Notice of Intended Action

Term and universal life insurance reserve financing, ch 112

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INSURANCE DIVISION[191]

Notice of Intended Action

Twenty-five interested persons, a governmental subdivision, an agency or association of 25 or more persons may demand an oral presentation hereon as provided in Iowa Code section 17A.4(1)"b."

Notice is also given to the public that the Administrative Rules Review Committee may, on its own motion or on written request by any individual or group, review this proposed action under section 17A.8(6) at a regular or special meeting where the public or interested persons may be heard.

Pursuant to the authority of Iowa Code section 521B.105 as amended by 2017 Iowa Acts, House File 311, the Iowa Insurance Division hereby gives Notice of Intended Action to adopt new chapter 112, "Term and Universal Life Insurance Reserve Financing," Iowa Administrative Code.

Consistent with Iowa Code chapter 521B as amended by 2017 Iowa Acts, House File 311, the rules in Chapter 112 prescribe the requirements which the commissioner may use to establish standards governing reserve financing arrangements pertaining to life insurance policies containing guaranteed nonlevel gross premiums, guaranteed nonlevel benefits and universal life insurance policies with secondary guarantees. Cross references in these rules to provisions in Iowa Code chapter 521B should be understood to include the amendments enacted in 2017 Iowa Acts, House File 311. The Division intends that insurance companies shall comply with these rules beginning January 10, 2018.

Any interested person may make written comments on the proposed rules on or before October 31, 2017. Written comments may be sent to Bob Koppin, Iowa Insurance Division, Two Ruan Center, 601 Locust Street, Fourth Floor, Des Moines, Iowa 50309-3738. Comments may also be submitted electronically to robert.koppin@iid.iowa.gov or via facsimile to (515)281-3059.

A public hearing will be held on November 1, 2017, at 1:30 p.m. in Conference Room 4 North of the Iowa Insurance Division, Two Ruan Center, 601 Locust Street, Fourth Floor, Des Moines, Iowa, at which time persons may present their views orally or in writing. At the hearing, persons will be asked to give their names and addresses for the record and to confine remarks to the subject of the proposed rules.

Any persons who intend to attend the public hearing and have special requirements, such as those relating to hearing or mobility impairments, should contact the Division and advise of specific needs.

Chapter 112 does not provide for waivers.

After analysis and review of this rule making, no impact on jobs has been found.

These rules are intended to implement Iowa Code sections 521B.102, 521B.103 and 521B.105 as amended by 2017 Iowa Acts, House File 311.

The following amendment is proposed.

Adopt the following new 191—Chapter 112:

CHAPTER 112

TERM AND UNIVERSAL LIFE INSURANCE RESERVE FINANCING

191—112.1(521B) Authority. This chapter is promulgated by the commissioner of insurance pursuant to Iowa Code sections 521B.102, 521B.103 and 521B.105.

191—112.2(521B) Purpose and intent. The purpose and intent of this chapter is to establish uniform, national standards governing reserve financing arrangements pertaining to life insurance policies containing guaranteed nonlevel gross premiums, life insurance policies containing guaranteed nonlevel benefits, and universal life insurance policies with secondary guarantees; and to ensure that, with respect to each such financing arrangement, funds consisting of primary security and other security, as defined in rule 191—112.5(521B), are held by or on behalf of ceding insurers in the forms and amounts required herein. In general, reinsurance ceded for reserve financing purposes has one or more of the following characteristics: some or all of the assets used to secure the reinsurance treaty or to capitalize the reinsurer (1) are issued by the ceding insurer or its affiliates; or (2) are not unconditionally available to satisfy the general account obligations of the ceding insurer; or (3) create a reimbursement, indemnification or other similar obligation on the part of the ceding insurer or any of its affiliates (other than a payment obligation under a derivative contract acquired in the normal course and used to support and hedge liabilities pertaining to the actual risks in the policies ceded pursuant to the reinsurance treaty).

191—112.3(521B) Applicability. This chapter shall apply to reinsurance treaties that cede liabilities pertaining to covered policies, as that term is defined in rule 191—112.5(521B), issued by any life insurance company domiciled in this state. This chapter and rule 191—5.33(510) shall both apply to such reinsurance treaties; provided, that in the event of a direct conflict between a rule of this chapter and rule 191—5.33(510), the rules of this chapter shall apply, but only to the extent necessary in order to resolve the conflict.

191—112.4(521B) Exemptions. This chapter does not apply to:

112.4(1) Reinsurance of:

a. Policies that satisfy the criteria for exemption set forth in 191—subrule 47.5(6) or 47.5(7); and which are issued before the later of:

(1)[The effective date of this chapter], and

(2)The date on which the ceding insurer begins to apply the provisions of VM-20 to establish the ceded policies' statutory reserves, but in no event later than January 1, 2020.

b. Portions of policies that satisfy the criteria for exemption set forth in 191—subrule 47.5(5) and which are issued before the later of:

(1)[The effective date of this chapter], and

(2)The date on which the ceding insurer begins to apply the provisions of VM-20 to establish the ceded policies' statutory reserves, but in no event later than January 1, 2020.

c. Any universal life policy that meets all of the following requirements:

(1)Secondary guarantee period, if any, is five years or less;

(2)Specified premium for the secondary guarantee period is not less than the net level reserve premium for the secondary guarantee period based on the commissioners standard ordinary (CSO) valuation tables and valuation interest rate applicable to the issue year of the policy; and

(3)The initial surrender charge is not less than 100 percent of the first year annualized specified premium for the secondary guarantee period.

d. Credit life insurance.

e. Any variable life insurance policy that provides for life insurance, the amount or duration of which varies according to the investment experience of any separate account or accounts.

f. Any group life insurance certificate unless the certificate provides for a stated or implied schedule of maximum gross premiums required in order to continue coverage in force for a period in excess of one year.

112.4(2) Reinsurance ceded to an assuming insurer that meets the applicable requirements of Iowa Code section 521B.102(4).

112.4(3) Reinsurance ceded to an assuming insurer that meets the applicable requirements of Iowa Code sections 521B.102(1) to 521B.102(3), and that, in addition:

a. Prepares statutory financial statements in compliance with the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual, without any departures from NAIC statutory accounting practices and procedures pertaining to the admissibility or valuation of assets or liabilities that increase the assuming insurer's reported surplus and are material enough that they need to be disclosed in the financial statement of the assuming insurer pursuant to Statement of Statutory Accounting Principles No. 1 (SSAP 1); and

b. Is not in a company-action-level event, regulatory-action-level event, authorized-control-level event, or mandatory-control-level event as those terms are defined in Iowa Code section 521E.1 et seq. when its risk-based capital (RBC) is calculated in accordance with the life risk-based capital report including overview and instructions for companies, as the same may be amended by the NAIC from time to time, without deviation.

112.4(4) Reinsurance ceded to an assuming insurer that meets the applicable requirements of Iowa Code sections 521B.102(1) to 521B.102(3), and that, in addition:

a. Is not an affiliate of, as that term is defined in Iowa Code section 521A.1(1):

(1)The insurer ceding the business to the assuming insurer, or

(2)Any insurer that directly or indirectly ceded the business to that ceding insurer;

b. Prepares statutory financial statements in compliance with the NAIC Accounting Practices and Procedures Manual;

c. Is both:

(1)Licensed or accredited in at least ten states (including its state of domicile), and

(2)Not licensed in any state as a captive, special purpose vehicle, special purpose financial captive, special purpose life reinsurance company, limited purpose subsidiary, or any other similar licensing regime; and

d. Is not, or would not be, below 500 percent of the authorized-control-level RBC as that term is defined in Iowa Code section 521E.1(12)"c" when its RBC is calculated in accordance with the life risk-based capital report including overview and instructions for companies, as the same may be amended by the NAIC from time to time, without deviation, and without recognition of any departures from the NAIC statutory accounting practices and procedures pertaining to the admission or valuation of assets or liabilities that increase the assuming insurer's reported surplus.

112.4(5) Reinsurance ceded to an assuming insurer that meets the requirements of Iowa Code section 521B.102(5) pertaining to certain certified reinsurers that meet threshold size and licensing requirements.

112.4(6) Reinsurance not otherwise exempt under subrules 112.4(1) to 112.4(5) if the commissioner, after consulting with the NAIC financial analysis working group (FAWG) or other group of regulators designated by the NAIC, as applicable, determines under all the facts and circumstances that all of the following apply:

a. The risks are clearly outside of the intent and purpose of this chapter (as described in rule 191—112.2(521B)),

b. The risks are included within the scope of this chapter only as a technicality, and

c. The application of this chapter to those risks is not necessary to provide appropriate protection to policyholders. The commissioner shall post on the insurance division's public Web site a notice of any decision made pursuant to this subrule to exempt a reinsurance treaty from this chapter, as well as the general basis therefor (including a summary description of the treaty).

191—112.5(521B) Definitions.

"Actuarial method" means the methodology used to determine the required level of primary security, as described in rule 191—112.6(521B).

"Covered policies" means the following: Subject to the exemptions described in rule 191—112.4(521B), covered policies are those policies, other than grandfathered policies, of the following policy types:

1.Life insurance policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits or both, except for flexible premium universal life insurance policies; or

2.Flexible premium universal life insurance policies with provisions resulting in the ability of a policyholder to keep a policy in force over a secondary guarantee period.

"Grandfathered policies" means policies of the types described in the definition of "covered policies" above that were:

1.Issued prior to January 1, 2015; and

2.Ceded, as of December 31, 2014, as part of a reinsurance treaty that would not have met one of the exemptions set forth in rule 191—112.4(521B) had that rule then been in effect.

"Noncovered policies" means any policy that does not meet the definition of "covered policies," including grandfathered policies.

"Other security" means any security acceptable to the commissioner other than security meeting the definition of "primary security."

"Primary security" means the following forms of security:

1.Cash meeting the requirements of Iowa Code section 521B.103(2)"a";

2.Securities listed by the NAIC Securities Valuation Office meeting the requirements of Iowa Code section 521B.103(2)"b," but excluding any synthetic letter of credit, contingent note, credit-linked note or other similar security that operates in a manner similar to a letter of credit, and excluding any securities issued by the ceding insurer or any of its affiliates; and

3.For security held in connection with funds-withheld and modified coinsurance reinsurance treaties:

Commercial loans in good standing of CM3 quality and higher;

Policy loans; and

Derivatives acquired in the normal course and used to support and hedge liabilities pertaining to the actual risks in the policies ceded pursuant to the reinsurance treaty.

"Required level of primary security" means the dollar amount determined by applying the actuarial method to the risks ceded with respect to covered policies, but not more than the total reserve ceded.

"Valuation manual" means the valuation manual adopted by the NAIC as described in Iowa Code section 508.36(14)"b"(1), with all amendments adopted by the NAIC that are effective for the financial statement date on which credit for reinsurance is claimed.

"VM-20" means "Requirements for Principle-Based Reserves for Life Products," including all relevant definitions, from the valuation manual.

191—112.6(521B) The actuarial method.

112.6(1) The actuarial method that is used to establish the required level of primary security for each reinsurance treaty subject to this chapter shall be VM-20, applied on a treaty-by-treaty basis, including all relevant definitions, from the valuation manual as then in effect, applied as follows:

a. For covered policies described in paragraph "1" of the definition of "covered policies," the actuarial method is the greater of the deterministic reserve or the net premium reserve (NPR) regardless of whether the criteria for exemption testing can be met. However, if the covered policies do not meet the requirements of the stochastic reserve exclusion test in the valuation manual, then the actuarial method is the greatest of the deterministic reserve, the stochastic reserve, or the NPR. In addition, if such covered policies are reinsured in a reinsurance treaty that also contains covered policies described in paragraph "2" of the definition of "covered policies," the ceding insurer may elect to instead use paragraph 112.6(1)"b" as the actuarial method for the entire reinsurance agreement. Regardless of whether paragraph 112.6(1)"a" or 112.6(1)"b" is used, the actuarial method must comply with any requirements or restrictions that the valuation manual imposes when aggregating these policy types for purposes of principle-based reserve calculations.

b. For covered policies described in paragraph "2" of the definition of "covered policies," the actuarial method is the greatest of the deterministic reserve, the stochastic reserve, or the NPR regardless of whether the criteria for exemption testing can be met.

c. Except as provided in paragraph 112.6(1)"d," the actuarial method is to be applied on a gross basis to all risks with respect to the covered policies as originally issued or assumed by the ceding insurer.

d. If the reinsurance treaty cedes less than 100 percent of the risk with respect to the covered policies, then the required level of primary security may be reduced as follows:

(1)If a reinsurance treaty cedes only a quota share of some or all of the risks pertaining to the covered policies, the required level of primary security, as well as any adjustment under subparagraph 112.6(1)"d"(3), may be reduced to a pro rata portion in accordance with the percentage of the risk ceded;

(2)If the reinsurance treaty in a nonexempt arrangement cedes only the risks pertaining to a secondary guarantee, the required level of primary security may be reduced by an amount determined by applying the actuarial method on a gross basis to all risks, other than risks related to the secondary guarantee, pertaining to covered policies, except that for covered policies for which the ceding insurer did not elect to apply the provisions of VM-20 to establish statutory reserves, the required level of primary security may be reduced by the statutory reserve retained by the ceding insurer on those covered policies, provided that the retained reserve of those covered policies shall be reflective of any reduction pursuant to the cession of mortality risk on a yearly renewable term basis in an exempt arrangement;

(3)If a portion of the covered policy risk is ceded to another reinsurer on a yearly renewable term basis in an exempt arrangement, the required level of primary security may be reduced by the amount resulting by applying the actuarial method including the reinsurance section of VM-20 to the portion of the covered policy risks ceded in the exempt arrangement, except that for covered policies issued prior to January 1, 2017, this adjustment is not to exceed [cx/ (2 * number of reinsurance premiums per year)] where cx is calculated using the same mortality table used in calculating the net premium reserve; and

(4)For any other treaty ceding a portion of risk to a different reinsurer, including but not limited to stop loss, excess of loss and other non-proportional reinsurance treaties, there will be no reduction in the required level of primary security.

It is possible for any combination of subparagraphs 112.6(1)"d"(1) to 112.6(1)"d"(4) to apply. Such adjustments to the required level of primary security will be done in the sequence that accurately reflects the portion of the risk ceded via the treaty. The ceding insurer shall document the rationale and steps taken to accomplish the adjustments to the required level of primary security due to the cession of less than 100 percent of the risk.

The adjustments for other reinsurance will be made only with respect to reinsurance treaties entered into directly by the ceding insurer. The ceding insurer will make no adjustment as a result of a retrocession treaty entered into by the assuming insurers.

e. In no event will the required level of primary security resulting from application of the actuarial method exceed the amount of statutory reserves ceded.

f. If the ceding insurer cedes risks with respect to covered policies, including any riders, in more than one reinsurance treaty subject to this chapter, in no event will the aggregate required level of primary security for those reinsurance treaties be less than the required level of primary security calculated using the actuarial method as if all risks ceded in those treaties were ceded in a single treaty subject to this chapter.

g. If a reinsurance treaty subject to this chapter cedes risk on both covered and noncovered policies, credit for the ceded reserves shall be determined as follows:

(1)The actuarial method shall be used to determine the required level of primary security for the covered policies, and rule 191—112.7(521B) shall be used to determine the reinsurance credit for the covered policy reserves; and

(2)Credit for the noncovered policy reserves shall be granted only to the extent that security, in addition to the security held to satisfy the requirements of subparagraph 112.6(1)"g"(1), is held by or on behalf of the ceding insurer in accordance with Iowa Code sections 521B.102 and 521B.103. Any primary security used to meet the requirements of this subparagraph may not be used to satisfy the required level of primary security for the covered policies.

112.6(2) For the purposes of both calculating the required level of primary security pursuant to the actuarial method and determining the amount of primary security and other security, as applicable, held by or on behalf of the ceding insurer, the following shall apply:

a. For assets, including any such assets held in trust, that would be admitted under the NAIC Accounting Practices and Procedures Manual if they were held by the ceding insurer, the valuations are to be determined according to statutory accounting procedures as if such assets were held in the ceding insurer's general account and without taking into consideration the effect of any prescribed or permitted practices; and

b. For all other assets, the valuations are to be those that were assigned to the assets for the purpose of determining the amount of reserve credit taken. In addition, the asset spread tables and asset default cost tables required by VM-20 shall be included in the actuarial method if adopted by the NAIC's life actuarial (A) task force no later than the December 31st on or immediately preceding the valuation date for which the required level of primary security is being calculated. The tables of asset spreads and asset default costs shall be incorporated into the actuarial method in the manner specified in VM-20.

191—112.7(521B) Requirements applicable to covered policies to obtain credit for reinsurance; opportunity for remediation.

112.7(1) Subject to the exemptions described in rule 191—112.4(521B) and the provisions of subrule 112.7(2), credit for reinsurance shall be allowed with respect to ceded liabilities pertaining to covered policies pursuant to Iowa Code sections 521B.102 and 521B.103 if, and only if, in addition to all other requirements imposed by law or rules, the following requirements are met on a treaty-by-treaty basis:

a. The ceding insurer's statutory policy reserves with respect to the covered policies are established in full and in accordance with the applicable requirements of Iowa Code section 508.36 and related rules and actuarial guidelines, and credit claimed for any reinsurance treaty subject to this chapter does not exceed the proportionate share of those reserves ceded under the contract; and

b. The ceding insurer determines the required level of primary security with respect to each reinsurance treaty subject to this chapter and provides support for its calculation as determined to be acceptable to the commissioner; and

c. Funds consisting of primary security, in an amount at least equal to the required level of primary security, are held by or on behalf of the ceding insurer, as security under the reinsurance treaty within the meaning of Iowa Code section 521B.103, on a funds-withheld, trust, or modified coinsurance basis; and

d. Funds consisting of other security, in an amount at least equal to any portion of the statutory reserves as to which primary security is not held pursuant to paragraph 112.7(1)"c," are held by or on behalf of the ceding insurer as security under the reinsurance treaty within the meaning of Iowa Code section 521B.103; and

e. Any trust used to satisfy the requirements of rule 191—112.7(521B) shall comply with all of the conditions and qualifications of 191—subrule 5.33(10), except that:

(1)Funds consisting of primary security or other security held in trust shall, for the purposes identified in subrule 112.6(2), be valued according to the valuation rules set forth in subrule 112.6(2), as applicable; and

(2)There are no affiliate investment limitations with respect to any security held in such trust if such security is not needed to satisfy the requirements of paragraph 112.7(1)"c"; and

(3)The reinsurance treaty must prohibit withdrawals or substitutions of trust assets that would leave the fair market value of the primary security within the trust (when aggregated with primary security outside the trust that is held by or on behalf of the ceding insurer in the manner required by paragraph 112.7(1)"c") below 102 percent of the level required by paragraph 112.7(1)"c" at the time of the withdrawal or substitution; and

(4)The determination of reserve credit under 191—subparagraphs 5.33(10)"d"(3) to 5.33(10)"d"(5) shall be determined according to the valuation rules set forth in subrule 112.6(2), as applicable; and

f. The reinsurance treaty has been approved by the commissioner.

112.7(2) Requirements at inception date and on an ongoing basis; remediation.

a. The requirements of subrule 112.7(1) must be satisfied as of the date that risks under covered policies are ceded (if such date is on or after [the effective date of this chapter]) and on an ongoing basis thereafter. Under no circumstances shall a ceding insurer take or consent to any action or series of actions that would result in a deficiency under paragraph 112.7(1)"c" or 112.7(1)"d" with respect to any reinsurance treaty under which covered policies have been ceded, and in the event that a ceding insurer becomes aware at any time that such a deficiency exists, it shall use its best efforts to arrange for the deficiency to be eliminated as expeditiously as possible.

b. Prior to the due date of each quarterly or annual statement, each life insurance company that has ceded reinsurance within the scope of rule 191—112.3(521B) shall perform an analysis, on a treaty-by-treaty basis, to determine, as to each reinsurance treaty under which covered policies have been ceded, whether as of the end of the immediately preceding calendar quarter (the valuation date) the requirements of paragraphs 112.7(1)"c" and 112.7(1)"d" were satisfied. The ceding insurer shall establish a liability equal to the excess of the credit for reinsurance taken over the amount of primary security actually held pursuant to paragraph 112.7(1)"c," unless either:

(1)The requirements of paragraphs 112.7(1)"c" and 112.7(1)"d" were fully satisfied as of the valuation date as to such reinsurance treaty; or

(2)Any deficiency has been eliminated before the due date of the quarterly or annual statement to which the valuation date relates through the addition of primary security or other security or both, as the case may be, in such amount and in such form as would have caused the requirements of paragraphs 112.7(1)"c" and 112.7(1)"d" to be fully satisfied as of the valuation date.

c. Nothing in paragraph 112.7(2)"b" shall be construed to allow a ceding company to maintain any deficiency under paragraph 112.7(1)"c" or 112.7(1)"d" for any period of time longer than is reasonably necessary to eliminate the deficiency.

191—112.8(521B) Severability. If any provision of this chapter shall be held invalid, the remainder of the chapter shall not be affected.

191—112.9(521B) Prohibition against avoidance. No insurer that has covered policies as to which this chapter applies, as set forth in rule 191—112.3(521B), shall take any action or series of actions, or enter into any transaction or arrangement or series of transactions or arrangements, if the purpose of such action, transaction or arrangement or series thereof is to avoid the requirements of this chapter, or to circumvent its purpose and intent, as set forth in rule 191—112.2(521B).

These rules are intended to implement Iowa Code sections 521B.102, 521B.103, and 521B.105.

Insurance Division


This Organization is a part of the Commerce Department

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Public Hearing

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Official Document

  • Term and universal life insurance reserve financing, ch 112
  • Published on 10/11/2017
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  • Notice of Intended Action

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Administrative Rule References

The following administrative rule references were added to this document. You may click a reference to view related notices.

Rule 191-112.1 Rule 191-112.2 Rule 191-112.3 Rule 191-112.4 Rule 191-112.5 Rule 191-112.6 Rule 191-112.7 Rule 191-112.8 Rule 191-112.9

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Applicability Authority Definitions Exemptions Prohibition against avoidance Purpose and intent Severability The actuarial method
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