20__. Tabulated below are

those reserves and related actuarial items which have been subjected to asset adequacy

analysis.”

Actuarial Opinion and Memorandum Requirements VM-30

Asset Adequacy Tested Amounts—Reserves and Related Actuarial Items

Statement Item

Formula

Reserves

(1)

Principle-Based

Reserves

(2)

Additional

Reserves

(3)

Analysis

Method

Other

Amount

(4)

Total Amount =

(1)+(2)+(3)+(4)

(5)

Exhibit 5

A Life Insurance

B Annuities

C Supplementary

Contracts Involving

Life Contingencies

D Accidental Death

Benefits

E Disability—

Active

F Disability—

Disabled

G Miscellaneous

Total

Exhibit 6

A Active Life

Reserve

B Claim Reserve

Total

Exhibit 7

Guaranteed Interest

Contracts

Annuities Certain

Supplemental

Contracts

Dividend

Accumulations or

Refunds

Actuarial Opinion and Memorandum Requirements VM-30

Asset Adequacy Tested Amounts—Reserves and Related Actuarial Items

Statement Item

Formula

Reserves

(1)

Principle-Based

Reserves

(2)

Additional

Reserves

(3)

Analysis

Method

Other

Amount

(4)

Total Amount =

(1)+(2)+(3)+(4)

(5)

Premium and Other

Deposit Funds

Total Exhibit 7

Exhibit 8 Part 1

1 Life

2 Health

Total Exhibit 8,

Part 1

Separate Accounts

(Page 3 of the

Annual Statement

of the Separate

Accounts,

Lines 1 and 2)

Other Reserves

and Related

Actuarial Items

Tested

<<include a

description and the

location of other

reserves and related

actuarial items

tested>>

TOTAL

RESERVES

a. The additional reserves are the reserves established under Section 2.C.2.

b. The appointed actuary should indicate the method of analysis, determined in

accordance with the standards for asset adequacy analysis referred to in Section

2.B of these AOM requirements, by means of symbols that should be defined in

footnotes to the table. If more than one method of analysis is used for any single

annual statement line or line from the above table, an additional line for each

method of analysis shall be provided with the method of analysis identified for

IMR (General Account, Page____ Line____)

(Separate Accounts, Page____ Line____)

AVR

(Page____ Line____)

Net Deferred and Uncollected Premium

Actuarial Opinion and Memorandum Requirements VM-30

each line.

c. This is the allocated amount of AVR.

6. The reliance section should contain only one of the following if the appointed actuary is

using the prescribed wording:

If the appointed actuary has not relied upon other experts for data, assumptions, projections

or analysis, the reliance section should include only the following statement:

“My examination included a review of the data, assumptions, projections and analysis and

of the underlying basic asset and liability data, and such tests of the assumptions,

projections and analysis I considered necessary. I also reconciled the underlying basic asset

and liability data to the extent applicable to [exhibits and schedules listed as applicable] of

the company’s current annual statement.”

If the appointed actuary has relied upon other experts for data, assumptions, projections or

analysis, the reliance section should include only the following statement:

“In forming my opinion on [specify types of reserves], I relied upon data, assumptions,

projections or analysis prepared by [name and title each expert providing the data,

assumptions, projections, or analysis] as certified in the attached statements. I evaluated

that data, assumptions, projections or analysis for reasonableness and consistency. I also

reconciled data to the extent applicable to [list applicable exhibits and schedules] of the

company’s current annual statement. In other respects, my examination included review of

the assumptions, projections, and analysis used and tests of the assumptions, projections

and analysis I considered necessary. I have received documentation from the experts listed

above that supports the data, assumptions, projections and analysis.”

The appointed actuary shall attach to his/her opinion a statement by each expert relied upon

in the form prescribed by Section 3.A.12.

7. The opinion section should include only the following statement if the actuary is using

prescribed wording:

“In my opinion, the reserves and related actuarial items concerning the statement items

identified above:

a. Are computed in accordance with presently accepted ASOPs consistently applied

and are fairly stated, in accordance with sound actuarial principles.

b. Are based on assumptions and methods that 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.

c. Meet the requirements of the insurance laws and regulations of the state of [state

of domicile]; and

(Use one of the following phrases as appropriate)

“are at least as great as the minimum aggregate amounts required by any state

in which this company is licensed.”

“are at least as great as the minimum aggregate amounts required by any state

Actuarial Opinion and Memorandum Requirements VM-30

in which this company is licensed, with the exception of the following states [list

states]. For each listed state, a separate statement of actuarial opinion was

submitted to that state that complies with the requirements of that state.”

d. Are computed on the basis of assumptions and methods consistent with those used

in computing the corresponding items in the annual statement of the preceding

year-end (with any exceptions noted below).

e. Include provision for all reserves and related actuarial items that ought to be

established.

The reserves and related actuarial 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 the assets, and the considerations

anticipated to be received and retained under the policies and contracts, make

adequate provision, according to presently accepted ASOPs, for the anticipated

cash flows required by the contractual obligations and related expenses of the

company. (At the discretion of the commissioner, this language may be omitted

for an opinion filed on behalf of a company doing business only in this state and

in no other state.)

The methods, considerations and analyses used in forming my opinion conform to

the appropriate ASOPs as promulgated by the Actuarial Standards Board, which

form the basis of this statement of opinion.

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 that should be

considered in reviewing this opinion.

The impact of unanticipated events subsequent to the date of this opinion is beyond

the scope of this opinion. The analysis of the 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.”

8. The opinion may include a relevant comments section. The relevant comments section

should provide a brief description of each item. A detailed analysis of each item should be

included in the actuarial memorandum.

Guidance Note: An example of a relevant comment is if there has been any material change in the

assumptions or methods from those previously employed, a portion of the relevant comment section

can describe that change in the statement of opinion by including a description of the changes, such

as: “A material change in assumptions or methods was made during the past year, but such change

accords with accepted actuarial standards.” A brief description of the change would follow.

Other examples of items to include in the relevant comments section include topics of

regulatory importance, descriptions of the reason for qualifying an opinion or explanations

for an aspect of the annual statement that is not already sufficiently explained in the annual

statement.

9. The opinion should conclude with the signature of the appointed actuary responsible for

providing the actuarial opinion and the date when the opinion was rendered. The signature

Actuarial Opinion and Memorandum Requirements VM-30

and date should appear in the following format:

Signature of Appointed Actuary

Printed Name of Appointed Actuary

Address of Appointed Actuary

Telephone Number of Appointed Actuary

Email Address of Appointed Actuary

Date

10. If the appointed actuary is able to form an opinion that is not qualified, adverse or

inconclusive as those terms are defined in Section 1.B, the actuary should issue a statement

of unqualified opinion. If the opinion is adverse, qualified or inconclusive, the appointed

actuary should issue an adverse, qualified or inconclusive opinion explicitly stating the

reason for such opinion. In all circumstances, the category of opinion should be accurately

identified in the TABLE of KEY INDICATORS section of the opinion.

11. The adoption for new issues or new claims or other new liabilities of an assumption that

differs from a corresponding assumption used for prior new issues or new claims or other

new liabilities is not a change in assumptions within the meaning of this section (i.e.,

Section 3.A).

12. If the appointed actuary relies on other experts for data, assumptions, projections or

analysis in forming the actuarial opinion, the actuarial opinion should identify the experts

the actuary is relying upon and a precise identification of the information provided by the

experts. In addition, the experts on whom the appointed actuary relies shall provide a

certification that identifies the specific information provided; states that supporting

documentation was provided; opines on the accuracy, completeness or reasonableness of

the information provided; and describes their qualifications. This certification shall include

the signature, name, title, company, address and telephone number of the person rendering

the certification, as well as the date on which it is signed.

B. Description of the Actuarial Memorandum, Including an Asset Adequacy Analysis and

Regulatory Asset Adequacy Issues Summary

1. The appointed actuary shall prepare a memorandum to the company describing the analysis

done in support of his or her opinion regarding the reserves. The memorandum shall be

made available for examination by an insurance commissioner upon request but shall be

returned to the company after such examination and shall not be considered a record of the

insurance department nor subject to automatic filing with an insurance commissioner.

Actuarial Opinion and Memorandum Requirements VM-30

2. In preparing the memorandum, the appointed actuary may rely on, and include as a part of

his/her own memorandum, memoranda prepared and signed by other actuaries, each of

whom is a qualified actuary within the meaning of the VM-01 definition thereof, with

respect to the areas covered in such memoranda, and so state in his/her memoranda.

3. Any actuary engaged by the insurance commissioner under [insert reference to Section 3

of the state’s Standard Valuation Law] shall have the same status as an examiner for

purposes of obtaining data from the company, and the work papers and documentation of

the actuary shall be retained by the insurance commissioner—provided, however, that any

information provided by the company to the actuary and included in the work papers shall

be considered as material provided by the company to the insurance commissioner and

shall be kept confidential to the same extent as is prescribed by law with respect to other

material provided by the company to the insurance commissioner pursuant to the statute

governing these AOM requirements. The 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 these AOM requirements for any one of the current year or the preceding three

years.

4. The memorandum shall include the following statement:

“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.”

5. An appropriate allocation of assets in the amount of the 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; these

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.

6. 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.

7. The appointed actuary shall retain on file, for at least seven years, sufficient documentation

so that it will be possible to determine the procedures followed, the analyses performed,

the bases for assumptions and the results obtained.

8. When an actuarial opinion is provided, the memorandum shall demonstrate that the

analysis has been done in accordance with the standards for asset adequacy referred to in

Section 2.B and any additional standards specified in these AOM requirements.

9. When an actuarial opinion is provided, the memorandum shall specify for reserves:

a. Product descriptions, including market description, underwriting and other aspects

of a risk profile and the specific risks the appointed actuary deems significant.

b. Source of liability in force.

c. Reserve method and basis.

d. Investment reserves.

e. Reinsurance arrangements.

Actuarial Opinion and Memorandum Requirements VM-30

f. Identification of any explicit or implied guarantees made by the general account in

support of benefits provided through a separate account or under a separate account

policy or contract and the methods used by the appointed actuary to provide for

the guarantees in the asset adequacy analysis.

g. Documentation of assumptions used for lapse rates (both base and excess), interest

crediting rate strategy, mortality (including base assumptions and future mortality

improvement or deterioration), policyholder dividend strategy, competitor or

market interest rate, annuitization rates, commissions and expenses, and morbidity.

The documentation of the assumptions shall be such that an actuary reviewing the

actuarial memorandum could form a conclusion as to the reasonableness of the

assumptions and whether the assumptions contribute to the conclusion that the

reserves make provision for “moderately adverse conditions.”

10. When an actuarial opinion is provided, the memorandum shall specify for assets:

a. Portfolio descriptions, including a risk profile disclosing the quality, distribution

and types of assets.

b. Investment and disinvestment assumptions.

c. Source of asset data.

d. Asset valuation bases.

e. Documentation of assumptions made for default costs, bond call function,

mortgage prepayment function, determining market value for assets sold due to

disinvestment strategy and determining yield on assets acquired through the

investment strategy. The documentation of the assumptions shall be such that an

actuary reviewing the actuarial memorandum could form a conclusion as to the

reasonableness of the assumptions.

11. When an actuarial opinion is provided, the memorandum shall specify for the analysis

basis:

a. Methodology.

b. Rationale for inclusion or exclusion of different blocks of business and how

pertinent risks were analyzed.

c. Rationale for degree of rigor in analyzing different blocks of business. (Include in

the rationale the level of “materiality” that was used in determining how rigorously

to analyze different blocks of business.)

d. Criteria for determining asset adequacy. (Include in the criteria the precise basis

for determining if assets are adequate to cover reserves under “moderately adverse

conditions” or other conditions as specified in relevant ASOPs.)

e. Whether the impact of federal income taxes was considered and the method of

treating reinsurance in the asset adequacy analysis.

12. When an actuarial opinion is provided, the memorandum shall contain:

a. Summary of material changes in methods, procedures or assumptions from the

prior year’s asset adequacy analysis.

Actuarial Opinion and Memorandum Requirements VM-30

b. Summary of results.

c. Conclusions.

13. The appointed actuary shall prepare a regulatory asset adequacy issues summary, the

contents of which are specified below. The regulatory asset adequacy issues summary will

be submitted to the domiciliary commissioner no later than April 1 of the year following

the year for which a statement of actuarial opinion based on asset adequacy is required and

shall be available to any other insurance commissioners on request. An insurance

commissioner shall keep the regulatory asset adequacy issues summary confidential to the

same extent and under the same conditions as the actuarial memorandum.

a. The regulatory asset adequacy issues summary shall include:

i. The following key indicator. The only options are those presented below:

This opinion is unqualified: Yes No

If the response is “No,” the appointed actuary shall explain the reason(s)

why the opinion is not unqualified in a manner that is satisfactory to the

insurance commissioner.

ii. Descriptions of the scenarios tested (including whether those scenarios are

stochastic or deterministic) and the sensitivity testing done relative to

those scenarios. If negative ending surplus results under certain tests in the

aggregate, the actuary should describe those tests and the amount of

additional reserve as of the valuation date, which, if held, would eliminate

the negative aggregate surplus values. Ending surplus values shall be

determined by either extending the projection period until the in force and

associated assets and liabilities at the end of the projection period are

immaterial or by adjusting the surplus amount at the end of the projection

period by an amount that appropriately estimates the value that can

reasonably be expected to arise from the assets and liabilities remaining in

force. The actuary shall provide a summary of the testing results, tabular

or otherwise, sufficient to provide a clear understanding of the basis for

the actuarial opinion. This summary shall include clarifying explanations

of the results as needed.

iii. The extent to which the appointed actuary uses assumptions in the asset

adequacy analysis that are materially different from the assumptions used

in the previous asset adequacy analysis.

iv. The amount of reserves and the identity of the product lines that had been

subjected to asset adequacy analysis in the prior opinion but were not

subject to analysis for the current opinion.

v. Comments on any interim results that may be of significant concern to the

appointed actuary.

vi. The methods used by the actuary to recognize the impact of reinsurance on

the company’s cash flows, including both assets and liabilities, under each

of the scenarios tested.

vii. Whether the actuary has been satisfied that all options, whether explicit or

embedded, in any asset or liability (including, but not limited to, those

Actuarial Opinion and Memorandum Requirements VM-30

affecting cash flows embedded in fixed income securities) and equity-like

features in any investments have been appropriately considered in the asset

adequacy analysis.

b. The regulatory asset adequacy issues summary shall contain the name of the

company for which the regulatory asset adequacy issues summary is being

supplied and shall be signed and dated by the appointed actuary rendering the

actuarial opinion.

Actuarial Opinion and Memorandum Requirements VM-30

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PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

VM-31: PBR Actuarial Report Requirements for Business

Subject to a Principle-Based Valuation

Table of Contents

Section 1: Purpose .......................................................................................................................... 31-1

Section 2: General Requirements ................................................................................................... 31-1

Section 3: PBR Actuarial Report Requirements ............................................................................ 31-2

Section 1: Purpose

The purpose of this section is to establish the minimum reporting requirements for policies or contracts

subject to a principle-based valuation according to the methods defined in VM-20 and VM-21.

Section 2: General Requirements

A. Each year a company shall prepare, under the direction of one or more qualified actuaries, as

assigned by the company under the provisions of VM-G, a PBR Actuarial Report if the company

computes a DR or a SR or performs an exclusion test for any policy as defined in VM-20, or

computes an aggregate reserve for any contract as defined in VM-21.

A company that does not compute any deterministic or SR under VM-20 for a group of policies as

a result of the policies in that group passing the exclusion tests as defined in VM–20 Section 6 must

still develop a sub-report for that group of policies that addresses the relevant requirements of

Section 3.

A company that computes reserves under the Alternative Methodology defined in VM-21 must still

develop a sub-report with the applicable requirements to the Alternative Methodology for that

group of policies that addresses the relevant requirements of Section 3.

The PBR Actuarial Report shall consist of an Executive Summary, a Life Summary, a Life Report,

a VA Summary, and a VA Report, as applicable. The Life Report and the VA Report shall each

contain one or more sub-reports, with each such sub-report covering one or more groups of policies,

model segments or contracts. Each such sub-report shall be prepared by the qualified actuary

assigned responsibility for such groups of policies or contracts under the provisions of VM-G. The

PBR Actuarial Report must include documentation and disclosure sufficient for another actuary

qualified in the same practice area to evaluate the work.

B. The PBR Actuarial Report must include descriptions of all material decisions made and information

used by the company in complying with the minimum reserve requirements and must comply with

the minimum documentation and reporting requirements set forth in Section 3.

C. The Executive Summary, Life Summary and VA Summary of the PBR Actuarial Report, as

provided in Section 3.B, Section 3.C and Section 3.E, shall be submitted to the company’s

domiciliary commissioner no later than April 1 of the year following the year to which the PBR

Actuarial Report applies. The entire PBR Actuarial Report, as provided by the entirety of Section

3, shall be submitted upon request to the company’s domiciliary commissioner no later than April

1 of the year following the year to which the PBR Actuarial Report applies or within 30 days, if

requested after April 1. Similarly, the company shall submit the entire PBR Actuarial Report or the

Executive Summary, Life Summary and VA Summary upon request, to the commissioner of any

other jurisdiction in which the company is licensed.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

D. The company shall retain on file, for at least seven years from the date of filing, sufficient

documentation so that it will be possible to determine the procedures followed, the analyses

performed, the bases for assumptions and the results obtained in a principle-based valuation.

E. The PBR Actuarial Report shall be submitted in searchable portable document format (PDF) form,

in which the narrative uses a font size no smaller than 10 point. However:

1. This requirement shall in no way preclude the use of graphs and charts.

2. As needed, large arrays of data should be submitted alongside the PDF file in the

form of spreadsheets. The PDF document shall make specific reference to such

accompanying files. Such companion files shall be considered part of the PBR

Actuarial Report for regulatory review purposes.

Section 3: PBR Actuarial Report Requirements

A. The PBR Actuarial Report shall contain a table of contents with associated page numbers. The PBR

Actuarial Report shall retain and follow the order of the requirements listed herein. If only policies

valued under VM-20 are included, then Section 3.E and Section 3.F are not applicable. If only

contracts valued under VM-21 are included, then Section 3.C and Section 3.D are not applicable.

The PBR Actuarial Report shall keep the corresponding headers for each requirement and include

an explanatory statement for any requirement that is not applicable.

B. Executive Summary – The PBR Actuarial Report shall contain a single Executive Summary at the

beginning of the report which addresses all sub-reports. The Executive Summary shall include the

following:

1. Q

ualified Actuary – An opening paragraph identifying the qualified actuary that has been

assigned by the company to prepare each sub-report of the PBR Actuarial Report, the

qualifications of the qualified actuary and the relationship of the qualified actuary to the

company.

2. G

roups of Policies and/or Contracts – A listing of the groups of policies valued under

VM-20 and/or contracts valued under VM-21 covered by each sub-report.

3. P

olicies – A summary of the base policies within each VM-20 reserving category. Include

information necessary to fully describe the company’s distribution of business. For direct

business, use PBR Actuarial Report Template A located on the NAIC website

(

https://www.naic.org/pbr_data.htm?tab_3) to provide descriptions of each base policy

product type and underwriting process (including a description of the process, the time

period in which it was used, and the level of any additional margin), with a breakdown of

policy count and face amount by base policy product type and underwriting process. Also

include the target market, primary distribution system, and key product features that affect

risk, including conversion privileges.

4. C

ontracts – A description of the contracts valued under VM-21, including descriptions of

the target market, primary distribution system, and key product features that affect risk,

such as death benefit guarantees, living benefit guarantees, or any other guarantees.

5. Hi

gh-Level Results – Summarized separately for business valued under VM-20 and

business valued under VM-21, for the current and prior year, and on both a pre- and post-

reinsurance-ceded basis, a table of the final reported reserve amounts, policy or contract

counts, face amounts (for policies under VM-20) or in-force account values (for contracts

under VM-21) and any other metrics helpful for the understanding of the company’s overall

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

level of reserves under a principle-based valuation. A template is provided below for

reference.

Post-Reinsurance-Ceded Pre-Reinsurance-Ceded

Current Year

(YYYY)

Prior Year

(YYYY-1)

Current Year

(YYYY)

Prior Year

(YYYY-1)

Life Insurance valued under VM-20

- Total VM-20 Reserve

- Face Amount

N/A N/A

- Policy Count

N/A N/A

VA valued under VM-21

- Total VM-21 Reserve

- Account Value

N/A N/A

- Contract Count

N/A N/A

Guidance Note: Since AG 43 references the reserve requirements of VM-21, any contracts

within the scope of AG 43 are considered to be valued under VM-21, and they should be

documented as such within this PBR Actuarial Report.

C. Life Summary –The PBR Actuarial Report shall contain a Life Summary of the critical elements

of all sub-reports of the Life Report as detailed in Section 3.D. In particular, this Life Summary

shall include:

1. VM-20 M

ateriality – The standard established by the company pursuant to VM-20 Section

2.H.

2. M

onitored Risks and Findings or Concerns – A summary of:

a. The material risks within the principle-based valuation under VM-20 and other

risks that are subject to close monitoring by the board, the company, the qualified

actuary, or any state insurance regulators in jurisdictions in which the company is

licensed.

b. Any significant unresolved issues regarding the principle-based valuation under

VM-20 in accordance with VM-G Section 4.A.5.

Guidance Note: Risks that are subject to close monitoring include items pursuant to VM-G Section

3.A that necessitate a heightened degree of oversight for the implementation or ongoing operation

of the principle-based valuation function under VM-20. These may include risks relating to a

process, procedure, control or resource. An example might be that the company is closely

monitoring the adequacy of resources and level of knowledge for PBR.

3. Changes in Reserve Amounts – A description of the changes in reserve amounts from the

prior year to the current year and why the changes are reasonable.

4. C

hanges in Methods – A description of any significant changes from the prior year in the

methods used to model cash flows or other risks, or used to determine assumptions and

margins, and the rationale for the changes.

5. A

ssets and Risk Management – A brief description of the asset portfolio, and the approach

used to model risk management strategies, such as hedging, and other derivative programs,

including a description of any future hedging strategies supporting the policies and any

material changes to the hedging strategies from the prior year.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

6. Consistency between Life Sub-Reports – A brief description of any material differences in

methods, assumptions or risk management practices between groups of policies covered in

separate Life sub-reports, to the extent that they are not explained by variations in product

features, and the rationale for such differences.

7. Governance – A statement indicating that governance documentation, including that

required by VM-G Section 2.A.5, VM-G Section 3.A.6 and VM-G Section 4.A.3, is

available upon request.

8. Closing Section – A closing section with the signature, credentials, title, telephone number

and e-mail address of the qualified actuary (or qualified actuaries) responsible for the Life

Summary, the company name and address, and the date signed.

9. Supplement Part 1 – A copy of Part 1 of the VM-20 Reserves Supplement from the annual

statement blank.

10. S

upplement Part 2 – A copy of Part 2 of the VM-20 Reserves Supplement from the annual

statement blank.

11. R

econciliation of Reported Values – A reconciliation of reported values and an explanation

of differences, if any, between reported values in Section 3.B.5 (High-Level Results), in

the VM-20 Reserves Supplement – Part 1A and Part 1B, and in the Annual Statement

(Exhibit 3 for Separate Account values, Exhibit 5 for General Account values, and any

other).

D. L

ife Report – This subsection establishes the Life Report requirements for individual life insurance

policies valued under VM-20.

The company shall include in the Life Report and in any sub-report thereof:

1. Assumptions and Margins – Details on the valuation assumptions and margins, including:

a. Tables – For each material risk, the anticipated experience assumptions, margins,

and prudent estimate assumptions used in the model, provided in Excel format. A

complete table of reinsurance premiums is not required. If applicable, provide upon

request a sample calculation demonstrating the methodology used to determine

future reinsurance premiums reflecting non-guaranteed reinsurance features,

including margins and details of any simplifications and approximations used.

Guidance Note: See VM-20 Section 9.B.1 for a discussion on material risks.

There is a Sample Assumptions Summary for PBR Actuarial Report located on the NAIC website

(https://www.naic.org/pbr_data.htm?tab_3), which may be a useful reference document when

developing reporting in accordance with Section 3.D.1.a. For valuation dates prior to Dec. 31, 2022,

the company’s domiciliary commissioner may permit less than full compliance with the above

Section 3.D.1.a, provided that the commissioner determines that the company has made a good

faith attempt to comply.

b. Changes – A description of any changes in anticipated experience assumptions or

margins since the last PBR Actuarial Report.

c. Company Experience Studies – The following information for each risk factor,

provided using PBR Actuarial Report Template C provided on the NAIC website

(

https://content.naic.org/pbr_data.htm): the type(s) of policies included by

VM-20 reserving category, the year the most recent experience study was

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

performed, along with the observation calendar years, the policy issue years

included, and the length of the lag time used to allow for events reported after the

study period.

d. Assumption and Margin Development – The following information for each risk

factor: description of the methods used to determine anticipated experience

assumptions and margins, including the sources of experience (e.g., company

experience, industry experience, or other data); how changes in such experience

are monitored; any adjustments made to increase mortality margins above the

prescribed margin (such as to reflect increased uncertainty due to newer

underwriting approaches); and any other considerations, such as conversion

features, helpful in or necessary to understanding the rationale behind the

development of assumptions and margins, even if such considerations are not

explicitly mentioned in the Valuation Manual.

2. C

ash-Flow Models – The following information regarding the cash-flow model(s) used by

the company in performing a principle-based valuation under VM-20:

a. M

odeling Systems – Description of the modeling system(s) used for both assets

and liabilities. Each description should include identification of the model vendor

when external, identification of the model version number, discussion of the degree

of customization in the model, and discussion of the extent and function of

supporting tools (e.g., pre-processing or post-processing in a spreadsheet or

database software). If more than one modeling system is used, a description of how

the modeling systems interact.

b. M

odel Segments – Description and rationale for the organization of the policies

and assets into model segments, consistent with the guidance from VM-20 Section

7.A.1.b and VM-20 Section 7.D.2.

c. G

rouping within Model Segments (Deterministic) – Description of the approach

and rationale used to group assets and policies for the DR calculation within each

model segment.

A clear indication shall be provided of how the company met the requirements of

Section 2.G of VM-20 with respect to the grouping of policies. It shall be

documented that, upon request, information may be obtained that is adequate to

permit the audit of any subgroup of policies to ensure that the reserve amount

calculated using a seriatim (policy-by-policy) liability model produces a reserve

amount not materially higher than the reserve amount calculated using the grouped

liability model.

d. Grouping within Model Segments (Stochastic) – Description of the approach and

rationale used to group assets and policies for the SR calculation within each model

segment if different from the approach used in paragraph 2.c.

e. C

alculation and Model Validation – Description of the approach used to validate

model calculations for NPR, DR and SR, including:

i. How the model was evaluated for appropriateness and applicability, including

a thorough explanation of how the company became comfortable with the

model (e.g., specific model controls, independent reviews performed, etc.).

ii. How the model results compare with actual historical experience.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

iii. Tables showing numerical static and dynamic validation results, and

commentary on these results.

iv. Which risks, if any, are not included in the model.

v. Any limitations of the model that could materially impact the NPR, DR or SR.

f. Projection Period – Disclosure of the length of projection period and comments

addressing the conclusion that the projection of cash flows extends far enough into

the future that no obligations remain for both the deterministic and stochastic

models.

g. R

einsurance Cash Flows – Description of how reinsurance cash flows are modeled.

h. Deterministic Reserve Method – Identification of the DR method applied for each

model segment, either the gross premium valuation method outlined in VM-20

Section 4.A or the direct iteration method outlined in VM-20 Section 4.B.

3. M

ortality – The following information regarding the mortality assumptions used by the

company in performing a principle-based valuation under VM-20:

a. Mo

rtality Segments – Description of each mortality segment and the rationale for

selecting the policies to include in each mortality segment.

b. C

ompany Experience – If company experience is used, a description and summary

of the company experience mortality rates for each mortality segment, including a

summary of the company experience mortality rates for any aggregate class that

mortality rates are based on pursuant to VM-20 Section 9.C.2.d.

Industry Tables – Description of the industry basic table used for each mortality

segment, including:

i. For mortality segments where industry basic tables are used in lieu of

company experience at all durations, a discussion of why company

experience data is limited or unavailable and the rationale for the choice

of industry basic table to the extent not covered in Section 3.D.3.e and

Section 3.D.3.f below.

ii. For mortality segments where company experience with margins is graded

to industry basic table with margins per VM-20 Section 9.C.7.b, the

rationale for the choice of industry basic table to the extent not covered in

Section 3.D.3.e and Section 3.D.3.f below.

d. Aggregate Company Experience – If the company bases mortality rates on more

aggregate company experience pursuant to VM-20 Section 9.C.2.d:

i. Documentation that when the mortality segments are weighted together,

the total amount of expected claims is not less than the aggregate company

experience data for the group.

ii. If underwriting processes are treated similar pursuant to VM-20 Section

9.C.2.d.iii, a description, summary and citation of the third-party

proprietary experience studies or published medical, clinical or other

published studies used to support the expectations regarding mortality.

The full reports and analyses for any third-party proprietary experience

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

studies shall be submitted upon request, considered part of the PBR

Actuarial Report, and kept confidential to the same extent as is prescribed

by law with respect the rest of the PBR Actuarial Report.

iii. If underwriting processes are treated similar pursuant to VM-20 Section

9.C.2.d.iv, a description, explanation and summary of results for the most

recent retrospective demonstration.

e. Relative Risk Tool – Description, rationale and results of applying the Relative

Risk Tool to select the industry basic table(s), and a summary of the analysis

performed to evaluate the relationship between the Relative Risk Tool and the

anticipated mortality established for mortality segments where the mortality

assumption is affected by the application of the Relative Risk Tool. If

underwriting-based justification not involving the Relative Risk Tool is being

applied, provide similar analysis applicable to the company's methods.

f. A

lternative Data Sources – If company experience mortality rates for any mortality

segment are not based on the experience directly applicable to the mortality

segment (whether or not the data source is from the company), a summary

containing the following:

i. The source of data, including a detailed explanation of the appropriateness

of the data, and the underlying source of data, including how the company

experience mortality rates were developed, graduated and smoothed.

ii. Similarities or differences noted between policies in the mortality segment

and the policies from the data source (e.g., type of underwriting, marketing

channel, average policy size, etc.).

iii. Adjustments made to the experience mortality rates to account for

differences between the mortality segment and the data source.

iv. The number of deaths and death claim amounts by major grouping and

including: age, gender, risk class, policy duration and other relevant

information.

g. Adjustments to Company Experience Mortality – If the company makes

adjustments to company experience mortality rates:

i. Rationale for the adjustments.

ii. For adjustments due to changes in risk selection and/or underwriting

practices, a description, summary and citation of the published medical,

clinical or other published studies used to support the adjustments,

including rationale and support for use of the study (or studies).

iii. Documentation of the mathematics used to adjust the mortality.

iv. Summary of any other relevant information concerning adjustments to the

experience mortality, including the removal of policies insuring impaired

lives and those for which there is a reasonable expectation, due to

conditions such as changes in premiums or other policy provisions, that

policyholder behavior will lead to mortality results that vary significantly

from those that would otherwise be expected.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

h. Credibility – The following items related to credibility:

i. Identification of the method used to determine credibility percentage(s) for

the company’s mortality exposure period, including a listing of the

credibility percentage that was used in VM-20 Section 9.C.7.b for each

mortality segment, and an indication of whether each such credibility

percentage was determined at the mortality segment level or at a higher

level using aggregate mortality experience.

ii. A statement confirming that the credibility level was calculated using the

data from the company’s mortality experience study, based on uncapped

amounts of insurance.

iii. For each credibility percentage that was used in VM-20 Section 9.C.6.b,

the numerical values of all credibility formula inputs, along with

calculation steps. For the Limited Fluctuation Method, this shall include r,

z, m, σ, and the resulting value of Z. For the Bühlmann Empirical Bayesian

Method, this shall include A, B, C, and the resulting value of Z.

i. Mortality Improvement – Description of and rationale for the mortality

improvement assumptions applied up to the valuation date and the mortality

improvement assumptions applied beyond the valuation date.

Such a description

shall include the assumed start and end dates of the improvements and a table of

the annual improvement percentage(s) used, both without and with margin,

separately for company experience and the industry basic table(s), along with a

sample calculation of the adjustment (e.g., for a male preferred nonsmoker age 45).

j. Mortality for Converted Policies – Description of the treatment of mortality for

policies issued under group or term conversion privileges including:

i. A description of the method(s) by which any excess conversion mortality

was taken into account in the development of company experience

mortality rates (e.g., through the use of separate mortality segments for

policies issued upon conversion, through aggregation of claim experience,

or through use of other methods), the rationale for the method(s) used, and

any changes in the method(s) from those used in previous years.

ii. The source(s) of the data used in the method(s) employed.

k. Mortality for Impaired Lives or Policyholder Behavior – Disclosure of:

i. the percentage of business that is on impaired lives;

ii. whether impaired lives were included or excluded from the mortality study

upon which company experience mortality was based; and

iii. whether any adjustments to mortality assumptions for impaired lives or

policyholder behavior were found to be necessary and, if so, the rationale

for the adjustments that were used.

Item (iii) above is a required disclosure for post-level term mortality assumptions

even if the company uses a 100% shock lapse assumption, since it pertains to the

analysis demonstrating whether there are post-level term profits.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

l. Setting Prudent Estimate Assumptions for Mortality – If company experience is

used, a summary of the approach used to determine the final set of prudent estimate

assumptions for mortality, including:

i. The start and ending period of time used to grade company experience to

the industry basic table, including the approach used to grade company

experience mortality rates to the industry table for advanced ages (attained

age 100 and up).

ii. Description and results of any smoothing technique used.

iii. Description of any adjustments that were made to ensure reasonable

relationships are maintained between mortality segments that reflect the

underwriting class or risk class of each mortality segment.

iv. Description and justification of the mortality rates the company actually

expects to emerge, and a demonstration that the anticipated experience

assumptions are no lower than the mortality rates that are actually expected

to emerge. The description and demonstration should include the level of

granularity at which the comparison is made (e.g., ordinary life, term only,

preferred term, etc.). For the mortality rates that are actually expected to

emerge, the description should include a forward-looking qualitative

analysis which includes, but is not limited to, the discussion of any

underwriting standard changes (or lack thereof), distribution channel

changes (or lack thereof), any pandemic adjustments (or lack thereof), and

the results of ongoing experience monitoring.

m. Actual to Expected Mortality Analysis – Summary of the results of an actual to

expected (without margins) analysis at least once every three years, or, for

mortality segments for which mortality rates are based on more aggregate company

experience pursuant to VM-20 Section 9.C.2.d.vi, at least annually for each

individual mortality segment separately until such a time as the estimated change

in expected mortality has been shown to be stable and unlikely to change based on

further review. For the purposes of this analysis, the expected mortality shall be

that last determined under VM-20 Section 9.C.2.e.

n. A

djustments to NPR Mortality – Description and rationale of any adjustments

made to the CSO mortality rates used in the NPR calculation to reflect the

requirements of VM-20 Section 3.C.1.g.

 o.  A

djustments to Prescribed Margins - Description and rationale for any adjustments

made to prescribed mortality margins pursuant to VM-20, Section 9.C.6.d or

Section 9.C.6.e.

4. Policyholder Behavior – The following information regarding each policyholder behavior

assumption used by the company in performing a principle-based valuation under VM-20:

a. D

ata Reliability – Discussion of the reliability of the data and an explanation of

why the data is reasonable and appropriate for this purpose.

b. S

parse Data – Explanation of how assumptions were determined for periods that

were based on less than fully credible or relevant data.

Actual to Expected Policyholder Behavior Analysis – The results of the most

recently available actual to expected (without margins) analysis, including:

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

i. Definitions of the expected basis used in all actual-to-expected ratios

shown.

ii. Comments addressing the conclusions drawn from the analysis.

d. Margins and Sensitivity Tests – Rationale for the particular margins used and a

description of testing performed to determine the size and direction of the margins

by duration, including how the results of sensitivity tests were used in connection

with setting the margins.

Impact of Non-guaranteed Elements – How changes in NGE affect the

policyholder behavior assumptions.

f. S

cenario-Dependent Dynamic Formulas – Description of any scenario-dependent

dynamic formula.

g. C

hanges from Prior Year – Changes in anticipated experience assumptions and/or

margins since the last PBR Actuarial Report.

h. F

lexible Premiums – For policies that give policyholders flexibility in timing and

amount of premium payments, the results of sensitivity tests related to the

following premium payment patterns: minimum premium payment, no further

premium payment, pre-payment of premium assuming a single premium and pre-

payment of premiums assuming level premiums.

i. An

ti-Selective Lapses – Specific to lapses, a description of and rationale regarding

adjustments to lapse and mortality assumptions to account for potential anti-

selection.

j. C

ompetitor Rates – Competitor rate definition and usage.

k. Post-Level Term Testing – For products with a level term period:

i. Summary results of the seriatim comparison of the present value of post-

level term cash inflows and outflows for the DR as required by VM-20

Section 9.D.6.

ii. If this comparison showed that there were post-level term profits, describe

how anti-selection was handled in the post-level term period, including the

prudent estimate premium, mortality and lapse assumptions used.

iii. If the comparison showed that there were post-level term losses, confirm

that the prudent estimate premium, mortality and lapse assumptions for the

post-level period were addressed in Section 3.D.1.a and were used in the

reserve calculation.

l. Term Conversions – Description of how the company reflects the impact of any

term conversion privilege contained in the policy.

m. Lapse Rates for Converted Policies – Description of and rationale for lapse rates

used for policies issued under any group or term conversion privilege.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

5. Expenses – The following information regarding the expense assumptions used by the

company in performing a principle-based valuation under VM-20:

a. Allocating Expenses to PBR Policies – Methodology used to allocate expenses to

the individual life insurance policies subject to a principle-based valuation under

VM-20, and a statement confirming that expenses have been fully allocated in

accordance with VM-20 Section 9.E.1.i.

b. A

llocating Expenses to Model Segments – Methodology used to apply the

allocated expenses to model segments or sub-segments within the cash-flow

model.

c. C

ommissions and Acquisition Expenses – One of the following statements, as

applicable, confirming the company’s treatment of commissions and acquisition

expenses pursuant to VM-20 Sections 7.B.1.e and 9.E.1.m:

i. There are no future commissions or acquisition expenses associated with

business in force as of the valuation date; therefore, none are included in

the model.

ii. There are future commissions and acquisition expenses associated with

business in force as of the valuation date, and these have been provided in

response to Section 3.D.1.a.

iii. There are future commissions associated with business in force as of the

valuation date, and these have been provided in response to Section

3.D.1.a. There are no future acquisition expenses associated with business

in force as of the valuation date; therefore, none are included in the model.

iv. There are future acquisition expenses associated with business in force as

of the valuation date, and these have been provided in response to Section

3.D.1.a. There are no future commissions associated with business in force

as of the valuation date; therefore, none are included in the model.

d. Spreading of Costs – Identification of types of costs that were spread, and for how

many years, if any cost spreading was done pursuant to VM-20 Section 9.E.1.b.

Expense Margins – Methodology used to determine margins.

f. Inflation – Assumed rate(s) of inflation and the underlying rationale/derivation,

including any consideration given to making distinctions between short term and

long term inflation rates.

g. Actual to Expected Analysis – The results of the most recently available actual to

expected (without margins) analysis, including:

i. Definitions of the expected basis used in all actual-to-expected ratios

shown.

ii. Comments addressing the conclusions drawn from the analysis.

6. Assets – The following information regarding the asset assumptions used by the company

in performing a principle-based valuation under VM-20:

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

a. Starting Assets – The amount of starting assets supporting the policies subject to a

principle-based valuation under VM-20, and the method and rationale for

determining such amount.

b. A

sset Selection – Method used and rationale for selecting the starting assets and

apportioning the assets between the policies subject to a principle-based valuation

under VM-20, and those policies not subject to principle-based valuation under

VM-20.

c. A

sset Segmentation – Method used and rationale for allocating the total asset

portfolio into multiple segments, if applicable.

d. Asset Description – Description of the starting asset portfolio, including the types

of assets, duration and their associated quality ratings.

Market Values – Method used to determine projected market value of assets (if

needed for assumed asset sales).

f. R

isk Management – Detailed description of model risk management strategies,

such as hedging and other derivative programs, including any future hedging

strategies supporting the policies and any adjustments to the SR pursuant to VM-

20, Section 7.K3 and VM-20, Section 7.K.4, specific to the groups of policies

covered in this sub-report and not discussed in the Life Summary Section 3.C.5.

Documentation of any future hedging strategies should include documentation

addressing each of the CDHS documentation attributes. The following should be

included in the documentation:

i. Descriptions of basis risk, gap risk, price risk and assumption risk.

ii. Methods and criteria for estimating the a priori effectiveness of the

strategy.

iii. Results of any reviews of actual historical hedging effectiveness.

iv. Strategy Changes – Discussion of any changes to the hedging strategy

during the past 12 months, including identification of the change, reasons

for the change, and the implementation date of the change.

v. Hedge Modeling – Description of how the hedge strategy was

incorporated into modeling, including:

• Differences in timing between model and actual strategy

implementation.

• For a company that does not have a future hedging strategy

supporting the contracts, confirmation that currently held hedge

assets were included in the starting assets.

• Evaluations of the appropriateness of the assumptions on future

trading, transaction costs, other elements of the model, the strategy,

and other items that are likely to result in materially adverse results.

• Discussion of the projection horizon for the future hedging strategy

as modeled and a comparison to the timeline for any anticipated

future changes in the company’s hedging strategy.

• If residual risks and frictional costs are assumed to have a value of

zero, a demonstration that a value of zero is an appropriate

expectation.

• Any discontinuous hedging strategies modeled, and where such

discontinuous hedging strategies contribute materially to a reduction

in the SR, any evaluations of the interaction of future trigger

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

definitions and the discontinuous hedging strategy, including any

analyses of model assumptions that, when combined with the reliance

on the discontinuous hedging strategy, may result in adverse results

relative to those modeled.

• The approach and rationale used to reflect the hedge modeling

error(s).

g. Foreign Currency Exposure – Analysis of exposure to foreign currency

fluctuations.

h. Max

imum Net Spread Adjustment Factor – Summary of the results of the steps for

determining the maximum net spread adjustment factor for each model segment,

including the method used to determine option adjusted spreads for each existing

asset.

i. Net

Asset Earned Rate – For each model segment’s DR: If the gross premium

valuation method outlined in VM-20 Section 4.A was used, a listing or graph of

the path of calculated NAER for all years of the projection and an explanation of

any abnormally high or low NAER values or unusual patterns over time.

j. I

nvestment Expenses – Description of the investment expense assumptions.

k. Prepayment, Call and Put Functions – Description of any prepayment, call and put

functions.

l. A

sset Collar – If required under the criteria described in VM-20 Section 7.D.3,

documentation that supports the conclusion that the modeled reserve is not

materially understated as a result of the estimate of the amount of starting assets.

m. R

esidual Risks and Frictional Costs – With respect to modeling of derivative

programs if a company assumes that residual risks and frictional costs have a value

of zero, a demonstration that a value of zero is an appropriate expectation.

n. P

olicy Loans – Description of how policy loans are modeled, including

documentation that if the company substitutes assets that are a proxy for policy

loans, the modeled reserve produces reserves that are no less than those produced

by modeling existing loan balances explicitly.

o. G

eneral Account Equity Investments – Description of an approach and rationale

used to group general account equity investments, including an analysis of the

proxy construction process that establishes the relationship between the investment

return on the proxy and the specific equity investment category.

p. S

eparate Account Funds – Description of the approach and rationale used to group

separate account funds and subaccounts, including analysis of the proxy

construction process that establishes a firm relationship between the investment

return on the proxy and the specific variable funds.

q. M

apping Stochastic Economic Paths to Fund Performance – Description of

method to translate stochastic economic paths into fund performance.

r. M

odeled Company Investment Strategy and Reinvestment Assumptions –

Description of the modeled company investment strategy (before comparison to

the alternative investment strategy), including asset reinvestment and

disinvestment assumptions, and documentation supporting the appropriateness of

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

the modeled company investment strategy compared to the actual investment

policy of the company.

s. Alternative Investment Strategy – Documentation demonstrating compliance with

VM-20 Section 7.E.1.g, showing that the modeled reserve is the higher of that

produced using the modeled company investment strategy and the alternative

investment strategy.

t. N

umber of Scenarios – Number of scenarios used for the SR and the rationale for

that number.

u. S

cenario Reduction Techniques – If a scenario reduction technique is used, a

description of the technique and documentation of how the company determined

that the technique meets the requirements of Section 2.G of VM-20.

7. R

evenue-Sharing Assumptions – The following information regarding the revenue-sharing

assumptions used by the company in performing a principle-based valuation under VM-

20:

a. A

greements and Guarantees – Description of revenue-sharing agreements and the

nature of any guarantees underlying the revenue-sharing income included in the

projections, including: the terms and limitations of the agreements; relationship

between the company and the entity providing the revenue-sharing income;

benefits and risk to the company and the entity providing the revenue-sharing

income of continuing the arrangement; the likelihood that the company will collect

the revenue-sharing income during the term of the agreement; the ability of the

company to replace the services provided by the entity providing the revenue-

sharing income; and the ability of the entity providing the revenue-sharing income

to replace the service provided by the company.

b. A

mounts Included – The amount of revenue-sharing income and a description of

the rationale for the amount of revenue-sharing income included in the projections,

including any reduction for expenses.

c. R

evenue-Sharing Margins – The level of margin in the prudent estimate

assumptions for revenue-sharing income and description of the rationale for the

margin for uncertainty. Also, a demonstration that the amounts of net revenue-

sharing income, after reflecting margins, do not exceed the limits set forth in VM-

20, Section 9.G.8.

8. R

einsurance – The following information regarding the reinsurance assumptions used by

the company in performing a principle-based valuation under VM-20:

a. A

greements – For those reinsurance agreements included in the calculation of the

minimum reserve as per VM-20 Section 8.A, a description of each reinsurance

agreement, including, but not limited to, the type of agreement, the counterparty,

the risks reinsured, any provisions related to converted policies, the portion of

business reinsured, identification of both affiliated and non-affiliated, as well as

captive and non-captive, or similar relationships, and whether the agreement

complies with the requirements of the credit for reinsurance under the terms of the

AP&P Manual.

b. A

ssumptions – Description of reinsurance assumptions used to determine the cash

flows included in the model.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

c. Separate Stochastic Analysis – To the extent that a single deterministic valuation

assumption for risk factors associated with certain provisions of reinsurance

agreements will not adequately capture the risk of the company, a description of

the separate stochastic analysis that was used outside the cash-flow model to

quantify the impact on reinsurance cash flows to and from the company. The

description should include which variables are modeled stochastically.

d. M

ultiple Agreement Allocation Method – If a policy is covered by more than one

reinsurance agreement, description of the method to allocate reinsurance cash

flows from each agreement.

e. C

ounterparty Assets – Pursuant to VM-20 Section 8.C.14, if the company

concludes that modeling the assets supporting reserves held by a counterparty is

not necessary, documentation of the testing and logic leading to that conclusion.

f. Pr

e-Reinsurance-Ceded Minimum Reserve – Description and rationale for

methods and assumptions used in determining the pre-reinsurance-ceded minimum

reserve that differ from methods and assumptions used in determining the

minimum reserve (post-reinsurance-ceded), including support that such methods

and assumptions are consistent with VM-20 Section 8.D.2.

g. Phase-In: If electing a phase-in period as described in VM-20 Section 8.C,

documentation of the length of the phase-in approved by the company’s

domiciliary commissioner, the result of the current and prior methodologies, the

weights applied to each result, and confirmation that reinsurance assumptions for

the calculation of the prior methodology are discussed in Section 3.D.8.b above.

9. Non

-guaranteed Elements – The following information, where applicable, regarding the

NGE assumptions used by the company in performing a principle-based valuation under

VM-20:

a. M

odeling – Description of the approach used to model NGEs, including a

discussion of how future NGE amounts were adjusted in scenarios to reflect

changes in experience and including how lag in timing of any change in NGE

relative to date of recognition of change in experience was reflected in projected

NGE amounts.

b. NGE

Margins – Description of the approach to establish a margin for

conservatism, if applicable.

c. P

ast Practices and Policies – Description of how the company’s past NGE practices

and established NGE policies were reflected in projected NGE amounts, including

a discussion of the impact of interest rates or other market factors on past and

projected premium scales, cost of insurance scales, and other NGEs.

d. C

onsistency – Description of the following: (i) whether and how projected levels

of NGEs in the model are consistent with experience assumptions used in each

scenario; and (ii) whether and how policyholder behavior assumptions are

consistent with the NGE assumed in the model.

e. C

onditional Exclusion – State if and how the provision in Section 7.C.5 of VM-20

allowing conditional exclusion of a portion of an NGE is used.

i. If used, discuss whether the provision is used for any purpose other than

recognition of subsidies for participating business.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

ii. If used, discuss how prevention of double counting of assets is ensured.

Guidance Note: Examples of considerations include: (1) if the subsidy is provided by a

downstream company, and the carrying value of the downstream company is reported as an asset

on the company’s books, where is the offsetting liability reported; or (2) if the subsidy is provided

by another block of business within the company, is the subsidy included in cash-flow testing of

the “other block.”

f. Interest Crediting Strategy – Description of interest crediting strategy.

g. Interest Bonus – Description of any interest bonuses included in the model.

10. Exclusion Tests – The following information regarding the deterministic and stochastic

exclusion tests, if calculated:

a. E

xclusion Test Policies – Identification and description of each group of policies

using the deterministic and stochastic exclusion tests, including contract type and

risk profile, and rationale for each grouping of policies.

b. T

ype of Stochastic Exclusion Test – Identification of each group of policies that

the company elects to exclude from SR requirements and the SET used (passing

the SERT or stochastic exclusion demonstration test, or certification that the group

of policies does not contain material interest, tail or asset risk). For any group of

policies for which a prior year’s result is being invoked as to the passing of the

stochastic exclusion demonstration test or the certification that policies are not

subject to material interest rate risk, a statement indicating which prior year’s result

it was.

c. St

ochastic Exclusion Ratio Test – For groups of policies for which the SERT is

used, the following data on a post-reinsurance-ceded basis calculated in

accordance with VM-20 Section 6.A.2 and on a pre-reinsurance-ceded basis

calculated in accordance with VM-20 Section 8.D.2:

i. The adjusted DR for each of the 16 scenarios.

ii. The values of a, b and c.

iii. The value of the test ratio (b – a)/c.

d. Stochastic Exclusion Demonstration Test – For groups of policies for which the

stochastic exclusion demonstration test is used, the rationale for using the

demonstration test, identification of which acceptable demonstration method listed

under VM-20 Section 6.A.3.b was applied or a statement that another method

acceptable to the commissioner was applied, and the details of the demonstration

supporting the exclusion in the initial exclusion year and at least once every three

calendar years subsequent to the initial exclusion year.

e. SET C

ertification Method – For groups of policies for which the SET certification

method is used, support for the certification including supporting analysis and

tests.

f. F

allback Results – If the stochastic exclusion demonstration test or the certification

method was successfully used for any group of policies for which the SERT was

initially attempted but failed, the company shall so indicate and show the

unsuccessful SERT results.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

Similarly, if the Stochastic Exclusion Ratio Test was successfully used for any

group of policies for which the stochastic exclusion demonstration test under the

method of VM-20 Section 6.A.3.b.iii or VM-20 Section 6.A.3.b.iv was initially

attempted but failed, the company shall so indicate and show the results of the

unsuccessful stochastic exclusion demonstration test.

g. Deterministic Net Premium Test – For groups of policies for which the

Deterministic Net Premium Test is performed, the results of the Deterministic Net

Premium Test for each group of policies.

h. D

ET Certification Method – For groups of policies for which the DET certification

method is used, support for the certification, including policy counts, reserve

amounts and their corresponding location in Exhibit 5 of the Annual Statement,

methodology, supporting analysis, and tests.

11. A

dditional Information – The following additional information:

a. Impact of Margins for Each Risk Factor –For each group of policies for which a

separate DR is calculated, the impact of margins on the DR for each risk factor, or

group of risk factors, that has a material impact on the DR, determined by

subtracting (i) from (ii):

i. The DR for that group of policies, but with the reserve calculated based on

the anticipated experience assumption for the risk factor and prudent

estimate assumptions for all other risk factors.

ii. The DR for that group of policies as reported.

Guidance Note: Pursuant to VM-20, margins must increase the reserve, so the impact of each

margin, as calculated by subtracting (i) from (ii) above, must be positive.

b. Aggregate Impact of Margins – For each group of policies for which a separate

DR is calculated, the aggregate impact of all margins on the DR for that group of

policies determined by subtracting (i) from (ii):

i. The DR for that group of policies, but with the reserve calculated based on

anticipated experience assumptions for all risk factors prior to the addition

of any margins.

ii. The DR for that group of policies as reported.

c. Impact of Implicit Margins – For purposes of the disclosures required in 11.a and

11.b above:

i. If the company believes the method used to determine anticipated

experience mortality assumptions includes an implicit margin, the

company can adjust the anticipated experience assumptions to remove this

implicit margin for this reporting purpose only. If any such adjustment is

made, the company shall document the rationale and method used to

determine the anticipated experience assumption.

ii. Since the company is not required to determine an anticipated experience

assumption or a prudent estimate assumption for risk factors that are

prescribed for the DR (i.e., interest rates movements, equity performance,

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

default costs and net spreads on reinvestment assets), when determining

the impact of margins, the prescribed assumption shall be deemed to be

the prudent estimate assumption for the risk factor, and the company can

elect to determine an anticipated experience assumption for the risk factor,

based on the company's anticipated experience for the risk factor. If this is

elected, the company shall document the rationale and method used to

determine the anticipated experience assumption.

d. Sensitivity Tests – For each distinct product type for which margins were

established:

i. List the specific sensitivity tests performed for each risk factor or

combination of risk factors.

ii. Indicate whether the reserve was calculated based on the anticipated

experience assumptions or prudent estimate assumptions for all other risk

factors while performing the tests.

iii. Provide the numerical results of the sensitivity tests.

iv. Explain how the results of sensitivity tests were used or considered in

developing assumptions.

Guidance Note: If a model segment contains multiple distinct product types (e.g., ART, Level

Term), (i) through (iv) should be done for each product type.

e. Material Risks Not Fully Reflected – A description of material risks not fully

reflected in the cash-flow model used to calculate the SR, including:

i. A description of each element of the cash-flow model for which this

provision has been made in the SR (e.g., risk factors, policy benefits, asset

classes, investment strategies, risk mitigation strategies, etc.).

ii. A description of the approach used by the company to provide for these

risks in the SR outside the cash-flow model, a summary of the rationale

for selecting this approach and the key assumptions justifying the

underlying approach.

iii. If there is more than one model element included in this provision,

clarifying whether a separate provision was determined for each element,

or collectively for groups of two or more elements and explaining the

methodology, supporting rationale and key assumptions for how separate

provisions were combined.

f. Allocation for DR – For each group of policies for which a DR is calculated and

an allocation is performed as described in VM-20 Section 4.C, disclosure of the

ratio (i) to (ii), in which the respective components are:

i. The DR for that group of policies as reported.

ii. The sum of the DR calculated separately for each VM-20 reserving

category within that group of policies.

g. Impact of Aggregation for SR – For each group of policies for which a SR is

calculated, the impact of aggregation on the SR, including a discussion of material

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

risk offsets across different product types within a VM-20 reserving category that

were modeled together.

h. Calculations as of the Valuation Date – The following information:

i. A statement confirming that the NPR was calculated based on policies in

force as of the valuation date.

ii. If the DR and/or SR were calculated as of the valuation date, a statement

confirming that the calculations were based on the following items:

policies in force, starting assets, and the starting yield curve as of the

valuation date, and the prescribed Table A and Tables F through J in effect

on the valuation date.

i. Calculations as of a Date Preceding the Valuation Date – If the DR and/or SR were

calculated as of a date preceding the valuation date (i.e., if the dates of any of the

items listed in Section 3.D.11.h.ii preceded the valuation date):

i. The dates used for each item listed in Section 3.D.11.h.ii, separately for

the DR and/or SR.

ii. A description of the methodology used to determine the adjustment

required by VM-20 Section 2.E, along with the adjustment amount and an

explanation that justifies why it produces a reserve that is not materially

less than a reserve calculated as of the valuation date.

j. Approximations, Simplifications, and Modeling Efficiency Techniques – A

description of each approximation, simplification or modeling efficiency

technique used in reserve calculations, and a statement that the required VM-20

Section 2.G demonstration is available upon request and shows that: 1) the use of

each approximation, simplification, or modeling efficiency technique does not

understate the reserve by a material amount; and 2) the expected value of the

reserve is not less than the expected value of the reserve calculated that does not

use the approximation, simplification, or modeling efficiency technique.

k. Aggregate Impact of Approximations, Simplifications and Modeling Efficiency

Techniques – Support that the aggregate impact of approximations and

simplifications does not result in a material understatement of the reserve. This

should include consideration of not just the magnitude of the sum of the individual

impacts when considered in isolation, but also consideration of any potential

interaction of approximations, simplifications, and modeling efficiency

techniques.

l. ULSG Detail – Breakdown of ULSG reserve results (NPR, DR and SR) into Variable

UL, Indexed UL and regular UL components, both pre- and post-reinsurance,

along with case counts and face amounts.

Any given UL policy is to be classified in its entirety as either Variable UL,

Indexed UL or regular UL. If a ULSG policy satisfies the definition of a variable

life insurance policy (even if it contains options for indexed funds or fixed funds),

that policy should be classified as variable for this VM-31 reporting purpose. If it

does not, but it satisfies the definition of an Indexed UL policy, it should be

classified as Indexed.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

m. PIMR – Description of the methodology used to derive the PIMR balance on the

projection start date and allocate it among the model segments, and the dollar

amount of each such portion of PIMR.

12. R

iders and Supplemental Benefits – The following information on the riders and

supplemental benefits attached to the base policies is subject to VM-20:

a. A brief description of the coverage provided and a list of the products to which the

rider or supplemental benefit is attached.

b. Whether the rider or supplemental benefit has a separate premium or charge.

c. For the NPR, DR, and SR separately, an indication of whether the rider or

supplemental benefit was valued with the base policy or separately, and a brief

description of the valuation methodology used.

d. For the NPR, DR, and SR separately, whether the rider or supplemental benefit

had a non-zero reserve and whether the reserve amount was included in the

respective column of Part 1 of the VM-20 Reserves Supplement.

e. Any other information necessary to fully describe the company’s riders and

supplemental benefits and the reserve methodology used.

13. Reliance Descriptions and Statements – A description of those areas where the qualified

actuary relied on others for data, assumptions, projections or analysis in performing the

principle-based valuation under VM-20 and a reliance statement from each individual on

whom the qualified actuary relied that includes:

a. R

eliance Listing – The name, title, telephone number, e-mail address and

qualifications of the individual, along with the individual’s company name and

address, and the information provided.

b. R

eliance Statements – A statement as to the accuracy, completeness or

reasonableness, as applicable, of the information provided, along with a signature

and the date signed.

14. C

ertifications

a. Investment Officer on Investments – A certification from a duly authorized

investment officer that the modeled company investment strategy, including any

future hedging strategies supporting the policies, is representative of and consistent

with the company’s investment policy and that documentation of the CDHS

attributes for any future hedging strategies supporting the policies are accurate.

b. Q

ualified Actuary on Investments – A certification by a qualified actuary, not

necessarily the same qualified actuary that has been assigned responsibility for the

PBR Actuarial Report or this sub-report, that the modeling of any future hedging

strategies supporting the policies is consistent with the company’s actual future

hedging strategies and was performed in accordance with VM-20 and in

compliance with all applicable ASOPs, and the alternative investment strategy as

defined in VM-20 Section 7.E.1.g reflects the prescribed mix of assets with the

same WAL as the reinvestment assets in the company investment strategy.

Senior Management on Internal Controls – A certification from senior

management, other than the qualified actuary, regarding the effectiveness of

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

internal controls with respect to the principle-based valuation under VM-20, as

provided in Section 12B(2) of Model #820.

d. Qualified Actuary on Interest Rate and Volatility Risks – Certification, by the

qualified actuary assigned responsibility under VM-G for a group of policies that

qualifies for exclusion from the requirement to calculate a SR under the provisions

of VM-20, Section 6.A.1.a.iii, that this group of policies is not subject to material

interest rate risk or asset return volatility risk.

e. Q

ualified Actuary on Accordance with VM-20 and Model #820 – Certification by

the qualified actuary, for the groups of policies for which responsibility was

assigned, that the principle-based valuation was performed in accordance with the

requirements outlined in VM-20 and the relevant sections of Model #820.

f. Q

ualified Actuary on Assumptions and Margins – Certification by the qualified

actuary, for the groups of policies for which responsibility was assigned, that the

assumptions used in the principle-based valuation under VM-20, other than

assumptions used for risk factors that are prescribed or stochastically modeled, are

prudent estimate assumptions and the margins applied therein are appropriate.

g. Qualified Actuary on Conservatism of Converted Policies – Certification by the

qualified actuary assigned responsibility under VM-G for a group of policies that

qualifies for exclusion from the requirement to calculate a DR under the provisions

of VM-20 Section 6.B.2.b, that the total reserve for this group of policies includes

a prudent provision for the additional mortality associated with the conversion and

reasonably exceed the value of a DR which otherwise would have been calculated

for this group of policies.

15. Closing Paragraph – A closing paragraph with the signature, credentials, title, telephone

number and e-mail address of the qualified actuary, the company name and address, and

the date signed.

VA Summary – The PBR Actuarial Report shall contain a VA Summary of the critical elements of

all sub-reports of the VA Report as detailed in Section 3.F. In particular, this VA Summary shall

include:

1. Mat

eriality – The Standard established by the company pursuant to VM-21 Section 1.E.

2. Material Risks – A summary of the material risks within the principle-based valuation

under VM-21 subject to close monitoring by the board, the company, the qualified actuary,

or any state insurance regulators in jurisdictions in which the company is licensed. Include

any summary metrics used to monitor the risk, such as the level of ITM by benefit type as

of the valuation date. Also, include any significant information required to be provided to

the board pursuant to VM-G, such as elements materially inconsistent with the company’s

overall risk assessment processes.

3. C

hanges in Reserve Amounts – A description of any material changes in reserve amounts

from the prior year and an explanation for the changes, including the results of any

supporting analysis such as an attribution analysis or waterfall chart. A table shall be

attached to the summary, listing the aggregate reserve amount, reserve component

amounts, and key statistics for the business valued under VM-21, including but not limited

to the SR, additional standard projection amount, alternative methodology reserve, account

values, cash surrender value, and contract count. A template is provided below for

reference.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

Post-Reinsurance-Ceded Pre-Reinsurance-Ceded

Current

Year

(YYYY)

Prior Year

(YYYY-1)

Current

Year

(YYYY)

Prior Year

(YYYY-1)

Total VM-21 Reserve

Stochastic Reserve (SR)

- SR Amount

- CTE 70 (best efforts)

- CTE 70 (adjusted)

- E Factor

N/A N/A

Standard Projections

- Additional Standard Projection Amount

- Prescribed Projections Amount

- Unbuffered Additional Standard Projection Amount

- Unfloored CTE 70 (adjusted)

- Unfloored CTE 65 (adjusted)

Alternative Methodology (AM)

- AM Reserve

- AM Reserve (without floor)

- Cash Surrender Value Floor

- Reserve Floor under AG 33

Phase-In Components

N/A N/A

Summary Statistics

- Separate Account Value

N/A N/A

- General Account Value

N/A N/A

- Total Account Value

N/A N/A

- Cash Surrender Value

N/A N/A

- Contract Count

N/A N/A

RBC Amount

- CTE 98 (pre-tax)

N/A

- CTE 98 (post-tax)

N/A N/A

- Effect of Phase-In

N/A

- Effect of Smoothing

N/A

4. Changes in Methods – A description of any significant changes from the prior year in the

methods used to model cash flows or other risks, or used to determine assumptions and

margins, and the rationale for the changes.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

5. Assets and Risk Management – A brief description of the general account asset portfolio,

and the approach used to model risk management strategies, such as hedging and other

derivative programs, including a description of any future hedging strategies supporting

the contracts and any material changes to the hedging strategies from the prior year.

6. C

onsistency between VA Sub-Reports – A brief description of any material differences in

methods, assumptions, or risk management practices between groups of contracts covered

in separate VA sub-reports, to the extent that they are not explained by variations in product

features, and the rationale for such differences.

7. C

losing Section – A closing section with the signature, credentials, title, telephone number

and e-mail address of the qualified actuary (or qualified actuaries) responsible for the VA

Summary, the company name and address, and the date signed.

8. S

upplement Part 1 – A copy of Part 1 of the VA Supplement from the annual statement

blank.

9. S

upplement Part 2 – A copy of Part 2 of the VA Supplement from the annual statement

blank.

F. VA

Report – This subsection establishes the VA Report requirements for variable annuity contracts

valued under VM-21.

The company shall include in the VA Report and in any sub-report thereof:

1. Liabilities – The following information regarding the liabilities included in the principle-

based valuation under VM-21:

a. P

roduct Descriptions – Description of key product features that impact risk,

including mortality and expense (M&E) charges, death benefit guarantees, living

benefit guarantees, and any premium or persistency bonuses, to the extent not

discussed in Section 3.B.4.

b. L

iability Data Source – Description of source(s) of liability data.

c. Alternative Methodology Scope – Identification of products whose reserve was

determined using the Alternative Methodology, including description of their key

product features (e.g., whether they contain no guarantee living or death benefits,

or contain GMDBs only), total account value, and contract count.

2. C

ash-Flow Models – The following information regarding the cash-flow model(s) used by

the company in performing a principle-based valuation under VM-21:

a. M

odeling Systems – Description of the modeling system(s) used for both assets

and liabilities. If more than one modeling system is used, a description of how the

modeling systems interact and how the results from different modeling systems are

combined to determine the aggregate reserve.

b. M

odel Segments – Description and rationale for the organization of the contracts

and assets into model segments, if any, as referenced in VM-21 Section 3.D.

c. M

odel Validation – Description of the approach used to validate model

calculations within each model segment for the models used to determine the SR,

including: how the models were evaluated for appropriateness and applicability;

how the model results compare with actual historical experience; what, if any, risks

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

are not included in the models; the extent to which the correlation of different risks

is reflected in the margins; and any material limitations of the models.

d. Projection Period – Disclosure of the length of projection period and comments

addressing the conclusion that no material amount of business remains at the end

of the projection period for the models used to determine the SR.

e. A

pproximations, Simplifications, and Modeling Efficiency Techniques – A

description of each approximation, simplification or modeling efficiency

technique used in reserve or TAR calculations, and a statement that the required

VM-21 Section 3.H demonstration is available upon request and shows that: 1) the

use of each approximation, simplification, or modeling efficiency technique does

not understate TAR by a material amount; and 2) the expected value of TAR is not

less than the expected value of TAR calculated without using the approximation,

simplification, or modeling efficiency technique.

f. A

ggregate Impact of Approximations, Simplifications and Modeling Efficiency

Techniques – Support that the aggregate impact of approximations and

simplifications does not result in a material understatement of TAR. This should

include consideration of not just the magnitude of the sum of the individual impacts

when considered in isolation, but also consideration of any potential interaction of

approximations, simplifications, and modeling efficiency techniques.

g. Model Cells – If a compressed liability model is used, as allowed by VM-21

Section 4.A.3, a statement that the assignment of contracts to model cells was not

done in a manner that intentionally understates the resulting reserve. Also, upon

request by the domiciliary commissioner, include information to permit the audit

of any subgroup of contracts to ensure that the reserve amount calculated using a

seriatim (contract-by-contract) liability model produces a reserve amount not

materially higher than the reserve amount calculated using the compressed liability

model.

h. S

cenario Reserve Method – Identification of the method used to determine the

scenario reserve, either (1) the method described in VM-21 Section 4.B.2 and VM-

21 Section 4.B.3; or (2) the direct iteration method described in VM-21 Section

4.B.4.

3. L

iability Assumptions and Margins – A listing of the assumptions and margins used in the

projections to determine the SR, including a discussion of the source(s) and the rationale

for each assumption:

a. P

remiums and Subsequent Deposits – Description of premiums and subsequent

deposits.

b. I

nterest Crediting Strategy – Description of the interest crediting strategy.

c. Commissions – Description of commissions, including any commission

chargebacks.

d. E

xpenses Other than Commissions – Description and listing of insurance company

expenses other than commissions, such as overhead, including:

i. Method used to allocate expenses to the contracts included in a principle-

based valuation under VM-21 and a statement confirming that expenses

have been fully allocated in accordance with VM-21, Section 12.D.1.h.

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ii. Method used to apply the allocated expenses to model segments or sub-

segments within the cash-flow model.

iii. Identification of the types of costs that were spread, and for how many

years, if any cost spreading was done pursuant to VM-21, Section

12.D.1.a.

iv. Method used to determine margins.

e. Partial Withdrawals – Description and listing of partial withdrawal rates, including

treatment of dollar-for-dollar offsets on GMDBs and VAGLBs, and required

minimum distributions.

f. L

apses and Full Surrenders – Description and listing of lapse or full surrender

rates, including:

i. For contracts with VAGLBs, two comparisons of actual to expected lapses

where “expected” equals (1) anticipated experience assumptions used in

the development of the SR; and (2) the assumptions used in the

development of the additional standard projection amount, and the

“actual” is separated by logical blocks of business, duration (e.g., during

and after surrender charge period), ITM (consistent with dynamic

assumptions), and age (to the extent that age affects the election of benefits

lapse). These data shall be separated by experience incurred in the past

year, the past three years, and all years.

ii. If experience for contracts without VAGLBs is used in setting lapse

assumptions for contracts with in-the-money or at-the-money VAGLBs,

then a detailed explanation of the appropriateness of the assumption and a

demonstration of the relevance of the experience to the business.

g. Annuitization Benefits – Description of assumptions for the purposes of projecting

annuitization benefits (excluding annuitizations stemming from the election of a

GMIB and withdrawal amounts from GMWBs, which are addressed in Section

3.F.3.h below), including:

i. Description and listing of assumptions regarding rates of annuitization.

ii. Description and listing of income purchase assumptions.

iii. Disclosure of any parameters not determined in a formulaic fashion in the

projection of statutory reserve of payout annuity benefits in the future.

h. GMIB and GMWB Utilizations – Description and listing of GMIB and GMWB

utilization assumptions (such as rates and withdrawal/income amounts), including:

i. Formulas used to set the assumptions.

ii. Key parameters affecting the level of the assumption (e.g., age, duration,

ITM, during and after the surrender charge period).

iii. Summary of utilization rates from various combinations of key

parameters.

iv. Description of the experience data used to develop the assumptions,

including the source, relevance and credibility of the experience data used.

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v. If relevant and credible data were not available, a discussion of how the

assumption is consistent with the requirement that the assumption is to be

on the conservative end of the plausible range of expected experience.

vi. Discussion of the sensitivity tests performed to support the assumption.

vii. Description of the method or approach adopted to model the assumptions,

including a description of any simplifications applied to improve

computational tractability, such as discarding developed cohorts.

i. Mortality – Description of the mortality assumptions and margins for all segments,

including:

i. Rationale for the grouping of contracts into different segments for the

determination of mortality assumptions, and the type and quantity of

business that constitutes each segment.

ii. Description of how each segment was determined to be a plus or minus

segment, and results of sensitivity tests performed, if any.

iii. Summary of any mortality studies used to support mortality assumptions,

including quantification of the exposures and corresponding deaths,

description of the important characteristics of the exposures, and

discussion of any unusual data points or trends.

iv. Description of the age of the experience data used to determine expected

mortality curves and the relevance of the data.

v. Description of the credibility procedure, the statistical basis for the specific

elements of the credibility procedure, and any material changes from prior

credibility procedures.

vi. Description of the mathematics used to adjust mortality based on

credibility, and summary of the result of applying credibility to the

mortality segments.

vii. Discussion of any assumptions made on mortality improvements both for

applying up to and beyond the valuation date (if applicable), the support

for such assumptions, and how such assumptions adjusted the modeled

mortality. In a case where mortality improvement as discussed in VM-21

Section 11.C and Section 11.D has not been applied, confirmation that

applying such improvement would not result in an increase in the SR.

viii. Description of how the expected mortality curves compare to recent

historic experience, and discussion of any differences.

ix. Discussion of how the mortality assumptions are consistent with the goal

of achieving the required CTE level over the joint distribution of all future

outcomes, in keeping with Principle 3 of VM-21.

x. If the study was done on a similar business segment, description of the

differences in the business segment on which the data were gathered and

the business segment on which the data were used to determine mortality

assumptions for the principle-based valuation under VM-21, and how

these differences were reflected in the mortality used in modeling.

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xi. If mortality assumptions were based in part on reinsurance rates, description of

how the rates were used to set expected mortality (e.g., assumptions made on

loadings in the rates and/or whether the assuming company provided their expected

mortality and the rationale for their assumptions).

xii. For a plus segment, discussion of the examination of the mortality data for the

underreporting of deaths and experience by duration, and description of any

adjustments made as a result of the examination.

xiii. For a minus segment, discussion of how the mortality deviations on minus

segments compare to those on any plus segments. To the extent that the overall

margin is reduced, include support for this assumption.

j. Contract Loans – Disclosure of whether contract loans are modeled, and if so, description

of how they are modeled, including documentation that if the company substitutes assets

that are a proxy for contract loans, the modeled reserve produces reserves that are no less

than those produced by modeling existing loan balances explicitly.

k. Actual to Expected Analysis – Disclosure of the results of the most recently available

actual to expected (without margins) analysis for the assumptions including 3.F.3.d

Expenses Other than Commissions, 3.F.3.e Partial Withdrawals, 3.F.3.g Annuitization

Benefits and 3.F.3.h GMIB and GMWB Utilizations, including:

i. Definitions of the expected basis used in all actual-to-expected ratios shown.

ii. Comments addressing the conclusions drawn from the analysis.

l. Other Considerations – Description of any considerations helpful in or necessary to

understanding the rationale behind the development of assumptions and margins, even if

such considerations are not explicitly mentioned in the Valuation Manual.

4. S

tarting Assets – The following information regarding the starting assets used by the company in

performing a principle-based valuation under VM-21, as it applies to the calculation of post-

reinsurance-ceded amounts:

a. A

mount – The amount of starting assets, listed separately as separate account assets and

general account assets, supporting the contracts valued under VM-21 at the start of the

projections, and the method and rationale for determining such amounts.

b. A

sset Description – Description of the starting general account asset portfolio, including

the types of assets, terms to maturity, duration, and associated quality ratings for fixed

income assets.

c. H

edge Assets – The value of hedge assets in the general account asset portfolio, and a

description of currently held hedge positions.

d. A

sset Selection – Method used and rationale for selecting the starting assets and

apportioning the assets between the contracts valued under VM-21 and those contracts not

valued under VM-21.

e. A

sset Data Source – Description of source(s) of asset data.

f. Asset Valuation Basis – Description of the asset valuation basis.

g. PIMR – Discussion of the treatment of all PIMR considered for the purposes of the

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

principle-based valuation under VM-21, whether included or excluded, and rationale for

the treatment.

5. Separate Account Assets – The following information regarding the separate account asset

assumptions used by the company in performing a principle-based valuation under VM-

21:

a. I

nvestment / Fund Choice – Description of investment and/or fund choices, as well

as fund fees.

b. A

sset Allocation – Description of asset allocation, rebalancing and transfer

assumptions, including any dollar cost averaging arrangements.

c. G

rouping of Funds – Description of the approach and rationale used to group

separate account funds and subaccounts.

6. G

eneral Account Assets – The following information regarding the general account asset

assumptions used by the company in performing a principle-based valuation under VM-

21:

a. Mode

led Company Investment Strategy and Reinvestment Assumptions –

Description of the modeled company investment strategy (before the comparison

to the alternative investment strategy), including asset reinvestment and

disinvestment assumptions, and documentation supporting the appropriateness of

the modeled company investment strategy compared to the actual investment

policy of the company.

b. A

lternative Investment Strategy – Documentation demonstrating compliance with

VM-21 Section 4.D.4.b showing that the SR is the higher of that produced using

the modeled company investment strategy and the alternative investment strategy.

c. G

rouping of Equity Investments – Description of the approach and rationale used

to group general account equity investments.

d. P

repayment, Call and Put Functions – Description of any prepayment, call and put

functions.

e. I

nvestment Expenses – Description of the investment expense assumptions.

f. Market Values – Method used to determine projected market value of assets (if

needed for assumed asset sales).

g. F

oreign Currency Exposure – Analysis of exposure to foreign currency

fluctuations.

h. Max

imum Net Spread Adjustment Factor – Summary of the results of the steps for

determining the maximum net spread adjustment factor, including the method used

to determine option adjusted spreads for each existing asset.

i. A

dditional Assets – If the direct iteration method was not used, a summary of the

amounts of additional assets needed to fund the present value of the accumulated

deficiency, including a description of the calculation process and the types of assets

included.

j. NAE

R – If the direct iteration method was not used, a description of the vectors of

NAER, including graphs or tables of summary statistics helpful to the

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understanding of the NAER vectors produced for each scenario, with a statement

that a complete listing of NAER will be made available in electronic spreadsheet

format upon request.

k. Asset Risks Reflected – Discussion of any other asset risks reflected in the

principle-based valuation under VM-21, as listed in VM-21 Section 1.C.2.a, not

otherwise discussed in the VA Report.

7. R

evenue-Sharing Assumptions – The following information regarding the revenue-sharing

assumptions used by the company in performing a principle-based valuation under

VM-21:

a. A

greements and Guarantees – Description of revenue-sharing agreements and the

nature of any guarantees underlying the revenue-sharing income included in the

projections, including: the terms and limitations of the agreements; the relationship

between the company and the entity providing the revenue-sharing income; the

benefits and risk to the company and the entity providing the revenue-sharing

income of continuing the arrangement; the likelihood that the company will collect

the revenue-sharing income during the term of the agreement; the ability of the

company to replace the services provided by the entity providing the revenue-

sharing income; and the ability of the entity providing the revenue-sharing income

to replace the service provided by the company.

b. A

mounts Included – The amount of revenue-sharing income and a description of

the rationale for the amount of revenue-sharing income included in the projections,

including any reduction for expenses.

c. R

evenue-Sharing Margins – The level of margin in the prudent estimate

assumptions for revenue-sharing income and a description of the rationale for the

margin for uncertainty. Also, a demonstration that the amounts of net revenue-

sharing income, after reflecting margins, do not exceed the limits set forth in VM-

21 Section 4.A.5.f.

8. H

edging and Risk Management – The following information regarding the hedging and

risk management assumptions used by the company in performing a principle-based

valuation under VM-21:

a. S

trategies – Detailed description of risk management strategies, such as hedging

and other derivative programs, including any future hedging strategies supporting

the contracts, specific to the groups of contracts covered in this sub-report.

i. Descriptions of basis risk, gap risk, price risk and assumption risk.

ii. Methods and criteria for estimating the a priori effectiveness of the

strategy.

iii. Results of any reviews of actual historical hedging effectiveness.

b. CDHS – Documentation addressing each of the CDHS documentation attributes

for any future hedging strategies supporting the contracts.

c. S

trategy Changes – Discussion of any changes to the hedging strategy during the

past 12 months, including identification of the change, reasons for the change, and

the implementation date of the change.

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d. Hedge Modeling – Description of how the hedge strategy was incorporated into

modeling, including:

i. Differences in timing between model and actual strategy implementation.

ii. For a company that does not have a future hedging strategy supporting the

contracts, confirmation that currently held hedge assets were included in

the starting assets.

iii. Evaluations of the appropriateness of the assumptions on future trading,

transaction costs, other elements of the model, the strategy, and other items

that are likely to result in materially adverse results.

iv. Discussion of the projection horizon for the future hedging strategy as

modeled and a comparison to the timeline for any anticipated future

changes in the company’s hedging strategy.

v. If residual risks and frictional costs are assumed to have a value of zero, a

demonstration that a value of zero is an appropriate expectation.

vi. Any discontinuous hedging strategies modeled, and where such

discontinuous hedging strategies contribute materially to a reduction in the

SR, any evaluations of the interaction of future trigger definitions and the

discontinuous hedging strategy, including any analyses of model

assumptions that, when combined with the reliance on the discontinuous

hedging strategy, may result in adverse results relative to those modeled.

vii. Disclosure of any situations where the modeled hedging strategies make

money in some scenarios without losing a reasonable amount in some

other scenarios, and an explanation of why the situations are not material

for determining the CTE 70 (best efforts).

viii. Results of any testing of the method used to determine prices of financial

instruments for trading in scenarios against actual initial market prices,

including how the testing considered historical relationships. If there are

substantial discrepancies, disclosure of the substantial discrepancies and

documentation as to why the model-based prices are appropriate for

determining the SR.

ix. Any model adjustments made when calculating CTE 70 (adjusted), in

particular, any liquidation or substitution of assets for currently held

hedges. If there is liquidation or a substitution of assets for currently held

hedges, disclosure of the impact on the adjusted run.

x. Justification for the margin for any future hedging strategy that offsets

interest index credits associated with index crediting strategies (index

credits), including relevant experience, other relevant analysis, and an

assessment of potential model error.

xi. Ten years of historical experience on hedge gains/losses as a percent of

index credited for hedge programs supporting index credits.

xii. If there is less than five years of historical experience of this hedging

program or a hedging program on similar products, an explanation of how

the company considered increases in the error factor to account for limited

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

historical experience.

e. Error Factor (E) and Back-Testing – Description of E, the error factor, and formal back-

tests performed, including:

i. The value of E, and the approach and rationale for the value of E used in the reserve

calculation.

ii. For companies that model hedge cash flows using the explicit method, as described

in VM-21 Section 9.C.6.a, and have 12 months of experience, an analysis of at

least the most recent 12 months of experience and the results of a back-test showing

that the model is able to replicate the hedging results experienced in a way that

justifies the value used for E. Include at least a ratio of the actual change in market

value of the hedges to the modeled change in market value of the hedges at least

quarterly.

iii. For companies that model hedge cash flows using the implicit method, and have

12 months of experience, as described in VM-21 Section 9.C.6.b, the results of a

back-test in which (a) actual hedge asset gains and losses are compared against (b)

proportional fair value movements in hedged liability, including:

a) Delta, rho and vega coverage ratios in each month over the back-testing

period, which may be presented in a chart or graph.

b) The implied volatility level used to quantify the fair value of the hedged

item, as well as the methodology undertaken to determine the appropriate

level used.

iv. For companies that do not model hedge cash flows using either the explicit method

or the implicit method, as described in VM-21 Section 9.C.6.c, and have 12 months

of experience, the results of the formal back-test conducted to validate the

appropriateness of the selected method and value used for E.

v. For companies that do not have 12 months of experience, the basis for the value of

E that is chosen based on the guidance provided in VM-21 Section 9.C.7,

considering the actual history available, mock testing performed, and the degree

and nature of any changes made to the hedge strategy.

vi. The basis for the magnitude of adjustment or lack of adjustment for the value of E

chosen based on the robustness of the documentation outlining the future hedging

strategy.

f. Safe Harbor for Future Hedging Strategies – If electing the safe harbor approach for a

future hedging strategy supporting the contracts, as discussed in VM-21 Section 9.C.8, a

description of the linear instruments used to model the option portfolio.

g. H

edge Model Results – Disclosure of whether the calculated CTE 70 (best efforts) is below

both the fair value and CTE 70 (adjusted), and if so, justification for why that result is

reasonable, as discussed in VM-21 Section 9.D.

9. S

cenario Generation – The following information regarding the scenario generation for interest

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

rates and equity returns used by the company in performing a principle-based valuation under VM-

21 and in determining the C-3 RBC amount under LR027, as it applies to the calculation of the SR,

TAR and CTEPA (if used):

a. S

ources – Identification of the sources or generators used to produce the scenarios.

Versions should be identified and parameters to the scenario generation shall be

available upon request.

b. N

umber of Scenarios – Number of scenarios used, rationale for that number,

methods used to determine the sampling error of the CTE 70 and CTE 98 statistic

when using the selected number of scenarios, and documentation that any resulting

understatement in reserve or TAR, as compared with that resulting from running

additional scenarios, is not material, as discussed in VM-21 Section 4.F.1.

c. S

cenario Reduction Techniques – If a scenario reduction technique is used, a

description of the technique and documentation of how the company determined

that the technique does not lead to a material understatement of results.

d. T

ime-Step – Identification of the time-step of the model (e.g., monthly, quarterly,

annual), and results of testing performed to determine that use of a more frequent

time-step does not materially increase reserves, as discussed in VM-21 Section

4.F.1.

e. P

roxy Construction – Description of the proxy construction process that

establishes a firm relationship between the investment return on the proxy and the

grouped separate account funds or equity investments in the general account, as

discussed in VM-21 Section 4.A.2.

f. M

apping Stochastic Economic Paths to Fund Performance – Description of

method to translate stochastic economic paths into fund performance.

g. P

roxy Funds Not Within Scope of Prescribed Scenario Generator – For any proxy

fund returns generated by a non-prescribed scenario generator (e.g., volatility

control funds and any funds projected dynamically in the liability model), a

description of:

i. The market price of risk implied in the projected fund returns.

ii. A correlation matrix that illustrates the average correlations across all

scenarios and all time periods of the projected fund returns with the fund

returns generated by the prescribed generator.

iii. Any other information that provides assurance that the returns for proxy

funds generated using a non-prescribed scenario generator do not

consistently outperform over the long term if the company believes that

the market price of risk and correlations described above are misleading

or not relevant.

h. Implied Volatility – Whether using the prescribed scenario generator or a non-

prescribed scenario generator, a description of the implied volatility including:

i. Discussion of the modeling process used to generate implied volatility

surfaces and how they meet the requirements defined in VM-21 Section

8.D.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

ii. Documentation that the implied volatility scenarios generated do not result

in a lower TAR than that obtained by assuming that the implied volatility

– at all ITM levels – at a given time step in a given scenario is equal to the

realized volatility of the underlying asset scenario over the same time

period as required by VM-21, Section 8.D.3.

i. Non-Prescribed Scenario Generator – If using non-prescribed scenario generators

in lieu of the prescribed generator, either in part or in full, a summary including:

i. Description of the models used for interest rates, fixed income returns,

equity returns, and/or volatility and discussion of model calibration.

Guidance Note: Examples of models include, but are not limited to: (1) Vasicek, Hull-White, Cox-

Ingersoll-Ross for interest rate models; (2) Merton, reduced-form, ratings-based for fixed income

models; or (3) Black-Scholes, Heston, Bates for equity and/or volatility models. Model calibration

refers to the process of reflecting the company’s view of future market dynamics into their risk-

modeling environment.

ii. If vendor software is used, identification of vendor, software name, and

version number.

iii. Identification of whether the scenario generators were developed for VM-

21 purposes, or adopted from another purpose such as pricing or asset

adequacy testing. If the latter, discussion of any adjustments made for VM-

21 purposes, and rationale for the adjustments.

iv. A statement that the interest rate, equity, and implied volatility scenarios

used to determine reserves are available upon request in an electronic

spreadsheet format to facilitate any regulatory review.

v. Documentation that scenarios generated do not result in a TAR that is

materially lower than the TAR resulting from scenarios generated from

the prescribed generator.

vi. Discussion of any correlation that exists in the development of interest rate

and equity scenarios.

10. Reinsurance – The following information regarding the reinsurance assumptions used by

the company in performing a principle-based valuation under VM-21:

a. A

greements – For those reinsurance agreements included in the calculation of the

aggregate reserve as per VM-21 Section 5, a description of each reinsurance

agreement, including, but not limited to, the type of agreement, the counterparty,

the risks reinsured, the portion of business reinsured, and whether the agreement

complies with the requirements of the credit for reinsurance under the terms of the

AP&P Manual. Include identification of both affiliated and non-affiliated, as well

as captive and non-captive, relationships.

b. A

ssumptions – Description of reinsurance assumptions used to determine the cash

flows included in the model.

c. M

odeling – Description of how post-reinsurance-ceded reserves are modeled.

d. Separate Stochastic Analysis – Description of any separate stochastic analysis that

was used outside the cash-flow model to quantify the impact on reinsurance cash

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

flows to and from the company, include which variables are modeled

stochastically.

e. Multiple Agreements – If contracts are covered by more than one reinsurance

agreement, a description of how reinsurance cash flows from the multiple

agreements interact and are reflected in the cash-flow model.

f. Pr

e-Reinsurance-Ceded Aggregate Reserve – Description and rationale for

methods and assumptions (including liability assumptions, asset assumptions, and

starting asset amounts) used in determining the pre-reinsurance-ceded aggregate

reserve if they differ from methods and assumptions used in determining the

aggregate reserve post-reinsurance-ceded.

11. A

lternative Methodology – The following information regarding the alternative

methodology used by the company:

a. G

rouping – Statement that a seriatim approach was used, or a description of how

contracts were grouped, if a seriatim approach was not used.

b. A

ssumptions – For contracts with GMDBs, disclosure of assumptions in the

alternative methodology using published factors, including:

i. For component CA, the mapping to prescribed asset categories, lapse rates

and withdrawal rates.

ii. For component FE, the determination of fixed dollar costs and revenues,

lapse rates, withdrawal rates, and inflation rates.

iii. For component GC:

a) Description of contract features and disclosure of mapping

contract-level attributes to alternative methodology factors,

including product definition, partial withdrawal provision, fund

class, attained age, contract duration, ratio of account value to

guaranteed value, and annualized account charge differential from

base assumption.

b) Derivation of equivalent account charges and margin offset.

c) Disclosure of interpolation procedures and confirmation of node

determination.

c. Reinsurance – For contracts with GMDBs, disclosure, if applicable, of reinsurance

that exists and how it was handled in applying published factors (for some

reinsurance, creation of company-specific factors or stochastic modeling may be

required) and discussion of how reserves before reinsurance were determined.

d. C

ompany-Specific Factors – For contracts with GMDBs, if company-specific

factors are used, documentation of the stochastic analysis supporting adjustments

to the published factors. Adjustments may include contract design, risk mitigation

strategy (excluding hedging), or reinsurance.

e. I

mpact of Floors – For contracts with GMDBs, discussion of whether the

alternative methodology reserve was impacted by the floors described in VM-21

Section 7.A.1, and disclosure of the alternative methodology reserve without

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

regard to any floor, the cash surrender value, and the reserve under AG 33 in VM-

12. Additional Standard Projection Amount – The following information regarding the

calculations to determine the additional standard projection amount performed by the

company:

a. Met

hod – Disclosure of the method used for the additional standard scenario

projection amount, either the CSMP method or the CTEPA.

b. CS

MP – If using the CSMP method, a summary including:

i. Disclosure (in tabular form) of all scenario reserves in the Company

Standard Projection Set and the scenario reserves from Market Paths A

and B from the Prescribed Standard Projection Set, as described in VM-

21 Section 6.B.2. If available, include disclosure of all scenario reserves

from the Prescribed Standard Projection Set.

ii. Summary of results from a cumulative decrement projection along Path A

(where Path A is described in VM-21 Section 6.B.2.a), under the

assumptions outlined in VM-21 Section 6.C. Such a cumulative decrement

projection shall include, at the end of each projection year, the projected

proportion (expressed as a percent of the total projected account value) of

persisting contracts, as well as the allocation of projected decrements

across death, full surrender, account value depletion, elective

annuitization, and other benefit election.

iii. Summary of results from a cumulative decrement projection, identical to

(ii) above, but replacing all assumptions outlined in VM-21 Section 6.C

with the corresponding assumptions used in calculating Company Amount

iv. The data sources used to obtain the implied volatility term structure and

spot exchange rates in effect as of the valuation date in the prescribed

market paths defined in VM-21 Section 6.B.5.

c. CTEPA – If using the CTEPA method, a summary including:

i. Disclosure (in tabular form) of the scenario reserves using the same

method and assumptions as those used by the company to calculate CTE

70 (adjusted) as outlined in VM-21 Section 9.C (or the SR following VM-

21 Section 4.A.4.a for a company that does not have a future hedging

strategy supporting the contracts), as well as the corresponding scenarios

reserves substituting the assumptions prescribed by VM-21 Section 6.C.

ii. Summary of results from a cumulative decrement projection along the

scenario whose reserve value is closest to the CTE 70 (adjusted), as

outlined in VM-21 Section 9.C (or the SR following VM-21 Section

4.A.4.a for a company that does not have a future hedging strategy

supporting the contracts), under the assumptions outlined in VM-21

Section 6.C. Such a cumulative decrement projection shall include, at the

end of each projection year, the projected proportion (expressed as a

percent of the total projected account value) of persisting contracts as well

as the allocation of projected decrements across death, full surrender,

account value depletion, elective annuitization, and other benefit election.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

iii. Summary of results from a cumulative decrement projection, identical to

(ii) above, but replacing all assumptions outlined in VM-21 Section 6.C

with the corresponding assumptions used in calculating the SR.

d. Model Comparison – Discussion of any differences between the cash-flow models

used to determine the additional standard projection amount and those used to

determine the SR, including any differences in the model validations performed

and how the models were evaluated for appropriateness and applicability.

Benefits Not Described – Regarding the assumptions in VM-21 Section 6.C,

discussion of any benefit type proxy chosen, or other approximations applied for

benefit types not described in the aforementioned section, and the rationale for the

chosen proxy or approximations.

f. D

ata Limitations – Regarding the partial withdrawal assumption in VM-21 Section

6.C.4, discussion of any proxy method used due to data limitations (e.g., with

respect to policies that are not enrolled in an automatic withdrawal program but

have exercised a non-excess withdrawal in the contract year immediately

preceding the valuation date), with documentation that supports the conclusion that

the proxy method does not result in a material understatement of the reserve.

g. D

iscarding Withdrawal Ages – Regarding the withdrawal delay cohort method in

VM-21 Section 6.C.5, disclosure of whether certain withdrawal ages were

discarded, or others used as representative as described in VM-21 Section 6.C.5.k,

including discussion of the appropriateness of the chosen method.

h. M

odifications – Discussion of any modifications in the application of the

requirements to produce the additional standard projection amount.

i. A

ssumptions Not Prescribed – Discussion of any assumptions with judgments or

procedures used to produce the additional standard projection amount that are not

prescribed and not the same as used in the calculation of SR.

j. R

einsurance – Description of any reinsurance treaties that have been excluded

from the calculation of the additional standard projection amount along with an

explanation of why the treaty was excluded, as well as a confirmation that none of

the reinsurance treaties included serve solely to reduce the calculated additional

standard projection amount without also reducing risk on scenarios similar to those

used to determine the SR.

k. O

ther Considerations – To the extent not discussed elsewhere in the VA Report, a

description of any material assumptions, margins, and other considerations helpful

in or necessary to understanding the rationale behind the development of

assumptions and margins used in the calculation of the additional standard

projection amount, as well as disclosure of any analysis that has been performed

to highlight the major drivers of the result.

l. I

mpact of Aggregation – Disclosure of the impact of aggregation, and discussion

of the method used to determine the impact, pursuant to VM-21 Section 6.A.1.a.

13. A

dditional Information – The following additional information:

a. Per-Contract Amounts – Description of the basis for the allocation to per-contract

amounts, in accordance with VM-21 Section 12.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

b. Phase-In – If electing a phase-in period, as described in VM-21 Section 2.B,

discussion of the phase-in calculation including:

i. Regarding the determination of R2—i.e., the reserve as of Jan. 1, 2020,

following the VM-21 requirements in the 2019 NAIC Valuation

Manual—disclosure of all changes from the Dec. 31, 2019, reserve

reported and documented in the 2019 PBR Actuarial Report (or AG 43

actuarial memorandum). Such changes should include changes in

reinsurance agreements (e.g., recaptures) and other significant changes in

in-force policies.

ii. Regarding the determination of R1—i.e., the reserve as of the valuation

date following the VM-21 requirements on or after Jan. 1, 2020—

disclosure of deviations from R2 in areas such as in-force contracts,

scenario generation, or other aspects that should parallel the R2

calculation. Also include disclosure of deviations from the methods and

factors used for 2020 reserve and documented in the 2020 VA Summary

and VA Report for those areas that should parallel those used for the Dec.

31, 2020, reserves.

iii. Disclosure of any scaling factors applied to the phase-in amount due to

material changes in the book of business, as well as any other

modifications of the remaining phase-in amount.

c. Sensitivity Tests – For each distinct product type for which margins were

established:

i. List the specific sensitivity tests performed for each risk factor or combination

of risk factors, other than those discussed in Section 3.F.3.h.vi and Section

3.F.3.i.ii.

ii. Indicate whether the reserve was calculated based on the anticipated

experience assumptions or prudent estimate assumptions for all other risk

factors while performing the tests.

iii. Provide the numerical results of the sensitivity tests for both reserves and

capital.

iv. Explain how the results of sensitivity tests were used or considered in

developing assumptions.

d. Impact of Margin

i. Company can perform the impact of margin analysis using off-cycle data. The

analysis can be done less frequently than annually unless there is change or

update in the margins, but not less frequently than every three years.

ii. Impact of Margins for Each Risk Factor – The impact of margins on the SR

for each risk factor, or group of risk factors, that has a material impact on the

SR, determined by subtracting (i) from (ii), expressed in both dollar amounts

and percentages. For the purposes of this analysis, calculate the CTE without

requiring that the scenario reserve for any scenario be no less than the cash

surrender value:

1. The CTE70 (best efforts), as outlined in VM-21, Section 9.C, but with the

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

reserve calculated based on the anticipated experience assumption for the

risk factor and prudent estimate assumptions for all other risk factors.

2. The CTE70 (best efforts), as outlined in VM-21, Section 9.C, for that

group of contracts as reported.

3. Repeat the impact analysis using the same method on CTE98 levels.

iii. Aggregate Impact of Margins – The aggregate impact of all margins on the SR

for that group of contracts determined by subtracting (1) from (2), expressed

in both dollar amounts and percentages. For the purposes of this analysis,

calculate the CTE without requiring that the scenario reserve for any scenario

be no less than the cash surrender value:

1. The CTE70 (best efforts), as outlined in VM-21, Section 9.C, for that

group of contracts, but with the reserve calculated based on anticipated

experience assumptions for all risk factors prior to the addition of any

margins.

2. The CTE70 (best efforts), as outlined in VM-21, Section 9.C, for that

group of contracts as reported.

3. Repeat the impact analysis using the same method on CTE98 levels.

iv. Impact of Implicit Margins – For the purposes of the disclosures required in

Section 13.d.ii and Section 13.d.iii above:

1. If the company believes the method used to determine anticipated

experience assumptions includes an implicit margin, the company can

adjust the anticipated experience assumptions to remove this implicit

margin for this reporting purpose only. If any such adjustment is made, the

company shall document the rationale and method used to determine the

anticipated experience assumption.

2. Since the company is not required to determine an anticipated experience

assumption or a prudent estimate assumption for risk factors that are

prescribed (i.e., interest rates movements, equity performance, default

costs, and net spreads on reinvestment assets), when determining the

impact of margins, the prescribed assumption shall be deemed to be the

prudent estimate assumption for the risk factor, and the company can elect

to determine an anticipated experience assumption for the risk factor,

based on the company's anticipated experience for the risk factor. If this is

elected, the company shall document the rationale and method used to

determine the anticipated experience assumption.

e. Calculations as of a Date Preceding the Valuation Date – If the SR and/or

the additional standard projection amount were developed as of a date

prior to the valuation date, disclosure of the prior date, the SR and the

additional standard projection amount of the in force on the prior date, and

an explanation of why the use of such a date will not produce a material

change in the results compared to if the results were based on the valuation

date. Such an explanation shall describe the process that the qualified

actuary used to determine the adjustment required by VM-21 Section 3.I,

the amount of the adjustment, and the rationale for why the adjustment is

appropriate.

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

14. RBC – If electing to include documentation of the RBC calculation in the PBR Actuarial

Report, the following information regarding the risk-based capital, as described in the Life

RBC instructions LR027:

a. Documentation and discussion of assumptions or methods that differ from those

used for the reserve calculations.

b. Description of the results of the modeling and analysis, including a table displaying

each of the seven steps of the RBC calculation.

c. Description of the process to split the resulting RBC into interest and market

components, and the results of that split.

d. If the alternative methodology was used, documentation of any non-prescribed

factors and the basis for those factors.

e. State the method that the company used to recognize the impact of federal income

tax. If the company used the specific tax recognition, disclosure of the result of the

macro tax adjustment method.

15. Reliance Descriptions and Statements – A description of those areas where the qualified

actuary relied on others for data, assumptions, projections or analysis in performing the

principle-based valuation under VM-21 and a reliance statement from each individual on

whom the qualified actuary relied that includes:

a. R

eliance Listing – The name, title, telephone number, e-mail address and

qualifications of the individual, along with the individual’s company name and

address, and the information provided.

b. R

eliance Statements – A statement as to the accuracy, completeness or

reasonableness, as applicable, of the information provided, along with a signature

and the date signed.

16. C

ertifications – The following certifications:

a. Investment Officer on Investments – A certification from a duly authorized

investment officer that the modeled asset investment strategy, including any future

hedging strategies supporting the contracts, is consistent with the company’s

current investment strategy except where the modeled reinvestment strategy may

have been substituted with the alternative investment strategy, and that

documentation of the CDHS attributes for any future hedging strategies supporting

the contracts are accurate.

b. Q

ualified Actuary on Investments – A certification by a qualified actuary, not

necessarily the same qualified actuary that has been assigned responsibility for the

PBR Actuarial Report or this sub-report, that the modeling of any future hedging

strategies supporting the contracts is consistent with the company’s actual future

hedging strategies and was performed in accordance with VM-21 and in

compliance with all applicable ASOPs.

c. S

enior Management on Internal Controls – A certification from senior

management, other than the qualified actuary, regarding the effectiveness of

PBR Actuarial Report Requirements for Business Subject to a Principle-Based Valuation VM-31

internal controls with respect to the principle-based valuation under VM-21, as

provided in Section 12B(2) of Model #820.

d. Qualified Actuary on Accordance with VM-21 and Model #820 – Certification by

the qualified actuary, for the groups of contracts for which responsibility was

assigned, that the principle-based valuation was performed in accordance with the

principles and requirements outlined in VM-21 and the relevant sections of Model

#820.

e. Q

ualified Actuary on Assumptions and Margins – Certification by the qualified

actuary, for the groups of contracts for which responsibility was assigned, that the

assumptions used in the principle-based valuation under VM-21 are prudent

estimate assumptions for the products, scenarios, and purpose being tested.

17. C

losing Paragraph – A closing paragraph with the signature, credentials, title, telephone

number and e-mail address of the qualified actuary, the company name and address, and

the date signed.

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VM-50

VM-50: Experience Reporting Requirements

Table of Contents

Section 1: Overview ....................................................................................................................... 50-1

Section 2: Statutory Authority and Experience Reporting Agent .................................................. 50-2

Section 3: Experience Reporting Requirements ............................................................................. 50-2

Section 4: Data Quality and Ownership ......................................................................................... 50-5

Section 5: Experience Data ............................................................................................................ 50-8

Section 6: Confidentiality of Data .................................................................................................. 50-9

Section 1: Overview

A. Purpose of the Experience Reporting Requirements

The purpose of this section is to define the requirements pursuant to Section 13 of Model #820 for

the submission and analysis of company data. It includes consideration of the experience reporting

process, the roles of the relevant parties, and the intended use of and access to the data, and the

process to protect the confidentiality of the data as outlined in Model #820.

B. PBR and the Need for Experience Data

The need for experience data includes but is not limited to:

1. PBR may require development of assumptions and margins based on company experience,

industry experience or a blend of the two. The collection of experience data provides a

database to establish industry experience tables or factors, such as valuation tables or

factors as needed.

2. The development of industry experience tables provides a basis for assumptions when

company data is not available or appropriate and provides a comparison basis that allows

the state insurance regulator to perform reasonableness checks on the appropriateness of

assumptions as documented in the actuarial reports.

3. The collection of experience data may assist state insurance regulators, reviewing actuaries,

auditors and other parties with authorized access to the PBR actuarial reports to perform

reasonableness checks on the appropriateness of principle-based methods and assumptions,

including margins, documented in those reports.

4. The collection of experience data provides an independent check on the accuracy and

completeness of company experience studies, thereby encouraging companies to establish

a disciplined internal process for producing experience studies. Industry aggregate or sub-

industry aggregate experience studies may assist an individual company for use in setting

experience-based assumptions. As long as the confidentiality of each company's submitted

results is maintained, a company may obtain results of a study on companies' submitted

experience for use in formulating experience assumptions.

5. The collection of experience data will provide a basis for establishing and updating the

assumptions and margins prescribed by regulators in the Valuation Manual.

6. The reliability of assumptions based on company experience is founded on reliable

historical data from comparable characteristics of insurance policies including, but not

limited to, underwriting standards and insurance policy benefits and provisions. As with

all forms of experience data analysis, larger and more consistent statistical samples have a

greater probability of producing reliable analyses of historic experience than smaller or

Experience Reporting Requirements VM-50

inconsistent samples. To improve statistical credibility, it is necessary that experience data

from multiple companies be combined and aggregated.

7. The collection of experience data allows state insurance regulators to identify outliers and

monitor changes in company experience factors versus a common benchmark to provide a

basis for exploring issues related to those differences.

8. PBR is an emerging practice and will evolve over time. Research studies other than those

contemplated at inception may be useful to improvement of the PBR process, including

increasing the accuracy or efficiency of models. Because the collection of experience data

will facilitate these improvements, research studies of various types should be encouraged.

9. The collection of experience data is not intended as a substitute for a robust review of

companies’ methodologies or assumptions, including dialogue with companies’ actuaries.

Section 2: Statutory Authority and Experience Reporting Agent

A. Statutory Authority

1. Model #820 provides the legal authority for the Valuation Manual to prescribe experience

reporting requirements with respect to companies and lines of business within the scope of

the model.

2. The statutes and regulations requiring data submissions generally apply to all companies

licensed to sell life insurance, A&H insurance and deposit-type contracts. These companies

must submit experience data as prescribed by the Valuation Manual.

3. Section 4A(5) of Model #820 defines the data to be collected to be confidential.

B. Experience Reporting Agent

1. For the purposes of implementing the experience reporting required by state laws based on

Section 13 of Model #820, an Experience Reporting Agent will be used for the purpose of

collecting, pooling and aggregating data submitted by companies as prescribed by lines of

business included in VM-51.

2. The NAIC is designated as Experience Reporting Agent for the Statistical Plan for

Mortality beginning Jan. 1, 2020, and NAIC expertise in collecting and sorting data from

multiple sources into a cohesive database in a secure and efficient manner, but the

designation of the NAIC as Experience Reporting Agent does not preclude state insurance

regulators from independently engaging other entities for similar data required under this

Valuation Manual or other data purposes.

Section 3: Experience Reporting Requirements

A. Statistical Plans

1. Consistent with state laws based on Section 13 of Model #820, the Experience Reporting

Agent shall collect experience data based on statistical plans defined in the Valuation

Manual.

2. Statistical plans are detailed instructions that define the type of experience data being

collected (e.g., mortality; elective policyholder behavior, such as surrenders, lapses,

premium payment patterns, etc.; and company expense data, such as commissions, policy

expenses, overhead expenses etc.). The state insurance regulators serving on the Life

Experience Reporting Requirements VM-50

Actuarial (A) Task Force and Health Actuarial (B) Task Force, or any successor body, will

be responsible for prescribing the requirements for any statistical plan by applicable line

of business. For each type of experience data being collected, the statistical plan will define

the data elements and format of each data element, as well as the frequency of the collection

of experience data. The statistical plan will define the process and the due dates for

submitting the experience data. The statistical plan will define criteria that will determine

which companies must submit the experience data. The statistical plan will also define the

scope of business that is to be included in the experience data collection, such as lines of

business, product types, types of underwriting, etc. Statistical plans are defined in VM-51

of the Valuation Manual. Statistical plans will be added to VM-51 of the Valuation Manual

when they are ready to be implemented. Additional data elements and formats to be

collected will be added as necessary, in subsequent revisions to the Valuation Manual.

3. Data must conform to common data definitions. Standard definitions provide for stable and

reliable databases and are the basis of meaningful aggregated insurance data. This will be

accomplished through a uniform set of suggested minimum experience reporting

requirements for all companies.

B. Role and Responsibilities of the Experience Reporting Agent

1. Based on requirements of VM-51, the Experience Reporting Agent may design its data

collection procedures to ensure it is able to meet these regulatory requirements. The

Experience Reporting Agent will provide sufficient notice to reporting companies of

changes, procedures and error tolerances to enable the companies to adequately prepare for

the data submission.

2. The Experience Reporting Agent will aggregate the experience of companies using a

common set of classifications and definitions to develop industry experience tables.

3. The Experience Reporting Agent will seek to enter into agreements with a group of state

insurance departments for the collection of information under statistical plans included in

VM-51. The number of states that contract with the Experience Reporting Agent will be

based on achieving a target level of industry experience prescribed by VM-51 for each line

of business in preparing an industry experience table.

a. The agreement between the state insurance department(s) and the Experience

Reporting Agent will be consistent with any data collection and confidentiality

requirements included within Model #820 and the Valuation Manual. Those state

insurance departments seeking to contract with the Experience Reporting Agent will

inform the Experience Reporting Agent of any other state law requirements, including

laws related to the procurement of services that will need to be considered as part of

the contracting process.

b. Use of the Experience Reporting Agent by the contracting state insurance departments

does not preclude those state insurance departments or any other state insurance

departments from contracting independently with another Experience Reporting Agent

for similar data required under this Valuation Manual or other data purposes.

4. The Life Actuarial (A) Task Force or Health Actuarial (B) Task Force will be responsible

for the content and maintenance of the experience reporting requirements. The Life

Actuarial (A) Task Force or Health Actuarial (B) Task Force or a working group will

monitor the data definitions, quality standards, appendices and reports described in the

experience reporting requirements to assure that they take advantage of changes in

technology and provide for new regulatory and company needs.

Experience Reporting Requirements VM-50

5. To ensure that the experience reporting requirements will continue to be useful, the Life

Actuarial (A) Task Force or Health Actuarial (B) Task Force will seek to review each

statistical plan on a periodic basis at least once every five years. The Life Actuarial (A)

Task Force or Health Actuarial (B) Task Force should have regular dialogue, feedback and

discussion of this topic. In seeking feedback and engaging in discussions, the Life

Actuarial (A) Task Force or Health Actuarial (B) Task Force shall include a broad range

of data users, including state insurance regulators, consumer representatives, members of

professional actuarial organizations, large and small companies, and insurance trade

organizations.

6. The Experience Reporting Agent will obtain and undergo at least annual external audits to

validate that controls with respect to data security and related topics are consistent with

industry standards and best practices. The Experience Reporting Agent will provide a copy

of any report prepared in connection with such an audit, upon a company’s request. In the

event of a material deficiency identified in the external audit or in the event of an identified

security breach affecting the Experience Reporting Data, the Experience Reporting Agent

shall notify the NAIC, and the states that have directed the Experience Reporting Agent to

collect this information, of the nature and extent of such an issue. In the event of an

identified security breach affecting Experience Reporting Data, the Experience Reporting

Agent shall also notify any insurer whose data was affected. Upon good cause shown, the

Experience Reporting Agent will take reasonable actions to protect the data under its

control, including that the data submission process may be suspended until the security

issue has been remediated. If data submission is suspended under this section, the

Experience Reporting Agent will work with the states that have directed collection to issue

appropriate guidance modifying the requirements of VM 51, Section 2.D. The term “good

cause” shall mean that there is the chance of irreparable harm upon continuing the

transmission of the data to the Experience Reporting Agent. Once the security issue has

been remediated, the Experience Reporting Agent shall notify the NAIC and the states that

have directed the Experience Reporting Agent to collect this information. The Experience

Reporting Agent shall work in conjunction with the NAIC and the states that have directed

the Experience Reporting Agent to collect this information to develop a revised data

submission schedule for any deferred submissions. The revised schedule shall provide for

reasonable timing for companies to provide such data.

C. Role of Other Organizations

The Experience Reporting Agent may ask for other organizations to play a role for one or more of

the following items, including the execution of agreements and incorporation of confidentiality

requirements where appropriate:

1. Consult with the NAIC (as appropriate) in the design and implementation of the experience

retrieval process;

2. Assist with the data validation process for data intended to be forwarded to the SOA or

other actuarial professional organizations to develop industry experience tables;

3. Analyze data, including any summarized or aggregated data, produced by the Experience

Reporting Agent;

4. Create initial experience tables and any revised tables;

5. Provide feedback in the development and evaluation of requests for proposal for services

related to the reporting of experience requirement;

6. Create statutory valuation tables as appropriate and necessary;

Experience Reporting Requirements VM-50

7. Determine and produce additional industry experience tables or reports that might be

suggested by the data collected;

8. Work with the Life Actuarial (A) Task Force or Health Actuarial (B) Task Force, in

accordance with the Valuation Manual governance process, in developing new reporting

formats and modifying current experience reporting formats;

9. Support a close working relationship among all parties having an interest in the success of

the experience reporting requirement.

Section 4: Data Quality and Ownership

A. General Requirements

1. The quality, accuracy and consistency of submitted data is key to developing industry

experience tables that are statistically credible and represent the underlying emerging

experience. Statistical procedures cannot easily detect certain types of errors in reporting

of data. For example, if an underwriter fails to evaluate the proper risk classification for an

insured, then the “statistical system” has little chance of detecting such an error unless the

risk classification is somehow implausible.

2. To ensure data quality, coding a policy, loss, transaction or other body of data as anything

other than what it is known as is prohibited. This does not preclude a company from coding

a transaction with incomplete detail and reporting such transactions to the Experience

Reporting Agent, but there can be nothing that is known to be inaccurate or deceptive in

the reporting. An audit of a company’s data submitted to the Experience Reporting Agent

under a statistical plan in VM-51 can include comparison of submitted data to other

company files.

3. When the Experience Reporting Agent determines that the cause of an edit exception could

produce systematic errors, the company must correct the error and respond in a timely

fashion, with priority given to errors that have the largest likelihood to affect a significant

amount of data. When an error is found that has affected data reported to the Experience

Reporting Agent, the company shall report the nature of the error and the nature of its likely

impact to the Experience Reporting Agent. Retrospective correction of data subject to

systematic errors shall be done when the error affects a significant amount of data that is

still being used for regulatory purposes and it is reasonably practical to make the correction

through the application of a computer program or a procedure applied to the entire data set

without the need to manually examine more than a small number of individual records.

B. Specific Requirements

1. Once the data file is submitted by the company, the Experience Reporting Agent will

perform a validity check of the data elements within each data record in the data file for

proper syntax and verify that required data elements are populated. The Experience

Reporting Agent will notify the company of all syntax errors and any missing data elements

that are required. Companies are required to respond to the Experience Reporting Agent

by submitting a corrected data file. The Experience Reporting Agent will provide sufficient

notice to reporting companies of changes, procedures and error tolerances to enable the

companies to adequately prepare for the data submission.

2. Each submission of data filed by a company with the Experience Reporting Agent shall be

balanced against a set of control totals provided by the company with the data submission.

At a minimum, these control totals shall include applicable record counts, claim counts,

amounts insured and claim amounts. Any submission that does not balance to the control

totals shall be referred to the company for review and resolution.

Experience Reporting Requirements VM-50

3. Each company submitting experience data and each company on whose behalf data is being

submitted as required in VM-51 will perform a reconciliation between its submitted

experience data with its statistical and financial data, and provide an explanation of

differences, to the Experience Reporting Agent. The reconciliation must include policy

count and insurance amount.

a. If a third-party administrator (TPA) that is not an insurance company or an

insurance company not required to submit its direct data is submitting data on

behalf of an insurance company, the reconciliation will consist of separate lines

identifying each insurance company for whom this entity is submitting data.

b. If the TPA is an insurance company that is required to submit its direct data, the

reconciliation must include separate lines identifying each additional company

whose data is being submitted.

c. The reconciliation to company statistical and financial data for both the direct

writer and the reinsurer or TPA must include lines indicating the amount of

business that is being reported by the reinsurer or TPA. The NAIC will use this

information to confirm that all in-scope business is reported and that there is no

double counting of policies.

4. Validity checks are designed to identify:

a. Improper syntax or incomplete coding (e.g., a numeric field that is not numeric,

missing elements of a date field);

b. Data elements containing codes that are not contained within the set of possible

valid codes;

c. Data elements containing codes that are contained within the set of possible valid

codes but are not valid in conjunction with another data element code;

d. Required data elements that are not populated.

5. Where quality would not appear to be significantly compromised, the Experience

Reporting Agent may use records with missing or invalid data if such invalid or missing

data do not involve a field that is relevant or would affect the credibility of the report. For

companies with a body of data for a state, line of business, product type or observation

period that fails to meet these standards, the Experience Reporting Agent will use its

discretion, with regulatory disclosure of key decisions made, regarding the omission of the

entire body of data or only including records with valid data. Completeness of reports is

desirable, but not at the risk of including a body of data that appears to have an

unreasonably high chance of significant errors.

6. Errors of a consistent nature are referred to as “systematic.” Incorrect coding instructions

can introduce errors of a consistent nature. Programming errors within the data processing

system of insurer company can also produce systematic miscoding as the system converts

data to the required formats for experience reporting. Most systematic errors will produce

data that, when reviewed using tests designed to reveal various types of systematic errors,

will appear unreasonable and likely to be in error. In addition, some individual coding

errors may produce erroneous results that show up when exposures and losses are

compared in a systematic fashion. Such checking often cannot, however, provide a

conclusive indication that data with unusual patterns is incorrect. The Experience

Reporting Agent will perform tests and look at trends using previously reported data to

determine if systematic errors or unusual patterns are occurring.

7. The Experience Reporting Agent will undertake reasonability checks that include the

comparison of aggregate and company experience for underwriting class and type of

Experience Reporting Requirements VM-50

coverage data elements for the current reporting period to company and aggregate

experience from prior periods for the purpose of identifying potential coding or reporting

errors. When reporting instructions are changed, newly reported data elements shall be

examined to see that they correlate reasonably with data elements reported under the old

instructions.

8. At a minimum, reasonability checks by the Experience Reporting Agent will include:

a. An unusually large percentage of company data reported under a single or very

limited number of categories;

b. Unusual or unlikely reporting patterns in a company’s data;

c. Claim amounts that appear unusually high or low for the corresponding exposures;

d. Reported claims without corresponding policy values and exposures;

e. Unreasonable loss frequencies or amounts in comparison to ranges of expectation

that recognize statistical fluctuation;

f. Unusual shifts in the distribution of business from one reporting period to the next.

9. If a company’s unusual pattern under Section 4.B.8.a, Section 4.B.8.b or Section 4.B.8.c is

verified as accurate (that is, the reason for the apparent anomaly is an unusual mix of

business), then it is not necessary that a similar pattern for the same company be

reconfirmed year after year.

10. The Experience Reporting Agent will keep track of the results of the validity and

reasonability checks and may adjust thresholds in successive reporting years to maintain a

reasonable balance between the magnitude of errors being found and the cost to companies.

11. Results that may indicate a likelihood of critical indications, as defined below, will be

reported to the company with an explanation of the unusual findings and their possible

significance. When the possible or probable errors appear to be of a significant nature, the

Experience Reporting Agent will indicate to the company that this is a “critical indication.”

“Critical indications” are those that, if not corrected or confirmed, would leave a significant

degree of doubt whether the affected data should be used in reports to the state insurance

regulator and included in industry databases. It is intended that Experience Reporting

Agents will have reasonable flexibility to implement this under the direction of the state

insurance regulators. Also, under the direction of the state insurance regulators, the

Experience Reporting Agent may grade the severity of indications, or it may simply

identify certain indications as critical. While companies are expected to undertake a

reasonable examination of all indications provided to them, they are not required to respond

to every indication except for those labeled by the Experience Reporting Agent as

“critical.”

12. The Experience Reporting Agent will use its discretion regarding the omission of data from

reports owing to the failure of an insurer company to respond adequately to unusual

reasonability indications. Completeness of reports is desirable, but not at the risk of

including data that appears to have an unreasonably high chance of containing significant

errors.

13. Companies shall acknowledge and respond to reasonability queries from the Experience

Reporting Agent. This shall include specific responses to all critical indications provided

by the Experience Reporting Agent. Other indications shall be studied for apparent errors,

Experience Reporting Requirements VM-50

as well as for indications of systematic errors. Corrections for critical indications shall be

provided to the Experience Reporting Agent or, when a correction is not feasible, the extent

and nature of the error shall be reported to the Experience Reporting Agent.

C. Ownership of Data

1. Experience data submitted by companies to the Experience Reporting Agent will be

considered the property of the companies submitting such data, but the recognition of such

ownership will not affect the ability of state insurance regulators or the NAIC to use such

information as authorized by state laws based on Model #820 or the Valuation Manual, or,

in case of state insurance regulators, for solvency oversight, financial examinations and

financial analysis.

2. The Experience Reporting Agent will be responsible for maintaining data, error reports,

logs and other intermediate work products, and reports for use in processing,

documentation, production and reproduction of reports provided to state insurance

regulators in accordance with the Valuation Manual. The Experience Reporting Agent will

be responsible for demonstrating such reproducibility at the request of state insurance

regulators or an auditor designated by state insurance regulators.

Section 5: Experience Data

A. Introduction

1. Using the data collected under statistical plans, as defined in the Valuation Manual, the

Experience Reporting Agent produces aggregate databases as defined by this Valuation

Manual. The Experience Reporting Agent, and/or other persons assisting the Experience

Reporting Agent, will utilize those databases to produce industry experience tables and

reports as defined in the Valuation Manual. In order to ensure continued relevance of

reports, each defined data collection and resulting report structure shall be reviewed for

usefulness at least once every five years since initial adoption or prior review.

2. Data compilations are evaluated according to four distinct, and often competing, standards:

quality, completeness, timeliness and cost. In general, quality is a primary goal in

developing any statistical data report. The priorities of the other three standards vary

according to the purpose of the report.

3. The Experience Reporting Agent may modify or enlarge the requirements of the Valuation

Manual, through recommendation to the Life Actuarial (A) Task Force or Health Actuarial

(B) Task Force and in accordance with the Valuation Manual governance process for

information to accommodate changing needs and environments. However, in most cases,

changes to existing data reporting systems will be feasible only to provide information on

future transactions. Requirements to submit new information may require that companies

change their systems. Also, the Experience Reporting Agent may need several years before

it can generate meaningful data meeting the new requirements with matching claims and

insured amounts. The exact time frames for implementing new data requirements and

producing reports will vary depending on the type of reports.

B. Design of Reports Linked to Purpose

Fundamental to the design of each report is an evaluation of its purpose and use. The Life Actuarial

(A) Task Force and Health Actuarial (B) Task Force shall specify model reports responding to

general regulatory needs. These model reports will serve the basic informational needs of state

insurance regulators. To address a particular issue or problem, a state insurance regulator may have

Experience Reporting Requirements VM-50

to request to the Life Actuarial (A) Task Force or Health Actuarial (B) Task Force that additional

reports be developed.

C. Basic Report Designs

1. The Life Actuarial (A) Task Force or Health Actuarial (A) Task Force will designate basic

types of reports to meet differing needs and time frames. Each statistical plan defined in

VM-51 of the Valuation Manual will provide a detailed description of the reports, the

frequency and time frame for the reports. Statistical compilations are anticipated to be the

primary reports.

2. Statistical compilations are aggregate reports that generally match appropriate exposure

amounts and transaction event amounts to evaluate the recent experience for a line of

business. For example, a statistical compilation of mortality experience would match

insurance face amounts exposed to death with actual death claims paid. Here the exposure

amount is the total insurance face amount exposed to death, and the transaction event

amounts would be the death claims paid. As another example, a statistical compilation of

surrender experience would match total cash surrender amounts exposed to surrender with

actual surrender amounts paid. Here the exposure amount is the total cash surrender

amounts that could be surrendered, and the transaction event amounts would be the total

surrender amounts actually paid. Statistical compilations can be performed for the industry

or for the state of domicile.

3. In addition to statistical compilations, state insurance regulators can specify additional

reports based on elements in the statistical plans in VM-51. State insurance regulators can

also use statistical compilations and additional reports to evaluate non-formulaic

assumptions.

4. The Life Actuarial (A) Task Force or Health Actuarial (B) Task Force will specify the

reports to be provided to the professional actuarial associations to fulfill their roles as

specified in Section 3.C of this VM-50. In general, the reports are expected to include

statistical compilation at the industry level.

5. State insurance regulators can use the reports to review long-term trends. Aggregate

experience results may indicate areas warranting additional investigation.

D. Supplemental Reports

1. For specific lines of business and types of experience data, state insurance regulators may

request additional reports from the Experience Reporting Agent. State insurance regulators

also may request custom reports, which may contain specific data or experience not

regularly produced in other reports.

2. The regulator and the Experience Reporting Agent must negotiate time schedules for

producing supplemental reports. The information in these reports is limited by the amount

of data actually available and the manner in which it has been reported.

E. Reports to State Insurance Departments

The Experience Reporting Agent will periodically provide the following reports to state insurance

departments:

1. A list of companies whose data is included in the compilation.

Experience Reporting Requirements VM-50

2. A list of companies whose data was excluded from the compilation because it fell outside

of the tolerances set for missing or invalid data, or for any other reason.

Section 6: Confidentiality of Data

A. Confidentiality of Experience Data

1. The confidentiality of the experience data, experience materials and related information

collected pursuant to the Valuation Manual is governed by state laws based on Section

14.A.(5) of Model #820. The following information is considered “confidential

information” by state laws based on Section 14A(5) of the Model #820:

Any documents, materials, data and other information submitted by a company under

Section 13 of [the Standard Valuation Law] (collectively, “experience data”) and any

other documents, materials, data and other information, including, but not limited to,

all working papers, and copies thereof, created or produced in connection with such

experience data, in each case that include any potentially company-identifying or

personally identifiable information, that is provided to or obtained by the commissioner

(together with any “experience data,” the “experience materials”) and any other

documents, materials, data and other information, including, but not limited to, all

working papers, and copies thereof, created, produced or obtained by or disclosed to

the commissioner or any other person in connection with such experience materials.

2. Nothing in the experience reporting requirements or elsewhere within the Valuation

Manual is intended to, or should be construed to, amend or supersede any applicable

statutory requirements, or otherwise require any disclosure of confidential data or materials

that may violate any applicable federal or state laws, rules, regulations, privileges or court

orders applicable to such data or materials.

B. Treatment of Confidential Information

1. Confidential information may be shared only with those individuals and entities specified

in state laws based on Section 14B(3) of Model #820. Any agreement between a state

insurance department and the Experience Reporting Agent will address the extent to which

the Experience Reporting Agent is authorized to share confidential information consistent

with state law.

2. The Experience Reporting Agent may be required to use confidential information in order

to prepare compilations of aggregated experience data that do not permit identification of

individual company experience or personally identifiable information. These reports of

aggregated information, including those reports referenced in Section 5 of VM-50, are not

considered confidential information, and the Experience Reporting Agent may make

publicly available such reports. Reports using aggregate experience data will have

sufficient diversification of data contributors to avoid identification of individual

companies.

3. Consistent with state laws based on Section 14B(3) of the Model #820 and any agreements

between a state insurance department and the Experience Reporting Agent, access to the

confidential information will be limited to:

a. State, federal or international regulatory agencies;

b. The company with respect to confidential information it has submitted, and any reports

prepared by the Experience Reporting Agent based on such confidential information;

Experience Reporting Requirements VM-50

c. The NAIC, and its affiliates and subsidiaries;

d. Auditor(s) of the Experience Reporting Agent for purposes of the experience reporting

function outlined in this VM-50; and

e. Other individuals or entities, including contractors or subcontractors of the Experience

Reporting Agent, otherwise assisting the Experience Reporting Agent or state

insurance regulators in fulfilling the purposes of VM-50. These other individuals or

entities may provide services related to a variety of areas of expertise, such as assisting

with performing industry experience studies, developing valuation mortality tables,

data editing and data quality review. These other individuals and entities shall be

subject to the same standards as the Experience Reporting Agent with respect to the

maintenance of confidential information.

VM-51

VM-51: Experience Reporting Formats

Table of Contents

Section 1: Introduction ................................................................................................................... 51-1

Section 2: Statistical Plan for Mortality ......................................................................................... 51-1

Appendix 1: Preferred Class Structure Questionnaire ....................................................................... 51-5

Appendix 2: Mortality Claims Questionnaire .................................................................................... 51-8

Appendix 3: Additional Plan Code Form ......................................................................................... 51-10

Appendix 4: Mortality Data Elements and Format .......................................................................... 51-12

Section 1: Introduction

A. The experience reporting requirements are defined in Section 3 of VM-50. The experience

reporting requirements state that the Experience Reporting Agent will collect experience data based

on statistical plans that are defined in VM-51 of the Valuation Manual. Statistical plans are to be

added to VM-51 of the Valuation Manual when they are ready to be implemented.

B. Each statistical plan shall contain the following information:

1. The type of experience data to be collected (e.g., mortality experience; policy behavior

experience, such as surrenders, lapses, conversions, premium payment patterns, etc.; and

company expense experience, such as commission expense, policy issue and maintenance

expense, company overhead expenses etc.);

2. The scope of business to be included in the experience data to be collected (e.g., line(s) of

business, such as individual or group, life, annuity or health; product type(s), such as term,

whole life, universal life, indexed life, variable life, fixed annuity, indexed annuity, variable

annuity, LTC or disability income; and type of underwriting, such as medically underwritten,

simplified issue (SI), GI, accelerated, etc.);

3. The criteria for determining which companies or legal entities must submit the experience data

to be collected;

4. The process for submitting the experience data to be collected, which will include the frequency

of the data collection, the due dates for data collection and how the data is to be submitted to

the Experience Reporting Agent;

5. The individual data elements and format for each data element that will be contained in each

experience data record, along with detailed instructions defining each data element or how to

code each data element. Additional information may be required, such as questionnaires and

plan code forms that will assist in defining the individual data elements that may be unique to

each company or legal entity submitting such experience data elements;

6. The experience data reports to be produced.

Section 2: Statistical Plan for Mortality

A. Type of Experience Collected Under This Statistical Plan

Experience Reporting Formats VM-51

The type of experience to be collected under this statistical plan is mortality experience.

B. Scope of Business Collected Under This Statistical Plan

1. The data for this statistical plan is the individual ordinary life line of business. Such

business is to include direct written business issued in the U.S. All values should be prior

to any reinsurance ceded except for the situation defined in VM-51 Section 2.B.2.

Assumption reinsurance of an individual ordinary life line of business, where the

assuming company is legally responsible for all benefits and claims paid, shall be

included within the scope of this statistical plan. The ordinary life line of business does

not include separate lines of business, such as SI/GI, worksite, individually solicited

group life, direct response, final expense, preneed, home service, credit life, and

corporate-owned life insurance (COLI)/bank-owned life insurance (BOLI)/charity-

owned life insurance (CHOLI).

2. In the event a reinsurer or TPA is responsible for administering a block of business, the

reinsurer or TPA may submit that block of business on behalf of the direct writer. In this

case, the reinsurer or TPA must be identified in Appendix 4 Item 1 - Submitting

Company ID, and the direct writer must be identified in Appendix 4 Item 2 - NAIC

Company Code of Direct Writer.

a. As defined in VM-50 Section 4.B.3, the reconciliation to company statistical and

financial data for both the direct writing company and all reinsurers and/or TPAs

must include lines indicating the amount of business that is being reported by

the reinsurers and/or TPAs. The Experience Reporting Agent will compare the

reconciliations for all business submitted by the direct writer and any reinsurers

and/or TPAs to ensure that all business is included and that there is no double

counting of policies.

b. If an insurance company is required to submit its direct written business and it

also has reinsurance assumed business, it should only submit the assumed

business if asked to do so by the ceding company since some ceding companies

may not have been selected for data submission.

3. The direct writing company is ultimately responsible for all the data submitted for its

company.

C. Criteria to Determine Companies That Are Required to Submit Experience Data

Companies with less than $50 million of direct individual life premium shall be exempted from

reporting experience data required under this statistical plan. This threshold for exemption shall be

measured based on aggregate premium volume of all affiliated companies and shall be reviewed

annually and be subject to change by the Experience Reporting Agent. At its option, a group of

nonexempt affiliated companies may exclude from these requirements affiliated companies with

less than $10 million direct individual life premium provided that the affiliated group remains

nonexempt.

Additional exemptions may be granted by the Experience Reporting Agent where appropriate,

following consultation with the domestic insurance regulator, based on achieving a target level of

approximately 85% of industry experience for the type of experience data being collected under

this statistical plan.

D. Process for Submitting Experience Data Under This Statistical Plan

Data for this statistical plan for mortality shall be submitted on an annual basis. Each company

required to submit this data shall submit the data using the Regulatory Data Collection (RDC)

online software submission application developed by the Experience Reporting Agent. For each

data file submitted by a company, the Experience Reporting Agent will perform reasonability and

Experience Reporting Formats VM-51

completeness checks, as defined in Section 4 of VM-50, on the data. The Experience Reporting

Agent will notify the company within 30 days following the data submission of any possible errors

that need to be corrected. The Experience Reporting Agent will compile and send a report listing

potential errors that need correction to the company.

Data for this statistical plan for mortality will be compiled using a calendar year method. The

reporting calendar year is the calendar year that the company submits the experience data. The

observation calendar year is the calendar year of the experience data that is reported. The

observation calendar year will be one year prior to the reporting calendar year. For example, if the

current calendar year is 2024 and that is the reporting calendar year, the company is to report the

experience data that was in-force or issued in calendar year 2023, which is the observation calendar

year. For the 2024 reporting calendar year, companies who are required to submit data for this

statistical plan for mortality will be required to submit two observation calendar years of data,

namely observation calendar year 2022 and observation calendar year 2023. For reporting calendar

years after 2024, companies who are required to submit data for this statistical plan for mortality

will be required to submit one observation calendar year of data.

Given an observation calendar year of 20XX, the calendar year method requires reporting of

experience data as follows:

i. Report policies in force during or issued during calendar year 20XX.

ii. Report terminations that were incurred in calendar year 20XX and reported before

April 1, 20XX+1. Companies may report terminations reported after April 1,

20XX+1 if they choose to do so. However, exclude rescinded policies (e.g., 10-

day free look exercises) from the data submission.

For any reporting calendar year, the data call will occur during the second quarter, and data is to be

submitted according to the requirements of the Valuation Manual in effect during that calendar

year. Data submissions must be made by Sept. 30 of the reporting calendar year. Corrections of

data submissions must be completed by Feb. 28 of the year following the reporting calendar year.

The NAIC may extend either of these deadlines if it is deemed necessary.

E. Experience Data Elements and Formats Required by This Statistical Plan

Companies subject to reporting pursuant to the criteria stated in Section 2.C are required

to complete the data forms in Appendix 1, Appendix 2 and Appendix 3 as appropriate, and

also complete the Experience Data Elements and Formats as defined in Appendix 4.

The data should include policies issued as standard, substandard (optional) or sold within

a preferred class structure. Preferred class structure means that, depending on the

underwriting results, a policy could be issued in classes ranging from a best preferred class

to a residual standard class. Policies issued as part of a preferred class structure are not to

be classified as substandard.

Policies issued as conversions from term or group contracts should be included. For these

converted policies, the issue date should be the issue date of the converted policy, and the

underwriting field will identify them as issues resulting from conversion.

Generally, each policy number represents a policy issued as a result of ordinary

underwriting. If a single life policy, the base policy on a single life has the policy number

and a segment number of 1. On a joint life policy, each life has separate records with the

same policy number. The base policy on the first life has a segment number of 1, and the

Experience Reporting Formats VM-51

base policy on the second life has a segment number of 2. Policies that cover more than

two lives are not to be submitted.

Term/paid up riders or additional amounts of insurance purchased through dividend options

on a policy issued as a result of ordinary underwriting are to be submitted. Each rider is on

a separate record with the same policy number as the base policy and has a unique segment

number. The details on the rider record may differ from the corresponding details on the

base policy record. If underwriting in addition to the base policy underwriting is done, the

coverage is given its own policy number.

Terminations (both death and non-death) are to be submitted. Terminations are to include

those that occurred in the observation year and were reported by June 30 of the year after

the observation year.

Plans of insurance should be carefully matched with the three-digit codes in item 19, Plan.

These plans of insurance are important because they will be used not only for mortality

experience data collection, but also for policyholder behavior experience data collection.

It is expected that most policies will be matched to three-digit codes that specify a particular

policy type rather than select a code that indicates a general plan type.

Each company is to submit data for in-force and terminated life insurance policies that are

within the scope defined in Section 2.B except:

i. For policies issued before Jan. 1, 1990, companies may certify that

submitting data presents a hardship due to fields not readily available in

their systems/databases or legacy computer systems that continue to be

used for older issued policies and differ from computer systems for

newer issued policies.

ii. For policies issued on or after Jan. 1, 1990, companies must:

a) Document the percentage that the face amount of policies

excluded are relative to the face amount of submitted policies

issued on or after Jan. 1, 1990; and

b) Certify that this requirement presents a hardship due to fields not

readily available in their systems/databases or legacy computer

systems that continue to be used for older issued policies and

differ from computer systems for newer issued policies.

F. Experience Data Reports Required by This Statistical Plan

1. Using the data collected under this statistical plan, the Experience Reporting Agent

will produce an experience data report that aggregates the experience data of all

companies whose data have passed all of the validity and reasonableness checks

outlined in Section 4 of VM-50 and has been determined by the Experience

Reporting Agent to be acceptable to be used in the development of industry

mortality experience.

2. The Experience Reporting Agent will provide to the SOA or other actuarial

professional organizations an experience data report of aggregated experience that

does not disclose a company’s identity, which will be used to develop industry

mortality experience and valuation mortality tables.

Experience Reporting Formats VM-51

3. As long as a company is licensed in a state, that state insurance regulator will be

given access to a company’s experience data that is stored on a confidential

database at the Experience Reporting Agent. Access by the state insurance

regulator will be controlled by security credentials issued to the state insurance

regulator by the Experience Reporting Agent.

Experience Reporting Formats VM-51

Appendix 1: Preferred Class Structure Questionnaire

PREFERRED CLASS STRUCTURE QUESTIONNAIRE

Fill out this preferred class structure questionnaire based on companywide summaries, such as

underwriting guideline manuals, compilations of issue instructions or other documentation.

The purpose of this preferred class structure questionnaire is to gather information on different preferred

class structures. This questionnaire varies between nonsmoker/non-tobacco and smoker/tobacco users and

provides for variations by issue year, face amount and plan. If the company has the standard Relative Risk

Score (RR Score) information available, the company should map its set of preferred class structure to sets

of RR Scores. Except for new preferred class structures or new sets of RR Scores applied to existing

preferred class structure(s), the response to the questionnaire should remain the same from year to year.

If a company has determined sets of RR Scores for its preferred class structures, it should provide separate

preferred class structure responses for each set of RR Scores applied to a preferred class structure. If a

company has not determined sets of RR Scores for its preferred class structures, it should fill out this

questionnaire with its preferred class structures and update the preferred class structure questionnaire at

such future time that sets of RR Scores for the preferred class structures are determined. When sets of RR

Scores are used, there is to be a one-to-one correspondence between a preferred class structure and a set

of RR Scores.

The information given in this questionnaire will be used both to map a set of RR Scores to policy level data

and as a check on the policy-level data submission. Submit this questionnaire along with the initial data

submission to the Experience Reporting Agent.

Each preferred class structure must include at least two classes (e.g., one preferred class and one

standard class). Make as many copies of this preferred class structure questionnaire as necessary for

your individual life business and submit in addition to policy-level detail information.

Company NAIC Company Code

Name Date

PREFERRED CLASS STRUCTURE – Part 1 Nonsmokers/Non-Tobacco Users

Preferred class structure must have at least one preferred and one standard class. Use multiple copies of this

page if needed for nonsmokers/non-tobacco users

Number of Nonsmoker/Non-Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Number of Nonsmoker/Non-Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Experience Reporting Formats VM-51

Number of Nonsmoker/Non-Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Number of Nonsmoker/Non-Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Number of Nonsmoker/Non-Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

PREFERRED CLASS STRUCTURE – Part 2 Smokers/Tobacco Users

Preferred class structure must have at least one preferred and one standard class. Use multiple copies of this

page if needed for smokers/tobacco users

Number of Smoker/Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Number of Smoker/Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Agee

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Number of Smoker/Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Number of Smoker/Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Number of Smoker/Tobacco User Risk Classes

Experience Reporting Formats VM-51

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Number of Smoker/Tobacco User Risk Classes

a) Issue Date Range

Date

through

Date

b) Issue Age Range

Age

through

Age

c) Face Amount Range

Amount

through

Amount

d) Plan Types (use three-digit codes from item 19, Plan)

Experience Reporting Formats VM-51

Appendix 2: Mortality Claims Questionnaire

MORTALITY CLAIMS QUESTIONNAIRE

The purpose of this mortality claims questionnaire is for a company to respond to the questions whether or

not it is submitting death claim data as specified. If the company is not submitting death claim data as

specified, provide the additional detail requested.

Fill out this questionnaire for your individual life business and submit in addition to policy-level

information.

Company NAIC Company Code

Name Date

MORTALITY CLAIMS

1. If the data is provided using a reporting run-out that is other than six months, what run-out period

was used? mm/dd/yyyy

2. The death claim amounts are to be for the total face amount and on a gross basis (before

reinsurance). The data is based on:

a. Total face amount (for policies that include the cash value in addition to the face amount

as a death benefit, use only the face amount) as specified OR

Other (describe):

If not as specified, indicate time period for which this occurred ___________ - ________

b. Gross basis (before reinsurance) as specified OR ⁭ Other (describe):

If not as specified, indicate time period for which this occurred:

___________ - _______

Is this the same basis used for face amounts included in the study data? ⁭ Yes ⁭ No

3. The date that the termination is reported is to be used for the termination reported date. The date

that the termination actually occurred is to be used for the actual termination date. What dates are

used for death claims in the study data with respect to?

a) Termination reported date

If not reported date, indicate

basis for dates provided

⁭ Reported date

⁭ Other (describe):

b) Actual termination date for death

claims:

⁭ Date of death

⁭ Other (describe):

If not date of death, indicate

basis for dates provided

4. Death claims pending at the end of the observation period but paid during the subsequent six months

following the observation year are to be included in the data submission. Claims that are still

pending at the end of the six-month run out are to be included.

Experience Reporting Formats VM-51

Are such pending claims included in the study data? ⁭ Yes ⁭ No

If no indicate time period for which this occurred: __________________

5. The face amounts and death claim amounts are to be included without capping by amount. Are the

face amounts and death claims/exposures included without capping by amount?

⁭ Yes No

If No, describe how face amounts and death claims are capped and at what amount the capping is

being done.

6. For death claims on policies issued before 1990:

Are death claims matched up to a corresponding in-force policy? ⁭ Yes ⁭ No

If no, indicate approach used:

7. Please briefly describe any other unique aspects of the death claims data that are not covered

above.

Experience Reporting Formats VM-51

Appendix 3: Additional Plan Code Form

If you need an additional plan code(s) for a product(s) in addition to those plan codes in Item 19, Plan, of

the statistical plan for life insurance mortality, fill in this form using plan codes in the range 300 to 999.

Your data submission should reflect the plan codes in this form. Make as many copies as necessary for your

individual life business and submit in addition to policy-level information. When this form is used, it must

be sent to the Experience Reporting Agent at the time that data is submitted.

Completed by: ______________________ Title: _______________________________

Company:__________________________

NAIC Company Code: _________________

Date: ______

Phone Number: _____________________ Email:_______________________________

Add comments or attachments where necessary.

Enter unique three-digit plan codes for each product.

Plan Code For Product I

Plan Code for Product II

Plan Code for Product III

Enter specific plan names for each product.

A. General Product Information

Product I Product II Product III

1. In what year was each

product introduced?

2. Briefly describe the product.

___________________

_________________

___________________

_________________

___________________

_________________

3. Enter three-digit plan code in

the range 300 to 999.

Experience Reporting Formats VM-51

B. For the products listed, please fit each product into one of the categories below.

Categories for Product I Categories for Product II Categories for Product III

1 Traditional Whole Life Plans 1 Traditional Whole Life Plans 1 Traditional Whole Life Plans

2 Term Insurance Plans 2 Term Insurance Plans 2 Term Insurance Plans

Universal Life Plans (excl.

Variable and excl. Secondary

Guarantees)

Universal Life Plans (excl.

Variable and excl. Secondary

Guarantees)

Universal Life Plans (excl.

Variable and excl. Secondary

Guarantees)

Universal Life Plans with

Secondary Guarantees (excl.

Variable)

Universal Life Plans with

Secondary Guarantees (excl.

Variable)

Universal Life Plans with

Secondary Guarantees (excl.

Variable)

Variable Life Plans (without

Secondary Guarantees)

Variable Life Plans (without

Secondary Guarantees)

Variable Life Plans (without

Secondary Guarantees)

Variable Life Plans with

Secondary Guarantees

Variable Life Plans with

Secondary Guarantees

Variable Life Plans with

Secondary Guarantees

7 Nonforfeiture 7 Nonforfeiture 7 Nonforfeiture

8 Other 8 Other 8 Other

Experience Reporting Formats VM-51

Appendix 4: Mortality Data Elements and Format

ITEM LENGTH DATA ELEMENT DESCRIPTION

1 9 Submitting Company

ID number representing the company submitting this

file.

If the company has an NAIC Company Code, then that

code must be used.

If the company does not have an NAIC Company

Code, the company’s Federal Employer Identification

Number (FEIN) must be used.

If the direct writer is the company submitting the data,

items 1 and 2 must contain the same value.

2 5 NAIC Company Code

of the Direct Writer

of Business

The NAIC Company Code of the company that wrote

the business being reported.

In the case of assumption reinsurance where the

assuming company is legally responsible for all

benefits and claims paid, the assuming company is

considered to be the direct writer.

If the direct writer is the company submitting the data

file, items 1 and 2 must contain the same value.

3 4 Observation Year Enter Calendar Year of Observation

4 20 Policy Number Enter Policy Number. For Policy Numbers with length

less than 20, left justify the number, and blank fill the

empty columns. Any other unique identifying number

can be used instead of a Policy Number for privacy

reasons.

5 3 Segment Number If only one policy segment exists, enter segment

number ‘1.’ For a single life policy, the base policy is

to be put in the record with segment number ‘1.’

Subsequent policy segments are in separate records

with information about that coverage and differing

segment numbers.

For joint life policies, the base policy of the first life is

to be put in a record with segment number ‘1,’ and the

base policy of the second life is to be put in a separate

record with segment number ‘2.’ Joint life policies

with more than two lives are not to be submitted.

Subsequent policy segments are in separate records

with information about that coverage and differing

segment numbers.

Policy segments with the same policy number are to be

submitted for:

a) Single life policies;

b) Joint life policies;

c) Term/paid up riders; or

d) Additional amounts of insurance including

purchase through dividend options.

6 2 State of Issue Use standard, two-letter state abbreviation codes (e.g.,

NY for New York)

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

7 1 Gender 0 = Unknown or unable to subdivide

1 = Male

2 = Female

3 = Unisex – Unknown or unable to identify

4 = Unisex – Male

5 = Unisex – Female

8 8 Date of Birth Enter the numeric date of birth in YYYYMMDD

format

9 1 Age Basis 0 = Age Nearest Birthday

1 = Age Last Birthday

2 = Age Next birthday

Drafting Note: Professional actuarial organization

will need to develop either age next birthday mortality

tables or procedure to adapt existing mortality tables to

age next birthday basis.

10 3 Issue Age Enter the insurance Issue Age

11 8 Issue Date Enter the numeric calendar year in YYYYMMDD

format.

12 1 Smoker Status Smoker status should be submitted where reliable.

0 = Unknown

1 = No tobacco usage

2 = Nonsmoker

3 = Cigarette smoker

4 = Tobacco user

13 1 Preferred Class

Structure Indicator

0 = If no reliable information on multiple preferred

and standard classes is available or if the policy

segment was issued substandard or if there were no

multiple preferred and standard classes available for

this policy segment

or if preferred information is

unknown.

1 = If this policy was issued in one of the available

multiple preferred and standard classes for this policy

segment.

Note: If Preferred Class Structure Indicator is 0, or if

preferred information is unknown, leave next four

items blank.

14 1 Number of Classes in

Nonsmoker Preferred

Class Structure

If Preferred Class Structure Indicator is 0 or if Smoker

Status is 0, 3 or 4, or if preferred information is

unknown, leave blank. For nonsmoker or no tobacco

usage policies that could have been issued as one of

multiple preferred and standard classes, enter the

number of nonsmoker preferred and standard classes

available at time of issue.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

15 1 Nonsmoker Preferred

Class

If Preferred Class Structure Indicator is 0 or if Smoker

Status is 0, 3 or 4, or if preferred information is

unknown, leave blank.

For nonsmoker policy segments that could have been

issued as one of multiple preferred and standard

classes:

1 = Best preferred class

2 = Next Best preferred class after 1

3 = Next Best preferred class after 2

4 = Next Best preferred class after 3

5 = Next Best preferred class after 4

6 = Next Best preferred class after 5

7 = Next Best preferred class after 6

8 = Next Best preferred class after 7

9 = Next Best preferred class after 8

Note: The policy segment with the highest nonsmoker

Preferred Class number should have that number equal

to the Number of Classes in Nonsmoker Preferred

Class Structure.

16 1 Number of Classes in

Smoker Preferred

Class Structure

If Preferred Class Structure Indicator is 0 or if Smoker

Status is 0, 1 or 2, or if preferred information is

unknown, leave blank.

For smoker or tobacco user policies that could have

been issued as one of multiple preferred and standard

classes, enter the number of smoker preferred and

standard classes available at time of issue.

17 1 Smoker Preferred

Class

If Preferred Class Structure Indicator is 0 or if Smoker

Status is 0, 1 or 2, or if preferred information is

unknown, leave blank.

For smoker policy segments that could have been

issued as one of multiple preferred and standard

classes:

1 = Best preferred class

2 = Next Best preferred class after 1

3 = Next Best preferred class after 2

4 = Next Best preferred class after 3

5 = Next Best preferred class after 4

6 = Next Best preferred class after 5

7 = Next Best preferred class after 6

8 = Next Best preferred class after 7

9 = Next Best preferred class after 8

Note: The policy segment with the highest Smoker

Preferred Class number should have that number equal

to the Number of Classes in Smoker Preferred Class

Structure.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

18 2 Type of Underwriting

Requirements

If underwriting requirement of ordinary business is

reliably known, use code other than “99.” Ordinary

business does not include separate lines of business,

such as simplified issue/guaranteed issue, worksite,

individually solicited group life, direct response, final

expense, preneed, home service and

COLI/BOLI/CHOLI.

01 = Underwritten, but unknown whether fluid was

collected

02 = Underwritten with no fluid collection

03 = Underwritten with fluid collected

06 = Term Conversion

07 = Group Conversion

09 = Not Underwritten

99 = For issues where underwriting requirement

unknown or unable to subdivide

19 1 Substandard Indicator 0 = Policy segment is not substandard

1 = Policy segment is substandard

2 = Policy segment is uninsurable

Note:

a. All policy segments that are

substandard need to be identified

as substandard or uninsurable.

b. Submission of substandard

policies is optional.

c. If feasible, identify substandard

policy segments where temporary

flat extra has ceased as

substandard.

20 3 Plan Exclude from contribution: spouse and children under

family policies or riders. If Form for Additional Plan

Codes was submitted for this policy, enter unique

three-digit plan number(s) that differ from the plan

numbers below:

000 = If unable to distinguish among plan types listed

below

100 = Joint life plan unable to distinguish among joint

life plan types listed below

Permanent Plans:

010 = Traditional fixed premium fixed benefit

permanent plan

011 = Permanent life (traditional) with term

012 = Single premium whole life

013 = Econolife (permanent life with lower premiums

in the early durations)

014 = Excess interest whole life

015 = First to die whole life plan (submit separate

records for each life)

016 = Second to die whole life plan (submit separate

records for each life)

017 = Joint whole life plan – unknown whether 015 or

016 (submit separate records for each life)

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

018 = Permanent products with non-level death

benefits

019 = Permanent plans 010, 011, 012, 013, 014, 015,

016, 017, 018 combined (i.e. unable to separate)

Term Insurance Plans:

020 = Term (traditional level benefit and attained age

premium)

021 = Term (level death benefit with guaranteed level

premium for five years and anticipated level

term period for five years)

211 = Term (level death benefit with guaranteed level

premium for five years and anticipated level

term period for 10 years)

212 = Term (level death benefit with guaranteed level

premium for five years and anticipated level

term period for 15 years)

213 = Term (level death benefit with guaranteed level

premium for five years and anticipated level

term period for 20 years)

214 = Term (level death benefit with guaranteed level

premium for five years and anticipated level

term period for 25 years)

215 = Term (level death benefit with guaranteed level

premium for five years and anticipated level

term period for 30 years)

022 = Term (level death benefit with guaranteed level

premium for 10 years and anticipated level term

period for 10 years)

221 = Term (level death benefit with guaranteed level

premium for 10 years and anticipated level term

period for 15 years)

222 = Term (level death benefit with guaranteed level

premium for 10 years and anticipated level term

period for 20 years)

223 = Term (level death benefit with guaranteed level

premium for 10 years and anticipated level term

period for 25 years)

224 = Term (level death benefit with guaranteed level

premium for 10 years and anticipated level term

period for 30 years)

023 = Term (level death benefit with guaranteed level

premium for 15 years and anticipated level term

period for 15 years)

231 = Term (level death benefit with guaranteed level

premium for 15 years and anticipated level term

period for 20 years)

232 = Term (level death benefit with guaranteed level

premium for 15 years and anticipated level term

period for 25 years)

233 = Term (level death benefit with guaranteed level

premium for 15 years and anticipated level term

period for 30 years)

024 = Term (level death benefit with guaranteed level

premium for 20 years and anticipated level term

period for 20 years)

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

241 = Term (level death benefit with guaranteed level

premium for 20 years and anticipated level term

period for 25 years)

242 = Term (level death benefit with guaranteed level

premium for 20 years and anticipated level term

period for 30 year)

025 = Term (level death benefit with guaranteed level

premium for 25 years and anticipated level term

period for 25 years)

251 = Term (level death benefit with guaranteed level

premium for 25 years and anticipated level term

period for 30 year)

026 = Term (level death benefit with guaranteed level

premium for 30 years and anticipated level term

period for 30 years)

027 = Term (level death benefit with guaranteed level

premium period equal to anticipated level term

period where the period is other than five, 10,

15, 20, 25 or 30 years)

271 = Term (level death benefit with guaranteed level

premium period not equal to anticipated level

term period, where the periods are other than

five, 10, 15, 20, 25 or 30 years)

028 = Term (decreasing benefit)

040 = Select ultimate term (premium depends on issue

age and duration)

041 = Return of Premium Term (level death benefit

with guaranteed level premium for 15 years)

042 = Return of Premium Term (level death benefit

with guaranteed level premium for 20 years)

043 = Return of Premium Term (level death benefit

with guaranteed level premium for 25 years)

044 = Return of Premium Term (level death benefit

with guaranteed level premium for 30 years)

045 = Return of Premium Term (level death benefit

with guaranteed level premium for period other

than 15, 20, 25 or 30 years)

046 = Economatic term

059 = Term plan, unable to classify

101 = First to die term plan (submit separate records

for each life)

102 = Second to die term plan (submit separate records

for each life)

103 = Joint term plan – unknown whether 101 or 102

(submit separate records for each life)

Universal Life Plans (Other than Variable), issued

without a Secondary Guarantee:

061 = Single premium universal life

062 = Universal life (decreasing risk amount)

063 = Universal life (level risk amount)

064 = Universal life – unknown whether code 062 or

063

065 = First to die universal life plan (submit separate

records for each life)

066 = Second to die universal life plan (submit

separate records for each life)

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

067 = Joint life universal life plan – unknown whether

code 065 or 066 (submit separate records for

each life)

068 = Indexed universal life

Universal Life Plans (Other than Variable) with

Secondary Guarantees:

071 = Single premium universal life with secondary

guarantees

072 = Universal life with secondary guarantees

(decreasing risk amount)

073 = Universal life with secondary guarantees (level

risk amount)

074 = Universal life with secondary guarantees –

unknown whether code 072 or 073

075 = First to die universal life plan with secondary

guarantees (submit separate records for each

life)

076 = Second to die universal life plan with secondary

guarantees (submit separate records for each

life)

077 = Joint life universal life plan with secondary

guarantees unknown whether code 075 or 076

(submit separate records for each life)

078 = Indexed universal life with secondary

guarantees

Variable Life Plans issued without a Secondary

Guarantee:

080 = Variable life

081 = Variable universal life (decreasing risk amount)

082 = Variable universal life (level risk amount)

083 = Variable universal life – unknown whether code

081 or 082

084 = First to die variable universal life plan (submit

separate records for each life)

085 = Second to die variable universal life plan

(submit separate records for each life)

086 = Joint life variable universal life plan – unknown

whether 084 or 085 (submit separate records for

each life)

Variable Life Plans with Secondary Guarantees:

090 = Variable life with secondary guarantees

091 = Variable universal life with secondary

guarantees (decreasing risk amount)

092 = Variable universal life with secondary

guarantees (level risk amount)

093 = Variable universal life with secondary

guarantees –unknown whether code 091 or 092

094 = First to die variable universal life plan with

secondary guarantees (submit separate records

for each life)

095 = Second to die variable universal life plan with

secondary guarantees (submit separate records

for each life)

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

096 = Joint life variable universal life plan with

secondary guarantees – unknown whether code

094 or 095 (submit separate records for each

life)

Coverage purchased with dividends:

196 = Paid Up Additions

197 = One-Year Term

Nonforfeiture:

098 = Extended term

099 = Reduced paid-up

198 = Extended term for joint life (submit separate

records for each life)

199 = Reduced paid-up for joint life (submit separate

records for each life)

21 1 In-force Indicator 0 = If the policy segment was not in force at the end of

the calendar year of observation

1 = If the policy segment was in force at the end of the

calendar year of observation

22 12 Face Amount of

Insurance at Issue

Face amount of the policy segment at its issue date

rounded to nearest dollar. If policy provides payment

of cash value in addition to face amount, include face

amount and do not include cash value. If the policy

was issued during the observation year, the Face

Amount of Insurance at the Beginning of the

Observation Year should be blank.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

23 12 Face Amount of

Insurance at the

Beginning of the

Observation Year

Face amount of the policy segment at the beginning of

the calendar year of observation rounded to nearest

dollar. If policy provides payment of cash value in

addition to face amount, include face amount and do

not include cash value. Exclude extra amounts

attributable to 7702 corridors. If the policy was issued

during the observation year, the Face Amount at the

Beginning of the Observation Year should be blank.

24 12 Face Amount of

Insurance at the End

of the Observation

Year

Face amount of the policy segment at the end of the

calendar year of observation rounded to nearest dollar.

If policy provides payment of cash value in addition to

face amount, include face amount, and do not include

cash value.

Exclude extra amounts attributable to 7702

corridors.

If In-force Indicator is 0, enter face amount of the

policy segment at the time of termination, if available;

otherwise, leave blank.

25 12 Death Claim Amount

If In-force Indicator is 1, leave blank.

Death claim amount rounded to the nearest dollar.

If In-force Indicator is 0 and Cause of Termination is

04, then enter the face amount.

If In-force Indicator is 0 and Cause of Termination is

not 04, then leave blank.

If the policy provides payment of cash value in

addition to face amount, report face amount, and do

not include cash value.

26 8 Termination Reported

Date

If In-force Indicator is 1, leave blank.

Enter in the format YYYYMMDD the eight-digit

calendar date that the termination was reported.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

27 8 Actual Termination

Date

If In-force Indicator is 1, leave blank.

Enter in the format YYYYMMDD the eight-digit

calendar date when the termination occurred.

If termination is due to death (Cause of Termination is

04), enter actual date of death.

If termination is lapse due to non-payment of premium

(Cause of Termination is 01 or 02 or 14), enter the last

day the premium was paid to.

28 2 Cause of Termination If Inforce Indicator is 1, leave blank.

00 = Termination type unknown or unable to

subdivide

01 = Reduced paid-up

02 = Extended term

03 = Voluntary; unable to subdivide among 01, 02, 07,

09, 10, 11 or 13

04 = Death

05 = Death due to COVID-19

07 = 1035 exchange

09 = Term conversion – unknown whether attained

age or original age

10 = Attained age term conversion

11 = Original age term conversion

12 = Coverage expired or contract reached end of the

mortality table

13 = Surrendered for full cash value

14 = Lapse (other than to Reduced Paid Up or

Extended Term)

15 = Termination via payment of a discounted face

amount while still alive, pursuant to an accelerated

death benefit provision

Annualized Premium

at Issue

For level term segments with plan codes 021 through

027, 041 through 045 or 211 through 271 of Item 19,

Plan, enter the annualized premium set at issue.

Except for level term segments specified above, leave

blank for non-base segments.

For the base segments for ULSG, and Variable Life

with Secondary Guarantees (VLSG) with plan codes

071 through 078 or 090 through 096 of Item 19, Plan,

enter the annualized billed premium set at issue.

Round to the nearest dollar.

If unknown, leave blank.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

Annualized Premium

at the Beginning of

Observation Year

For level term segments with plan codes 021 through

027, 041 through 045 or 211 through 271 of Item 19,

Plan, enter the annualized premium for the policy year

that includes the beginning of the observation year.

Except for level term segments specified above, leave

blank for non-base segments.

For the base segments for ULSG and VLSG with plan

codes 071 through 078 or 090 through 096 of Item 19,

Plan, enter the annualized billed premium for

the policy year that includes the beginning of the

observation year.

Round to the nearest dollar.

For policies issued in the observation year, leave

blank.

If unknown, leave blank.

Annualized Premium

at the End of

Observation, if

available. Otherwise

Annualized Premium

as of Year/Actual

Termination Date

For level term segments with plan codes 021 through

027, 041 through 045 or 211 through 271 of Item 19,

Plan, for each segment that has Item 20, with the In-

force Indicator = 1, enter the annualized premium for

the policy year that includes the end of the observation

year. Otherwise, enter the annualized premium that

would have been paid at the end of the observation

year. If end of year premium is not available, enter the

annualized premium as of the Actual Termination Date

(Item 26).

Except for level term segments specified above, leave

blank for non-base segments.

For the base segments for ULSG and VLSG with plan

codes 071 through 078 or 090 through 096 of Item 19,

Plan, use the annualized billed premium. For base

segments that have Item 20, with the Inforce Indicator

=1,

enter the annualized billed premium for the policy

year that includes the end of the observation year.

Otherwise, enter the annualized billed premium that

would have been paid at the end of the observation

year. If end of

year premium is not available, enter the annualized

premium as of the Actual Termination Date (Item 26).

Round to the nearest dollar.

If unknown, leave blank.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

Premium Mode

01 = Annual

02 = Semiannual

03 = Quarterly

04 = Monthly Bill Sent

05 = Monthly Automatic Payment

06 = Semimonthly

07 = Biweekly

08 = Weekly

09 = Single Premium

10 = Other / Unknown

Cumulative

Premium

Collected as of the

Beginning of

Observation Year

If not ULSG or VLSG, leave blank.

For ULSG, and VLSG policies with plan codes

071 through 078 or 090 through 096 of Item 19,

Plan:

1) For non-base segments, leave blank.

2) For base segments, enter the cumulative

premium collected since issue, as of

the

beginning of the observation year. Round to the

nearest dollar.

For policies issued in the observation year, leave

blank. If unknown, leave blank.

Cumulative

Premium

Collected as of the

End of Observation

Year if available.

Otherwise

Cumulative

Premium Collected

as of Actual

Termination Date

If not ULSG or VLSG, leave blank.

For ULSG, and VLSG policies with plan codes

071 through 078 or 090 through 096 of Item 19,

Plan:

For non-base segments, leave blank.

For base segments inforce at the end of the

observation year, enter the cumulative premium

collected as of

the end of the observation year.

For base segments terminated during the

observation year, enter the cumulative premium

collected since issue, as of the Actual

Termination Date (Item 26).

Round to the nearest dollar.

If unknown, leave blank.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

ULSG/VLSG

Premium Type

For non-base segments, leave blank.

If not ULSG or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 or 090 through 096 of Item 19, Plan:

00 = Unknown

01 = Single premium

02 = ULSG/VLSG Whole life level

premium

03 = Lower premium (term like)

04 = Other

Type of Secondary

Guarantee

For non-base segments, leave blank.

If not ULSG or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 or 090 through 096 of Item 19, Plan:

00 = Unknown

01 = Cumulative Premium without Interest (Single

Tier)

02 = Cumulative Premium without Interest

(Multiple Tier)

03 = Cumulative Premium without Interest (Other)

04 = Cumulative Premium with Interest (Single

Tier)

05 = Cumulative Premium with Interest (Multiple

Tier)

06 = Cumulative Premium with Interest (Other)

11 = Shadow Account (Single Tier)

12 = Shadow Account (Multiple Tier)

13 = Shadow Account (Other)

21 = Both Cumulative Premium without Interest

and Shadow Account

22 = Both Cumulative Premium with Interest and

Shadow Account

23= Other, not involving either Cumulative

Premium or Shadow Account

Cumulative

Minimum

Premium as of the

Beginning of

Observation Year

If not ULSG or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 or 090 through 096 of Item 19, Plan:

If Item 35, Type of Secondary Guarantee is blank,

00, 11, 12, 13 or 23, leave blank.

If Item 35, Type of Secondary Guarantee is 01, 02,

03, 04, 05, 06, 21 or 22:

1) Leave non-base segments, blank.

2) For base segments:

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

Enter the cumulative minimum premiums,

including applicable interest, for all policy

years up to the beginning of the observation

year.

Round to the nearest dollar.

For policies issued in the observation year, leave

blank.

If unknown, leave blank.

Cumulative

Minimum

Premium as of the

End of Observation

Year/ Actual

Termination Date

If not ULSG or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 and 090 through 096 of Item 19, Plan:

If Item 35, Type of Secondary Guarantee is blank,

00, 11, 12, 13 or 23, leave blank.

If Item 35, Type of Secondary Guarantee is 01, 02,

03, 04, 05, 06, 21 or 22:

For non-base segments, leave blank.

For base segments inforce at the end of the

observation year, enter the cumulative

minimum

premiums, including applicable

interest, up to the end of the observation year.

For base segments terminated during the

observation year, enter the cumulative

minimum premiums, including applicable

interest, up to the Actual Termination Date

(Item 26)

Round to the nearest dollar.

If unknown, leave blank.

Shadow Account

Amount at the

Beginning of

Observation Year

If not ULSG, or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 or 090 through 096 of Item 19, Plan:

If Item 35, Type of Secondary Guarantee is blank,

00, 01, 02, 03, 04, 05, 06, or 23 leave blank.

If Item 35, Type of Secondary Guarantee is 11, 12,

13, 21 or 22:

1) Leave non-base segments blank.

2) For base segments:

Enter total amount of the Shadow Account at the

beginning of the observation year. The Shadow

Account can be positive, zero or negative.

Round to the nearest dollar.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

For policies issued in the observation year, leave

blank.

If unknown, leave blank.

Shadow Account

Amount at the End

of Observation

Year/ Actual

Termination Date

If not ULSG, or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 or 090 through 096 of Item 19, Plan:

If Item 35, Type of Secondary Guarantee is blank,

00, 01, 02, 03, 04, 05, 06, or 23 leave blank.

If Item 35, Type of Secondary Guarantee is 11, 12,

13, 21 or 22:

For non-base segments, leave blank.

For base segments inforce at the end of the

observation year, enter the total amount of the

Shadow Account at the end of the observation

year. The Shadow Account can be positive, zero

or negative.

For base segments terminated during the

observation year, enter the total amount of the

Shadow Account as of the Actual Termination

Date (Item 26). The Shadow Account can be

positive, zero or negative.

Round to the nearest dollar.

If unknown, leave blank.

Account Value at

the

Beginning of

Observation Year

For non-base segments, leave blank.

If not ULSG or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 or090 through 096 of Item 19, Plan, the

policy Account Value (gross of any loan) at the

Beginning of the Observation Year. The policy

Account Value can be positive, zero or negative.

Round to the nearest dollar.

For policies issued in the observation year, leave

blank.

If unknown, leave blank.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

Account Value at

the End of

Observation

Year/Actual

Termination Date

For non-base segments, leave blank.

If not ULSG or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 or 090 through 096 of Item 19, Plan:

If policy is in force at the end of observation

year, enter the policy Account Value (gross of

any loan) at the end of the Observation Year.

The policy Account Value can be positive, zero

or negative.

If policy terminated during the observation year,

enter the policy Account Value (gross of any

loan) as of the Actual Termination Date (Item

26). The policy Account Value can be positive,

zero or negative.

Round to the nearest dollar.

If unknown, leave blank.

Amount of

Surrender

Charge at the

Beginning of

Observation Year

For non-base segments, leave blank.

If not ULSG or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 and 090 through 096 of Item 19, Plan,

enter the dollar Amount of the Surrender Charge as

of the Beginning of the Observation Year.

Round to the nearest dollar.

For policies issued in the observation year, leave

blank.

If unknown, leave blank.

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

Amount of

Surrender Charge at

the End of

Observation

Year/Actual

Termination Date

For non-base segments, leave blank.

If not ULSG or VLSG, leave blank.

For ULSG and VLSG policies with plan codes 071

through 078 or 090 through 096 of Item 19, Plan:

If policy is in force at the end of observation

year,

enter the dollar amount of the Surrender Charge

at the end of the Observation Year.

2) If policy terminated during the observation year,

enter the dollar amount of the Surrender Charge

as of the Actual Termination Date (Item 26).

Round to the nearest dollar.

If unknown, leave blank.

Operative

Secondary

Guarantee at the

Beginning of

Observation Year

The company defines whether a secondary

guarantee is in effect for a policy with a secondary

guarantee at the beginning of the Observation Year.

If Item 35, Type of Secondary Guarantee is blank,

leave blank.

If Item 35, Type of Secondary Guarantee is 00

through 23:

1) For non-base segments, leave blank.

2) For base segments:

00 = If unknown whether the secondary guarantee

is in effect

01 = If secondary guarantee is not in effect

02 = If secondary guarantee is in effect

03 = If all secondary guarantees have expired

Operative

Secondary

Guarantee at the

End of Observation

Year/Actual

Termination Date

The company defines whether a secondary

guarantee is in effect for a policy with a secondary

guarantee at the end of the Observation Year/Actual

Termination Date.

If Item 35, Type of Secondary Guarantee is blank,

leave blank.

If Item 35, Type of Secondary Guarantee is 00

through 23:

1) For non-base segments, leave blank.

For base segments in force at the end of

observation year, enter the appropriate value

below as of the end of observation year:

00 = If unknown whether the secondary

guarantee is in effect

01 = If secondary guarantee is not in effect

02 = If secondary guarantee is in effect

03 = If all secondary guarantees have expired

For base segments terminated during the

observation year, enter the appropriate value

Experience Reporting Formats VM-51

ITEM LENGTH DATA ELEMENT DESCRIPTION

below as of the Actual Termination Date (Item

26):

00 = If unknown whether the secondary

guarantee is in effect

01 = If secondary guarantee is not in effect

02 = If secondary guarantee is in effect

03 = If all secondary guarantees have expired

Owner’s State of

Residence

Use standard, two-letter state abbreviations codes

(e.g., FL for Florida) for the policy owner’s state of

residence.

If unknown or outside of the U.S., leave blank.

Experience Reporting Formats VM-51

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VM-A

VM-A: Appendix A – Requirements

Unless otherwise noted, this appendix references the following requirements from Appendix A of the AP&P

Manual.

INDEX

Reference TITLE

A-200 Separate Accounts Funding Guaranteed Minimum Benefits Under Group Contracts

A-235 Interest-Indexed Annuity Contracts

A-250 Variable Annuities

A-255 Modified Guaranteed Annuities

A-270 Variable Life Insurance

A-585 Universal Life Insurance

A-588 Modified Guaranteed Life Insurance

A-620 Accelerated Benefits

A-641 Long-Term Care Insurance

A-695 Synthetic Guaranteed Investment Contracts

A-785 Credit for Reinsurance

A-791 Life and Health Reinsurance Agreements

A-812

Smoker/Nonsmoker Mortality Tables for Use in Determining Minimum

Reserve Liabilities

VM-A-814

Recognition of the 2001 CSO Mortality Table for Use in Determining Minimum Reserve

Liabilities and Nonforfeiture Benefits Model Regulation (Model #814, NAIC adoption

2002)

A-815

Model Regulation Permitting the Recognition of Preferred Mortality Tables for Use in

Determining Minimum Reserve Liabilities

A-817 Preneed Life Insurance Minimum Standards

A-820 Minimum Life and Annuities Reserve Standards

A-821 Annuity Mortality Table for Use in Determining Reserve Liabilities for Annuities

A-830

Valuation of Life Insurance Policies (Including the Introduction and Use of New Select

Mortality Factors)

VM-A

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VM-C

VM-C: Appendix C – Actuarial Guidelines

Guidance Note: This appendix references the following requirements from Appendix C of the AP&P

Manual.

INDEX

Guideline No. TITLE

Interpretation of the Standard Valuation Law With Respect to the Valuation of Policies Whose

Valuation Net Premiums Exceed the Actual Gross Premium Collected

Reserve Requirements With Respect to Interest Rate Guidelines on Active Life Funds Held

Relative to Group Annuity Contracts

Actuarial Interpretation Regarding Minimum Reserves for Certain Forms of Term Life

Insurance

Interpretation Regarding Acceptable Approximations for Continuous Functions

Interpretation Regarding Use of Single Life or Joint Life Mortality Tables Draft 20 June 1983

VII Interpretation Regarding Calculations of Equivalent Level Amounts

VIII The Valuation of Individual Single Premium Deferred Annuities

Form Classification of Individual Single Premium Immediate Annuities for Application of the

Valuation and Nonforfeiture Laws

IX-A

Use of Substandard Annuity Mortality Tables in Valuing Impaired Lives Under Structured

Settlements

IX-B

Clarification of Methods Under Standard Valuation Law for Individual Single Premium

Immediate Annuities, Any Deferred Payments Associated Therewith, Some Deferred Annuities

and Structured Settlements Contracts

IX-C

Use of Substandard Annuity Mortality Tables in Valuing Impaired Lives Under Individual

Single Premium Immediate Annuities

XIII Guideline Concerning the Commissioners’ Annuity Reserve Valuation Method

XIV Surveillance Procedure for Review of the Actuarial Opinion for Life and Health Insurers

XVI Calculation of CRVM Reserves on Select Mortality and/or Split Interest

XVII Calculation of CRVM Reserves When Death Benefits are not Level

XVIII

Calculation of CRVM Reserves on Semi-Continuous, Fully Continuous or Discounted

Continuous Basis

XIX

1980 CSO Mortality Table With Ten-Year Select Mortality Factors

Joint Life Functions for 1980 CSO Mortality Table

XXI

Calculation of CRVM Reserves When (b) is Greater Than (a) and Some Rules for

Determination of (a)

XXIII

Guideline Concerning Variable Life Insurance Separate Account Investments

XXV

Calculation of Minimum Reserves and Minimum Nonforfeiture Values for Policies With

Guaranteed Increasing Death Benefits Based on an Index

XXVI

Election of Operative Dates Under Standard Valuation Law and Standard Nonforfeiture Law

XXVII

Accelerated Benefits

XXVIII

Statutory Claim Reserves For Group Long-Term Disability Contracts With a Survivor Income

Benefit Provision

XXIX

Guideline Concerning Reserves of Companies in Rehabilitation

XXX

Guideline for the Application of Plan Type to Guaranteed Interest Contracts (GICS) With

Benefit Responsive Payment Provisions Used to Fund Employee Benefit Plans

XXXI

Valuation Issues vs. Policy Form Approval

XXXII

Reserve for Immediate Payment of Claims

XXXIII

Determining CARVM Reserves for Annuity Contracts With Elective Benefits

VM-C

INDEX

Guideline No. TITLE

XXXV

The Application of the Commissioners Annuity Reserve Method to Equity Indexed

Annuities

XXXVI

The Application of the Commissioners Reserve Valuation Method to Equity Indexed Life

Insurance Policies

XXXVII Variable Life Insurance Reserves for Guaranteed Minimum Death Benefits

XXXVIII The Application of the Valuation of Life Insurance Policies Model Regulation (“Model”)

Guideline for Valuation Rate of Interest for Funding Agreements and Guaranteed Interest

Contracts (GICS) With Bail-Out Provisions

XLI Projection of Guaranteed Nonforfeiture Benefits under CARVM

XLII

The Application of the Model Regulation Permitting the Recognition of Preferred Mortality

Tables for Use in Determining Minimum Reserve Liabilities

XLIV Group Term Life Waiver of Premium Disabled Life Reserves

XLVI

Interpretation of the Calculation of the Segment Length With Respect to the Life Insurance

Policies Model Regulation upon a Change in the Valuation Mortality Rates Subsequent to

Issue

AG App

Appendix to Guidelines – New York State Insurance Department – Maximum Reserve

Valuation and Maximum Life Policy Nonforfeiture Interest Rates

VM-C

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VM-G

VM-G: Appendix G – Corporate Governance Guidance for Principle-Based Reserves

Table of Contents

Section 1: Introduction, Definition and Scope ................................................................................ G-1

Section 2: Guidance for the Board .................................................................................................. G-2

Section 3: Guidance for Senior Management .................................................................................. G-2

Section 4: Responsibilities of Qualified Actuaries .......................................................................... G-4

Section 1: Introduction, Definition and Scope

A. A principle-based approach to the calculation of reserves places the responsibility for actuarial and

financial assumptions with respect to the determination of sufficient reserves on individual

companies, as compared with reserves determined strictly according to formulas prescribed by

regulators. This responsibility requires that sufficient measures are established for oversight of the

function related to principle-based reserves.

The corporate governance guidance provided in VM-G is applicable only to a principle-based

valuation calculated according to methods defined in VM-20 and VM-21, except for the following

condition:

For a company that does not compute any deterministic or SR under VM-20 as a result of passing

the exclusion tests as defined in VM–20 Section 6, and all contracts subject to reserves under VM-

21 are determined by application of the Alternative Methodology, VM-G Sections 2 and 3 below

are generally not applicable; the requirements of Section 4 are still applicable. However, if the

company calculated the SERT using the DR method outlined in VM-20 Section 6.A.2.b.i.a, or the

Stochastic Exclusion Demonstration Test outlined in VM-20 Section 6.A.3, then VM-G Sections 2

and 3 are applicable.

Guidance Note: Given requirements in AG 43 are intended to be the same as those in VM-21, if a

company chooses to aggregate business subject to AG 43 with business subject to VM-21 in

calculating the reserve, then the provisions in VM-G apply to this aggregate principle-based

valuation.

B. In carrying out the responsibility described in Section 1.A for each group of policies and contracts

subject to Section 12 of Model #820, the company shall assign to one or more qualified actuaries

the responsibilities indicated in Section 4.A.

C. For the purposes of VM-G:

1. The term “group of insurance companies” means a set of insurance companies in a holding

company system (for purposes of applicable insurance holding company system acts) that

is designated as a group of insurance companies by the senior management of any holding

company that is a holding company of all the insurance companies in such set of insurance

companies.

2. The terms “board” and “board of directors” mean: (a) the board of an insurance company

that has not been designated to be part of a group of insurance companies; or (b) the board

of a single company within a group of insurance companies that is designated by the senior

management of any holding company of all the insurance companies in such group of

insurance companies, or a committee of such board, consisting of members of such board,

duly appointed by such board and authorized by such board to perform functions

substantially similar to those described in this section.

Appendix G – Corporate Governance Guidance for Principle-Based Reserves VM-G

Guidance Note: The group of companies is a group of life insurers designated by senior

management for purposes of managing the PBR process, and the board is the appropriate board

responsible for those companies.

3. The term “senior management” includes the highest ranking officers of an insurance

company or group of insurance companies with responsibilities for operating results, risk

assessment and financial reporting (e.g., the chief executive officer [CEO], chief financial

officer [CFO], chief actuary and chief risk officer [CRO]) and such other senior officers as

may be designated by the insurance company or group of insurance companies.

D. Section 2 and Section 3 below, while not expanding the existing legal duties of a company’s board

of directors and senior management, provide guidance that focuses on their roles in the context of

principle-based valuations. Section 2 and Section 3 are not applicable for companies meeting the

requirements to be exempt from Section 2 and Section 3 as outlined in Section 1.A above.

While existing governance standards encompass adequate and appropriate standards for oversight

of PBR, Section 2 and Section 3 below describe guidance for the roles of the board of directors and

senior management, in light of their existing duties as applied in the context of PBR. It is not

intended to create new duties but rather to emphasize and clarify how their duties apply to the PBR

actuarial valuation function of an insurance company or group of insurance companies. To the

extent that any law or regulation conflicts with the guidance described herein, such other law or

regulation shall prevail, and the conflicting parts of this section VM-G shall not apply.

E. The company shall retain governance documentation on file for at least seven years from the

valuation date, including that required by VM-G Section 2.A.5, Section 3.A.6 and Section

4.A.3. This documentation shall be available upon request.

Section 2: Guidance for the Board

A. Commensurate with the materiality of PBR in relationship to the overall risks borne by the

insurance company and consistent with its oversight role, the board is responsible for:

1. Overseeing the process undertaken by senior management to identify, and correct where

needed, any material weakness in the internal controls of the insurance company or group

of insurance companies with respect to a principle-based valuation.

2. Overseeing the infrastructure (consisting of policies, procedures, controls and resources)

in place to implement principle-based valuation processes.

3. Receiving and reviewing the reports and certifications referenced in Section 3.A.6.

4. Interacting with senior management to resolve questions and collect additional information

as the board requests.

5. Documenting the review and actions undertaken by the board, relating to the principle-

based valuation function, in the minutes of all board meetings where such function is

discussed.

Section 3: Guidance for Senior Management

A. Senior management is responsible for directing the implementation and ongoing operation of the

principle-based valuation function. This includes:

Appendix G – Corporate Governance Guidance for Principle-Based Reserves VM-G

1. Ensuring that an adequate infrastructure (consisting of the policies, procedures, controls,

and resources) has been established to implement the principle-based valuation function.

2. Reviewing the elements of the principle-based valuation (consisting of the assumptions,

methods and models used to determine PBR of the insurance company or group of

insurance companies) that have been put in place, and whether these elements of the

principle-based valuation appear to be consistent with, but not necessarily identical to,

those for other company risk assessment processes, while recognizing potential differences

in financial reporting structures and any prescribed assumptions or methods.

3. Reviewing and addressing any significant and unusual issues and/or findings in light of the

results of the principle-based valuation processes and applicable sensitivity tests of the

insurance company or group of insurance companies.

4. Ensuring the adoption of internal controls with respect to the principle-based valuations of

the insurance company or group of insurance companies that are designed to provide

reasonable assurance that all material risks inherent in the liabilities and assets subject to

such valuations are included, and that such valuations are made in accordance with the

Valuation Manual and regulatory requirements and actuarial standards. Senior

management is responsible for ensuring that an annual evaluation is made of such internal

controls and for communicating the results of that evaluation to the board of directors.

5. Determining that:

a. Resources are adequate to carry out the modeling function with skill and

competence.

b. A process exists that ensures that models and procedures produce the intended

results relative to the principle-based valuation objectives as outlined in Section

12.A of Model #820.

c. A process exists that validates data for determination of model input assumptions,

other than input assumptions that are prescribed in law, regulation or the Valuation

Manual for use in determining PBR.

d. A process exists that is appropriately designed to ensure that model input is

appropriate given the experience of the insurance company or group of insurance

companies, other than model inputs that are prescribed in law, regulation or the

Valuation Manual for use in determining PBR.

e. A process exists that reviews principle-based valuations to find and limit material

errors and material weaknesses (such process (a) to provide a credible ongoing

effort to improve model performance where material errors and weaknesses exist,

and (b) to include a regular cycle of model validation that includes monitoring of

model performance and stability, review of model relationships, and testing of

model outputs against outcomes).

f. A review procedure and basis for reliance on principle-based valuation processes

has been established that includes consideration of reporting on the adequacy of

PBR, the implementation of policies, reporting and internal controls, and the work

of the appointed actuary.

6. Facilitating the board’s oversight role by reporting to the board, no less frequently than

annually, regarding such matters as:

Appendix G – Corporate Governance Guidance for Principle-Based Reserves VM-G

a. The infrastructure (consisting of the policies, procedures, controls and resources)

that senior management has established to support the PBR actuarial valuation

function.

b. The critical risk elements of the valuation as applicable—related to the

assumptions, methods and models—and their relationship to those for other risk

assessment processes, noting differences in financial reporting structures and any

prescribed assumptions or methods.

c. The level of knowledge and experience of senior management personnel

responsible for monitoring, controlling and auditing PBR.

d. Reports related to governance of PBR, including:

i. The certification of the effectiveness of internal controls with respect to

the PBR, as provided in Section 12.B.(2) of Model #820.

ii. The certifications from the Investment Officer on Investments and

Qualified Actuary on Investments, as provided in VM-31 Sections

3.D.14.a and 3.D.14.b, and VM-31 Sections 3.F.16.a and 3.F.16.b.

Section 4: Responsibilities of Qualified Actuaries

A. The responsibilities assigned by the company to one or more qualified actuaries with respect to a

group of policies or contracts under Section 1.B are:

1. The responsibility for overseeing the calculation of PBR for that group of policies or

contracts;

2. The responsibility for verifying that:

a. The assumptions, methods and models that are used in determining PBR; and

b. The company’s documented internal standards used in the principle-based

valuation processes, the company’s documented internal controls and

documentation used for such reserves,

appropriately reflect the requirements of the Valuation Manual for that group of policies

or contracts. In particular, the qualified actuaries are required to certify that the assumptions

used in the principle-based valuation, other than assumptions that are prescribed in the

Valuation Manual or by law or regulation, or that pertain to risk factors that are modeled

stochastically, are prudent estimates, as defined in VM-01, with appropriate margins. The

qualified actuaries are not required to verify the appropriateness of any prescribed

assumptions, methods or models but are required to verify that they are being used as

required.

3. The responsibility for providing a summary report to the board and to senior management

on the valuation processes used to determine and test PBR, the principle-based valuation

results, the general level of conservatism incorporated into the company’s PBR, the

materiality of PBR in relationship to the overall liabilities of the company, and significant

and unusual issues and/or findings.

If Sections 2 and 3 are not applicable because the company met the requirements to be

exempt from Section 2 and Section 3 as outlined in Section 1.A, this particular reporting

to board and senior management is limited to:

Appendix G – Corporate Governance Guidance for Principle-Based Reserves VM-G

a. For VM-20, notifying senior management if the company is at risk of failing either

exclusion test, and if so, reporting on the company’s readiness to calculate

deterministic and SR; and

b. For VM-21, notifying senior management if the company may not be able to use

the Alternative Methodology for all business subject to VM-21, and if so, reporting

on the company’s readiness to calculate a SR.

4. The responsibility for preparing the PBR Actuarial Report with respect to that group of

policies or contracts, as described in VM-31.

5. The responsibility for disclosing to the company’s external auditors and regulators any

significant unresolved issues regarding the company’s PBR held with respect to that group

of policies or contracts.

B. A qualified actuary assigned responsibilities under Section 1.B with respect to a group of policies

or contracts may be required to make any certification required by the Valuation Manual, but is not

required, except in regard to any responsibilities he or she may have as the appointed actuary under

VM-30, to opine upon or certify the adequacy of the aggregate reserve for that group of policies or

contracts, the company’s surplus or the company’s future financial condition.

C. The responsibilities of the appointed actuary are described in VM-30.

Appendix G – Corporate Governance Guidance for Principle-Based Reserves VM-G

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VM-M: APPENDIX M – MORTALITY TABLES

Table of Contents

Section 1: Valuation and Nonforfeiture Mortality Tables ...............................................................

M-1

Section 2: Industry Experience Valuation Basic Tables ................................................................. M-4

Definitions

A. “Composite mortality table” means a mortality table with rates of mortality that do not distinguish

between smokers and nonsmokers.

B. “Smoker and nonsmoker mortality table” means a mortality table with separate rates of mortality

for smokers and nonsmokers.

Section 1: Valuation and Nonforfeiture Mortality Tables

A. 1959 Accidental Death Benefits Table

B. 1961 Commissioners Standard Industrial Mortality Table

Composite Table (1961 CSI)

Proceedings of the NAIC, 1961 Volume II: pages 538–540

C. 1961 Commissioners Industrial Extended Term Insurance Table

Composite Table (1961 CIET)

Proceedings of the NAIC, 1961 Volume II: pages 541–543

D. 1980 CSO Mortality Tables

1. Composite tables (with optional 10-Year Select Mortality Factors) (1980 CSO)

Proceedings of the NAIC, 1980 Volume I: page 598

2. Smoker/Nonsmoker tables (1980 CSO NS and 1980 CSO SM)

Proceedings of the NAIC, 1984: pages 406–413

3. Blended tables (1980 CSO B, 1980 CSO C, 1980 CSO D, 1980 CSO E, 1980 CSO F)

Proceedings of the NAIC, 1984: pages 396–400

E. 1980 Commissioners Extended Term Insurance Tables

1. Composite Tables (1980 CET)

Proceedings of the NAIC, 1980 Volume I: page 619

2. Smoker/Nonsmoker tables (1980 CET NS and 1980 CET SM)

Proceedings of the NAIC, 1984: pages 406–413

3. Blended tables (1980 CET B, 1980 CET C, 1980 CET D, 1980 CET E, 1980 CET F)

Proceedings of the NAIC, 1984: pages 396–400

F. 1983 Group Annuity Mortality Table Without Projection

G. 2001 Commissioners Standard Ordinary Mortality Tables (2001 CSO)

1. “2001 CSO Mortality Table” means that mortality table, consisting of separate rates of

mortality for male and female lives, developed by the Academy CSO Task Force from the

Valuation Basic Mortality Table developed by the SOA Individual Life Insurance

Valuation Mortality Task Force, and adopted by the NAIC in December 2002. The 2001

CSO Mortality Table is included in the Proceedings of the NAIC (2nd Quarter 2002).

Unless the context indicates otherwise, the “2001 CSO Mortality Table” includes both the

ultimate form of that table and the select and ultimate form of that table and includes both

the smoker and nonsmoker mortality tables and the composite mortality tables. It also

includes both the age-nearest-birthday and age-last-birthday bases of the mortality tables.

2. “2001 CSO (F)” means that mortality table consisting of the rates of mortality for female

lives from the 2001 CSO Mortality Table.

3. “2001 CSO (M)” means that mortality table consisting of the rates of mortality for male

lives from the 2001 CSO Mortality Table.

4. “2001 CSO Preferred Class Structure Mortality Table” means mortality tables with

separate rates of mortality for super preferred nonsmokers, preferred nonsmokers, residual

standard nonsmokers, preferred smokers and residual standard smoker splits of the 2001

CSO Nonsmoker and Smoker Tables, as adopted by the NAIC at the September 2006

national meeting and published in the NAIC Proceedings (third-quarter 2006). Unless the

context indicates otherwise, the “2001 CSO Preferred Class Structure Mortality Table”

includes both the ultimate form of that table and the select and ultimate form of that table.

It includes both the smoker and nonsmoker mortality tables. It includes both the male and

female mortality tables and the gender composite mortality tables. It also includes both the

age-nearest-birthday and age-last-birthday bases of the mortality table.

H. 2017 CSO Mortality Tables

1. “2017 CSO Mortality Table” means that mortality table, consisting of separate rates of

mortality for male and female lives, developed by the CSO Subgroup of the Joint Academy

Life Experience Committee and SOA Preferred Mortality Oversight Group from the 2015

Valuation Basic Mortality Table developed by the joint group’s Valuation Basic Mortality

Subgroup, and adopted by the NAIC in April 2016. The 2017 CSO Mortality Table is

included in the Proceedings of the NAIC (1

Quarter 2016). Unless the context indicates

otherwise, the “2017 CSO Mortality Table” includes both the ultimate form of that table

and the select and ultimate form of that table and includes both the smoker and nonsmoker

mortality tables and the composite mortality tables. It also includes both the age-nearest-

birthday and age-last-birthday bases of the mortality tables.

2. “2017 CSO (F)” means that mortality table consisting of the rates of mortality for female

lives from the 2017 CSO Mortality Table.

3. “2017 CSO (M)” means that mortality table consisting of the rates of mortality for male

lives from the 2017 CSO Mortality Table.

4. “2017 CSO Preferred Class Structure Mortality Table” means those mortality tables with

separate rates of mortality for super preferred nonsmokers, preferred nonsmokers, residual

standard nonsmokers, preferred smokers and residual standard smoker splits of the 2017

CSO Nonsmoker and Smoker Tables as adopted by the NAIC at the 2016 Spring National

Meeting and published in the NAIC Proceedings (first-quarter 2016). Unless the context

indicates otherwise, the “2017 CSO Preferred Class Structure Mortality Table” includes

both the ultimate form of that table and the select and ultimate form of that table. It includes

both the smoker and nonsmoker mortality tables. It includes both the male and female

mortality tables. It also includes both the age-nearest-birthday and age-last-birthday bases

of the mortality table.

5. The term “2001 CSO Male Composite Ultimate Mortality Table” means a specific

mortality table, included in the 2001 CSO Mortality Table, that contains mortality rates

that are composites of smokers and nonsmokers on male lives after the select period,

including both the age-nearest-birthday and age-last-birthday bases of the mortality tables.

I. Annuity 2000 Mortality Table

J. 2012 Individual Annuity Reserve Valuation Table

1. Definitions

a. “2012 IAR Table” means that generational mortality table developed by the Joint

Academy/SOA Payout Annuity Table Team and containing rates, q

2012+n

, derived

from a combination of the 2012 IAM Period Table and Projection Scale G2, using

the methodology stated in the “Application of the 2012 IAR Mortality Table”

paragraph of Appendix A-821 of the AP&P Manual.

b. “2012 Individual Annuity Mortality Period Life (2012 IAM Period) Table” means

the Period Table containing loaded mortality rates for calendar year 2012. This

table contains rates, q

2012

, developed by the Joint Academy/SOA Payout Annuity

Table Team and is shown in Appendices 1–2 of Appendix A-821 of the AP&P

Manual.

c. “Projection Scale G2 (Scale G2)” is a table of annual rates, G2

, of mortality

improvement by age for projecting future mortality rates beyond calendar year

2012. This table was developed by the Joint Academy/SOA Payout Annuity Table

Team and is shown in Appendices 3–4 of Appendix A-821 of the AP&P Manual.

2. Application of the 2012 IAR Mortality Table

In using the 2012 IAR Mortality Table, the mortality rate for a person age x in year (2012

+ n) is calculated as follows:







= 





(

1 2



)



The resulting q

2012+n

shall be rounded to three decimal places per 1,000, e.g., 0.741 deaths

per 1,000. Also, the rounding shall occur according to the formula above, starting at the

2012 period table rate.

For example, for a male age 30, q

2012

= 0.741.

2013

= 0.741 * (1 – 0.010) ^ 1 = 0.73359, which is rounded to 0.734.

2014

= 0.741 * (1 – 0.010) ^ 2 = 0.7262541, which is rounded to 0.726.

A method leading to incorrect rounding would be to calculate q

2014

as q

2013

* (1 – 0.010),

or 0.734 * 0.99 = 0.727. It is incorrect to use the already rounded q

2013

to calculate q

2014

K. 2017 Commissioners Standard Guaranteed Issue Mortality Tables

1. “2017 Commissioners Standard Guaranteed Issue Mortality Table” (2017 CSGI) means

that 2017 Guaranteed Issue basic ultimate mortality table with 75% loading, consisting of

separate rates of mortality for male and female lives, as well as combined unisex rates,

developed from the experience of 2005–2009 collected by the SOA. This table was adopted

by the NAIC on Aug. 7, 2018 and is included in the NAIC Proceedings of the 2018 Summer

National Meeting.

Section 2: Industry Experience Valuation Basic Tables

A. 2008 Valuation Basic Table (2008 VBT)

B. 2015 Valuation Basic Table (2015 VBT)

The 2015 Valuation Basic Table is a valuation table without loads jointly developed by the

Academy and SOA for use in determining a company’s prudent estimate mortality assumption for

valuations of Dec. 31, 2015, and later. The table consists of the Primary table (Male, Female,

Smoker, Nonsmoker and Composite), 10 Relative Risk tables for nonsmokers (Male and Female)

and four Relative Risk tables for smokers (Male and Female). Rates for juvenile ages are included

in the composite tables. The tables are on a select and ultimate and ultimate-only basis and are

available on an age nearest and an age last birthday basis.