By Cande Olsen, Vice President, Actuarial Resources Corporation of Georgia
This article will explain how the Interstate Insurance Product Regulation Commission (IIPRC or the Commission) product standards development process works, and will then give some important highlights of the requirements for selected IIPRC product standards that were developed from the process.
Product Standards Drafting Process
IIPRC product standards for life, annuities, Long Term Care (LTC) and Disability Income (DI) are drafted by the NAIC Product Standards Working Group with the help of the American Council of Life Insurers (ACLI). The ACLI volunteered to develop the initial drafts for each product standard because most ACLI companies are licensed in all 50 states and are in a good position to know common requirements in most states. The regulators then review, question, and modify the draft, with the ACLI and other interested parties giving continual input as part of the process.
There are some basic rules that are followed in the development of every product standard. Required policy provisions are based on model laws if they exist. If no model laws exist covering that issue, then the required provisions are based on laws, regulations or desk drawer rules in effect in the majority of states. If state regulation or interpretation of model laws varies extensively or is lacking, the basis of a required provision would be “best practices” that may be found only in a limited number of states. All requirements are carefully documented to be understood by the company and IIPRC reviewer.
Once the NAIC Working Group feels comfortable with the product standard, the draft is passed on to the IIPRC for their review and approval. The state legislatures then have 90 days to decide if they want to opt out of the product standard. So far no states have opted out of any product standard.
The entire process for each product standard takes 7 – 12 months, with drafting and review of multiple products going on simultaneously. For any company who wants to be involved in the process, there are multiple opportunities to comment and discuss their concerns. Many changes have been made during the drafting process because a company has made the effort to get involved and make their case for a change.
Highlights of Selected IIPRC Product Standards
Return of Premium Term
• Companies (and most states) previously interpreted the NAIC model Standard Nonforfeiture Law For Life Insurance to allow no cash values or low cash values during the return of premium period
• Regulators wanted IIPRC standards for these products to reflect a more rigorous interpretation of the nonforfeiture law
• Companies said they would be willing to accept such interpretation if the NAIC adopted an Actuarial Guideline that would govern both IIPRC and state filings.
• Actuarial Guideline 45 was adopted by the NAIC, which requires:
° Term policy and return of premium rider be treated as one
° Return of premium amount must be smoothly funded over the endowment period
• The IIPRC product standards require a prescribed format for deferred annuity minimum nonforfeiture value compliance demonstrations
• The maturity date for the minimum nonforfeiture value compliance demonstration is limited to the later of the tenth policy anniversary or the annuitant’s 70th birthday, and by that date surrender charges must end.
• There is a prescribed format for annual reports and it must be communicated in the policy form.
• There is a “betterment of rates” requirement, which requires the application of the company’s current single premium immediate annuity rate if it is more favorable than the annuitization rate in the contract.
• There are no models or state laws or regulations to serve as basis for any requirements for immediate annuity commutation values, so the requirements that were adopted are fairly liberal but include strict rules for disclosure.
• For any commutation of annuity payments, the standard allows the actuary to use any reasonable assumptions, as long as the contract states it will disclose the ratio of the result of using those assumptions to the price of a similar contract currently being offered by the company.
• Structured settlements can be filed under the immediate annuity product standards.
• The actuary must certify that the company's investments backing the contract are appropriate considering the index used.
• The contract must state:
° The annuity does not directly participate in any stock or equity investment
° The index-linked return does not include dividend income from the underlying index
° The elements used in determining the credited rate from the index are not required to be guaranteed and can therefore be changed by the company provided this is clearly disclosed in the policy
• There are very specific requirements for the minimum nonforfeiture value compliance demonstration that apply only to bonus annuities or other annuities with non-level interest guarantees.
• The contract must state that there may be situations where the bonus benefit may not be fully earned, and the owner should therefore read the contract carefully.
Market Value Adjustment (MVA) Annuities
• MVAs can be provided through a separate account or the general account, each having different minimum nonforfeiture value compliance demonstration requirements.
• Only multi-year interest rate guarantee annuities can base an MVA on the change in the company’s current guaranteed rates; all other MVAs must be based on the change in an index.
• The actuarial opinion must state that the MVA formula, assets and index are reasonably related.
Guaranteed Living Benefits (GLBs) for Variable Annuities
• No models or state laws or regulations exist to serve as a basis for standards; so there are few specific requirements, but very strict rules on disclosure.
• The GLB charge rate on the specifications page must be guaranteed.
• The contract must include a warning that excess withdrawals could reduce future benefits by more than the value of the excess withdrawals.
• The product standards permit the termination of the GLB benefit if ownership changes are made under certain circumstances. If the policy requires such termination, a notice to that effect must be included on the cover page.
• This standard is still under discussion at the PSC level.
• These annuities are not expected to be subject to the annuity minimum nonforfeiture value model law.
• Expected requirements include:
° Disclosure that there is no cash value and no income benefit if the owner dies prior to the income commencement date
° Actuarial certification that the longevity annuity income benefit exceeds the guaranteed income benefit for the company’s currently offered cash value contracts based on the same premium
Long Term Care
• IIPRC individual LTC standards are based on the NAIC LTC Model Act and Regulation.
• Standards for policy, benefit features, application form, forms to be used with the application, outline of coverage, advertising, initial rate filings and rate increase filings have been developed.
• The developed standards were exposed for comment by the Management Committee in January and public hearings were held in March to obtain input.
• A significant number of comments were received from regulators, legislators and industry, and so the Management Committee has decided to refer the comments to the PSC for their response.
• Major issues to be resolved include IIPRC authority for initial rate filings and rate increase filings.
• The draft policy standards are based on the NAIC Uniform Individual Accident & Sickness Policy Provision Law.
• The NAIC has drafted standards for the individual DI policy, application form, outline of coverage, change form, initial rate filings, renewal rate filings and underwriting exclusions.
• The NAIC is currently working on the individual Disability Business Overhead Expense policy standards and application inserts.
• The NAIC will next develop individual DI buy-sell product standards.
• The PSC will not consider until all DI components are complete.
Product Standards Summary
There are enough new IIPRC requirements to make filing with the IIPRC a slight resource drain, but once the learning curve is mastered, IIPRC filings are easier and faster to prepare and administer, especially when considering the burden of complying with state variations.
Cande Olsen is a Vice President with Actuarial Resources Corporation of GA. She is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. Ms. Olsen consults on individual life, annuity and long-term care regulatory, actuarial and compliance issues, and has been very active in working with the ACLI on drafting IIPRC product standards.