Proposed Edits to Valuation Manual Section II and

VM-21 to Coordinate with the Proposed Edits to

VM-22 (Amendment Proposal 2018-20)*

Exposed for comment through COB June 4, 2018

Comments should be sent to Reggie Mazyck ()

Commenters should consider whether the proposed edits to Section II and VM-21 included in this exposure sufficiently cover the application of VM-22 to fixed payout annuities emanating from variable or non-variable host contracts issued after 1/1/2017 for fixed payments beginning 1/1/2019 or later.

*LATF voted on its May 10 call to re-expose APF 2018-20 through June 4. NAIC staff was directed to incorporate a number of edits priortoposting the exposure. Staff was also directed to make coordinating edits to VM Section II and VM-21. Those coordinating edits comprise this exposure. The posting of this exposure precedes the re-exposure of 2018-20 by a few days, while final edits are being added to 2018-20.

VM-21, Requirements for Principle-Based reserves for Variable Annuities

Section I: Background

D.Scope

1.The following categories of annuities or product features, directly written or assumed through reinsurance, are covered by this section of the Valuation Manual:

a.Variable deferred annuity contracts subject to the CARVM, whether or not such contracts contain GMDBs or VAGLBs.

b.Variable immediate annuity contracts, whether or not such contracts contain GMDBs or VAGLBs.

c.Group annuity contracts that are not subject to CARVM, but contain guarantees similar in nature to GMDBs, VAGLBs or any combination thereof.

Guidance Note: The term “similar in nature” as used in this Section D.1.c and Section D.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 Section D.1.d. 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 and VAGLB in Section E.1.a and Section E.1.b, 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.All other products that contain guarantees similar in nature to GMDBs or VAGLBs, even if the insurer does not offer the mutual funds or variable funds 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 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.

2.These requirements do not apply to contracts falling under the scope of the Modified Guaranteed Annuity Model Regulation (#255); however, it does 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).

  1. Separate account products that guarantee an index and do not offer GMDBs or VAGLBs are excluded from the scope of these requirements.
  1. The maximum valuation interest rate for fixed payout annuities commencing on or after Jan. 1, 2019, resulting from host contracts, within the scope of VM-21 is subject to the requirements of VM-22.

Guidance Note: Current VAGLBs include Guaranteed Minimum Accumulation Benefits, Guaranteed Minimum Income Benefits, Guaranteed Minimum Withdrawal Benefits, Guaranteed Lifetime Withdrawal Benefits and Guaranteed Payout Annuity Floors. These requirements will be applied to future variations on these designs and to new guarantee designs.

Section II, Reserve Requirements

II.Reserve Requirements

This section provides the minimum reserve requirements by type of product. 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 words “policies” and “contracts” are used interchangeably.

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Annuity Products

  1. This subsection establishes reserve requirements for all contracts classified as annuity contracts defined in SSAP No. 50 in the AP&P Manual.
  2. Minimum reserve requirements for variable annuity contracts and similar business, specified in VM-21, Requirements for Principle-Based Reserves for Variable Annuities, shall be those provided by VM-21, with the exception of the maximum valuation interest rate requirements for fixed payout annuities, resulting from host contracts within the scope of VM-21, commencing on or after January 1, 2019, which shall be subject to paragraph C below. The minimum reserve requirements of VM-21 are considered PBR requirements for purposes of the Valuation Manual.
  3. Minimum reserve requirements for fixed annuity contracts are those requirements as found in VM-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 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.