20-696.04. Description of actuarial memorandum including an asset adequacy analysis and regulatory asset adequacy issues summary

A. Pursuant to section 20-510, subsection C, the appointed actuary shall prepare a memorandum to the company describing the analysis in support of the appointed actuary's opinion regarding the reserves.

B. The director may examine the memorandum pursuant to this section and shall return the memorandum to the company after the examination. The memorandum is not a record of the department and is not subject to automatic filing with the director.

C. The appointed actuary may rely on and include as a part of the memorandum other memoranda that are prepared and signed by other actuaries who are qualified pursuant to section 20-696.02, subsection B. The memorandum shall state that the appointed actuary relied on other qualified actuaries to prepare the memorandum.

D. If the director requests a memorandum and no such memorandum exists, or if the director finds that the analysis described in the memorandum fails to meet the standards of the actuarial standards board or the standards and requirements of this article, the director may designate a qualified actuary to review the opinion and prepare a supporting memorandum as is required for review. The company shall pay any reasonable and necessary expenses of the independent review. The director shall direct and control the review.

E. The reviewing actuary who is designated under subsection D of this section has the same status as an examiner for the purposes of obtaining data from the company. The director shall retain the work papers and documentation of the reviewing actuary. The director shall keep the work papers and documentation confidential. The reviewing actuary shall not be an employee of a consulting firm that is involved with the preparation of any prior actuarial memorandum or opinion for the insurer pursuant to this article during the current year or the preceding three years.

F. The appointed actuary shall prepare a regulatory asset adequacy issues summary pursuant to subsection H of this section. The regulatory asset adequacy issues summary shall be submitted no later than March 15 of the year following the year for which a statement of actuarial opinion based on asset adequacy is required. The director shall keep the regulatory asset adequacy issues summary confidential to the same extent and under the same conditions as the actuarial memorandum.

G. If an actuarial opinion is provided the memorandum shall demonstrate that the analysis was conducted pursuant to the standards for asset adequacy prescribed pursuant to section 20-696.03 and any additional standards prescribed pursuant to this article. The memorandum shall specify:

1. 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.

(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, including documentation to allow an actuary reviewing the actuarial memorandum to form a conclusion about the reasonableness of the assumptions, to test reserves for the following:

(i) Base lapse rates and excess lapse rates.

(ii) Interest crediting rate strategy.

(iii) Mortality.

(iv) Policyholder dividend strategy.

(v) Competitor or market interest rate.

(vi) Annuitization rates.

(vii) Commissions and expenses.

(viii) Morbidity.

2. For assets:

(a) Portfolio descriptions, including a risk profile that discloses 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, including documentation to allow an actuary reviewing the actuarial memorandum to form a conclusion about the reasonableness of the assumptions, made for:

(i) Default costs.

(ii) Bond call function.

(iii) Mortgage prepayment function.

(iv) Determining market value for assets sold due to disinvestment strategy.

(v) Determining yield on assets acquired through the investment strategy.

3. 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.

(d) Criteria for determining asset adequacy.

(e) Impact of federal income taxes and the method of treating reinsurance in the asset adequacy analysis.

4. A summary of material changes in methods, procedures or assumptions from a prior year's asset adequacy analysis.

5. A summary of results.

6. Conclusions.

H. The regulatory asset adequacy issues summary shall include:

1. 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 appointed actuary shall describe those tests and the amount of additional reserve as of the valuation date that, if held, would eliminate the negative aggregate surplus values. Ending surplus values shall be determined either by 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.

2. The extent to which the appointed actuary uses assumptions in the asset adequacy analysis that are materially different than the assumptions used in the previous asset adequacy analysis.

3. The amount of reserves and the identity of the product lines that had been subjected to asset adequacy analysis in the prior opinion but that were not subject to analysis for the current opinion.

4. Comments on any interim results that may be of significant concern to the appointed actuary.

5. The methods used by the appointed actuary to recognize the impact of reinsurance on the company's cash flows, including both assets and liabilities, under each of the scenarios tested.

6. The extent to which the appointed actuary is satisfied that all options, whether explicit or embedded, in any asset or liability and equity-like features in any investments are appropriately considered in the asset adequacy analysis.

7. The name of the company for which the regulatory asset adequacy issues summary is being supplied.

8. The signature of the appointed actuary and the date of the signature.

I. The memorandum shall include the following statement:

Actuarial methods, considerations and analyses used in the preparation of this memorandum conform to the appropriate actuarial standards of practice as promulgated by the actuarial standards board that form the basis for this memorandum.

J. An appropriate allocation of assets in the amount of the interest maintenance reserve 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 asset valuation reserve 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.

K. The amount of the assets used for the asset valuation reserve 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.

L. The appointed actuary shall retain on file, for at least seven years, sufficient documentation to determine the procedures followed, the analyses performed, the bases for assumptions and the results obtained.

20-696.04. Description of actuarial memorandum including an asset adequacy analysis and regulatory asset adequacy issues summary

A. Pursuant to section 20-510, subsection C, the appointed actuary shall prepare a memorandum to the company describing the analysis in support of the appointed actuary's opinion regarding the reserves.

B. The director may examine the memorandum pursuant to this section and shall return the memorandum to the company after the examination. The memorandum is not a record of the department and is not subject to automatic filing with the director.

C. The appointed actuary may rely on and include as a part of the memorandum other memoranda that are prepared and signed by other actuaries who are qualified pursuant to section 20-696.02, subsection B. The memorandum shall state that the appointed actuary relied on other qualified actuaries to prepare the memorandum.

D. If the director requests a memorandum and no such memorandum exists, or if the director finds that the analysis described in the memorandum fails to meet the standards of the actuarial standards board or the standards and requirements of this article, the director may designate a qualified actuary to review the opinion and prepare a supporting memorandum as is required for review. The company shall pay any reasonable and necessary expenses of the independent review. The director shall direct and control the review.

E. The reviewing actuary who is designated under subsection D of this section has the same status as an examiner for the purposes of obtaining data from the company. The director shall retain the work papers and documentation of the reviewing actuary. The director shall keep the work papers and documentation confidential. The reviewing actuary shall not be an employee of a consulting firm that is involved with the preparation of any prior actuarial memorandum or opinion for the insurer pursuant to this article during the current year or the preceding three years.

F. The appointed actuary shall prepare a regulatory asset adequacy issues summary pursuant to subsection H of this section. The regulatory asset adequacy issues summary shall be submitted no later than March 15 of the year following the year for which a statement of actuarial opinion based on asset adequacy is required. The director shall keep the regulatory asset adequacy issues summary confidential to the same extent and under the same conditions as the actuarial memorandum.

G. If an actuarial opinion is provided the memorandum shall demonstrate that the analysis was conducted pursuant to the standards for asset adequacy prescribed pursuant to section 20-696.03 and any additional standards prescribed pursuant to this article. The memorandum shall specify:

1. 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.

(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, including documentation to allow an actuary reviewing the actuarial memorandum to form a conclusion about the reasonableness of the assumptions, to test reserves for the following:

(i) Base lapse rates and excess lapse rates.

(ii) Interest crediting rate strategy.

(iii) Mortality.

(iv) Policyholder dividend strategy.

(v) Competitor or market interest rate.

(vi) Annuitization rates.

(vii) Commissions and expenses.

(viii) Morbidity.

2. For assets:

(a) Portfolio descriptions, including a risk profile that discloses 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, including documentation to allow an actuary reviewing the actuarial memorandum to form a conclusion about the reasonableness of the assumptions, made for:

(i) Default costs.

(ii) Bond call function.

(iii) Mortgage prepayment function.

(iv) Determining market value for assets sold due to disinvestment strategy.

(v) Determining yield on assets acquired through the investment strategy.

3. 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.

(d) Criteria for determining asset adequacy.

(e) Impact of federal income taxes and the method of treating reinsurance in the asset adequacy analysis.

4. A summary of material changes in methods, procedures or assumptions from a prior year's asset adequacy analysis.

5. A summary of results.

6. Conclusions.

H. The regulatory asset adequacy issues summary shall include:

1. 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 appointed actuary shall describe those tests and the amount of additional reserve as of the valuation date that, if held, would eliminate the negative aggregate surplus values. Ending surplus values shall be determined either by 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.

2. The extent to which the appointed actuary uses assumptions in the asset adequacy analysis that are materially different than the assumptions used in the previous asset adequacy analysis.

3. The amount of reserves and the identity of the product lines that had been subjected to asset adequacy analysis in the prior opinion but that were not subject to analysis for the current opinion.

4. Comments on any interim results that may be of significant concern to the appointed actuary.

5. The methods used by the appointed actuary to recognize the impact of reinsurance on the company's cash flows, including both assets and liabilities, under each of the scenarios tested.

6. The extent to which the appointed actuary is satisfied that all options, whether explicit or embedded, in any asset or liability and equity-like features in any investments are appropriately considered in the asset adequacy analysis.

7. The name of the company for which the regulatory asset adequacy issues summary is being supplied.

8. The signature of the appointed actuary and the date of the signature.

I. The memorandum shall include the following statement:

Actuarial methods, considerations and analyses used in the preparation of this memorandum conform to the appropriate actuarial standards of practice as promulgated by the actuarial standards board that form the basis for this memorandum.

J. An appropriate allocation of assets in the amount of the interest maintenance reserve 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 asset valuation reserve 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.

K. The amount of the assets used for the asset valuation reserve 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.

L. The appointed actuary shall retain on file, for at least seven years, sufficient documentation to determine the procedures followed, the analyses performed, the bases for assumptions and the results obtained.