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Subchapter Q. Actuarial Opinion and Memorandum

Regulation

28 TAC §§3.1605-3.1609

The Texas Department of Insurance proposes amendments to §§3.1605-3.1609 concerning the adoption by reference of the Actuarial Standards of Practice of the Actuarial Standards Board and exemptions from the actuarial opinion requirement. Insurance Code Article 3.28 §2A(a) requires every life insurance company doing business in this state to annually submit to the department the opinion of a qualified actuary as to whether the reserves and related actuarial items held in support of the policies and contracts of the insurer are computed appropriately, are based on assumptions which satisfy contractual provisions, are consistent with prior reported amounts and comply with applicable laws of this state. The statute directs the commissioner of insurance to define the specific requirements of this opinion by rule. The commissioner adopted Subchapter Q, Actuarial Opinion and Memorandum Regulation (28 Texas Administrative Code §§3.1601-3.1611) in response to the statute's directive. The proposed amendments delete the adoption by reference of the Actuarial Standards of Practice of the American Academy of Actuaries (Academy). The department adopted the standards of the Academy so the department would be able to monitor compliance with these standards independent of the Academy. Since the adoption of the standards in 1992 the department has not found it necessary to take any independent disciplinary actions against an actuary, therefore the department believes the requirements are unnecessary and intends to refer any matters requiring additional action to the Academy for appropriate handling.

The proposed amendments also make changes to §3.1606(c), paragraphs (1)(D), (2)(D) and (5)(D) concerning the criteria for determining the type of actuarial opinion required. The proposed amendments delete the provision concerning designations by the National Association of Insurance Commissioners Examiner Team since that function of the Examiner Team has been eliminated. The proposed amendment to §3.1605(d) and (f) replaces the language reflecting the adoption of the Standards of Practice of the Actuarial Standards Board with the standard language used in the actuarial profession. The proposed amendment to §3.1606(c) deletes an unnecessary reference to the National Association of Insurance Commissioners model regulation entitled "Model Actuarial Opinion and Memorandum Regulation.

The department will consider the proposed amendments to §§3.1605-3.1609 in a public hearing under Docket No. 2467, scheduled for 10:00 a.m. on November 7, 2000 in Room 100 of the William P. Hobby Jr. State Office Building, 333 Guadalupe Street in Austin, Texas.

Mike Boerner, managing actuary, actuarial division, has determined that for the first five-year period the amended sections are in effect there will be no fiscal implications for state or local government as a result of enforcing or administering the amended sections as proposed. There will be no impact on local employment or local economy as a result of the proposal.

Mr. Boerner has determined that for the first five years the amended sections are in effect, the public benefit anticipated as a result of the amendments will be more efficient and effective financial regulation of the reserves established by life insurance companies doing business in this state. The sections, as amended, will provide clarification and guidance to the appointed actuaries in rendering their opinions. Insurance Code Article 3.28 §2A(a) requires the actuary rendering the opinion to be a member of the American Academy of Actuaries. The Actuarial Standards Board is the rule making arm of the American Academy of Actuaries. All members of the Academy must comply with the standards adopted by the Actuarial Standards Board, therefore the actuary rendering an opinion under these sections must comply with these standards due to their membership in the Academy. Since the actuarial opinion is required by Insurance Code Article 3.28, the general cost of compliance is a result of the statute, not due to the proposal. Some insurers may be exempt from providing the department an actuarial opinion with an asset adequacy analysis as a result of criteria established in this regulation, which will reduce the cost of compliance with the statute for those insurers. The department finds it is neither legal nor feasible to waive the proposed regulation for micro or small businesses as Insurance Code Article 3.28 requires all insurers to provide the department an actuarial opinion.

To be considered, all comments must be in writing and received no later than 5:00 p.m. on November 13, 2000 by Lynda H. Nesenholtz, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comments should be simultaneously submitted to Betty Patterson, CPA, AFE, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104.

The amendments are proposed under Insurance Code Article 3.28 and §36.001. The Insurance Code Article 3.28, §2A, authorizes and requires the Commissioner of Insurance to define the specific requirements of actuarial opinions required under Article 3.28, including matters deemed to be necessary to the scope of such opinions. Section 36.001 authorizes the Commissioner to determine rules for general and uniform application for the conduct and execution of the duties and functions of the department.

Sections 3.1605 - 3.1609 affect Insurance Code Article 3.28.

§3.1605. General Requirements.

(a)-(c) (No change.)

(d) Standards for asset adequacy analysis. The asset adequacy analysis required by this regulation [ :]

[ (1)] shall conform to accepted standards of actuarial practice required of qualified actuaries [ the Standards of Practice as adopted by the Actuarial Standards Board ,as of October 1, 1994,] and any additional standards under this regulation [ , which standards are to form the basis of the statement of actuarial opinion in accordance with §3.1608 of this title (relating to Statement of Actuarial Opinion Based on an Asset Adequacy Analysis);]

[ (2) shall be based on methods of analysis as are deemed appropriate for such purposes by the Actuarial Standards Board].

(e) (No change.)

(f) Standards for an actuarial opinion not based on an asset adequacy analysis. The actuarial opinion rendered under §3.1607 of this title [ (relating to Statement of Actuarial Opinion Not Including an Asset Adequacy Analysis)]shall conform to accepted standards of actuarial practice required of qualified actuaries [ the Standards of Practice as adopted by the Actuarial Standards Board as of October 1, 1994,] and any additional standards under this regulation.

§3.1606. Required Opinions.

(a)-(b) (No change.)

(c) Exemption eligibility tests. Exemption eligibility shall be in accordance with criteria set forth in paragraphs (1)-(7) of this subsection . [ which include the criteria in the adopted model regulation by the National Association of Insurance Commissioners, as of September 15, 1992, entitled "Actuarial Opinion and Memorandum Regulation." ]

(1) Any Category A company that, for any year beginning with the year in which this subchapter becomes effective, meets all of the following criteria shall be eligible for exemption from submission of a statement of actuarial opinion in accordance with §3.1608 of this title (relating to Statement of Actuarial Opinion Based on an Asset Adequacy Analysis) for the year in which these criteria are met. The ratios in subparagraphs (A), (B), and (C) of this paragraph shall be calculated based on amounts as of the end of the calendar year for which the actuarial opinion is applicable.

(A)-(C) (No change.)

[ (D) The Examiner Team for the National Association of Insurance Commissioners has not designated the company as a first priority company in any of the two calendar years preceding the calendar year for which the actuarial opinion is applicable, or a second priority company in each of the two calendar years preceding the calendar year for which the actuarial opinion is applicable, or the company has resolved the first or second priority status to the satisfaction of the commissioner of the state of domicile and the commissioner has so notified the chair of the NAIC Life and Health Actuarial Task Force and the NAIC Staff and Support Office.]

(2) Any Category B company that, for any year beginning with the year in which this subchapter becomes effective, meets all of the following criteria shall be eligible for exemption from submission of a statement of actuarial opinion in accordance with §3.1608 of this title [ (relating to Statement of Actuarial Opinion Based on an Asset Adequacy Analysis)] for the year in which the criteria are met. The ratios in subparagraphs (A), (B), and (C) of this paragraph shall be calculated based on amounts as of the end of the calendar year for which the actuarial opinion is applicable.

(A)-(C) (No change.)

[ (D) The Examiner Team for the National Association of Insurance Commissioners has not designated the company as a first priority company in any of the two calendar years preceding the calendar year for which the actuarial opinion is applicable, or a second priority company in each of the two calendar years preceding the calendar year for which the actuarial opinion is applicable, or the company has resolved the first or second priority status to the satisfaction of the commissioner of the state of domicile and the commissioner has so notified the chair of the NAIC Life and Health Actuarial Task Force and the NAIC Staff and Support Office.]

(3)-(4) (No change.)

(5) Any Category C company that, after submitting an opinion in accordance with §3.1608 of this title [ (relating to Statement of Actuarial Opinion Based on an Asset Adequacy Analysis)], meets all of the following criteria shall not be required, unless required in accordance with paragraph (7) of this subsection, to submit a statement of actuarial opinion in accordance with §3.1608 of this title more frequently than every third year. Any Category C company which fails to meet all of the following criteria for any year shall submit a statement of actuarial opinion in accordance with §3.1608 of this title for that year. The ratios in subparagraphs (A), (B), and (C) of this paragraph shall be calculated based on amounts as of the end of the calendar year for which the actuarial opinion is applicable.

(A)-(C) (No change.)

[ (D) The Examiner Team for the National Association of Insurance Commissioners has not designated the company as a first priority company in any of the two calendar years preceding the calendar year for which the actuarial opinion is applicable, or a second priority company in each of the two calendar years preceding the calendar year for which the actuarial opinion is applicable, or the company has resolved the first or second priority status to the satisfaction of the commissioner of the state of domicile and the commissioner has so notified the chair of the NAIC Life and Health Actuarial Task Force and the NAIC Staff and Support Office.]

(6)-(7) (No change.)

(d) (No change.)

§3.1607. Statement of Actuarial Opinion Not Including an Asset Adequacy Analysis.

(a) (No change.)

(b) Recommended language. The language provided in paragraphs (1) - (10) of this subsection is that which in typical circumstances would be included in a statement of actuarial opinion in accordance with this section. The language may be modified as needed to meet the circumstances of a particular case, but the appointed actuary should use language which clearly expresses his or her professional judgment. Regardless of language used, the opinion shall retain all pertinent aspects of the language provided this section.

(1)-(5) (No change.)

(6) The opinion paragraph should include the following:

In my opinion the amounts carried in the balance sheet on account of the actuarial items identified above:

are computed in accordance with appropriate actuarial standards consistently applied;

are based on actuarial assumptions which 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;

meet the requirements of the insurance law and regulations of the state of (state of domicile) and are at least as great as the minimum aggregate amounts required by the state in which this statement is filed;

are computed on the basis of assumptions consistent with those used in computing the corresponding items in the annual statement of the preceding year-end (with any exceptions as noted below); and

include provision for all actuarial reserves and related statement items which ought to be established.

The actuarial methods, considerations and analyses used in forming my opinion conform to the appropriate Standards of Practice as adopted by the Actuarial Standards Board [ , as of October 1, 1994].

(7) The concluding paragraph should document the eligibility for the company to provide an opinion as provided by this section. It shall include the following items.

Figure: 28 TAC §3.1607(b)(7)

This opinion is provided in accordance with 28 TAC §3.1607. As such it does not include an opinion regarding the adequacy of reserves and related actuarial items when considered in light of the assets which support them.

Eligibility to submit under §3.1607 is confirmed as follows:

The ratio of the sum of capital and surplus to the sum of cash and invested assets is (insert amount), which equals or exceeds the applicable criterion based on the admitted assets of the company (28 TAC §3.1606(c)).

The ratio of the sum of the reserves and liabilities for annuities and deposits to the total admitted assets is (insert amount), which is less than the applicable criteria based on the admitted assets of the company (28 TAC §3.1606(c)).

The ratio of the book value of the non-investment grade bonds to the sum of capital and surplus is (insert amount), which is less than the applicable criteria of .50.

[ To my knowledge, the National Association of Insurance Commissioners Examiner Team has not designed the company as a first priority company in any of the two calendar years preceding the calendar year for which the actuarial opinion is applicable, or a second priority company in each of the two calendar years preceding the calendar year for which the actuarial opinion is applicable or the company has resolved the first or second priority status to the satisfaction of the commissioner of the state of domicile.]

To my knowledge there is not a specific request from any commissioner requiring an asset adequacy analysis opinion.

Signature of Appointed Actuary

Address of Appointed Actuary

Telephone Number of Appointed Actuary

(8)-(10) (No change.)

§3.1608. Statement of Actuarial Opinion Based On an Asset Adequacy Analysis.

(a) (No change.)

(b) Recommended language. The following paragraphs are to be included in the statement of actuarial opinion in accordance with this section. Language is that which in typical circumstances should be included in a statement of actuarial opinion. The language may be modified as needed to meet the circumstances of a particular case, but the appointed actuary should use language which clearly expresses his or her professional judgment. However, in any event the opinion shall retain all pertinent aspects of the language provided in this section.

(1)-(5) (No change.)

(6) The opinion paragraph should include the following:

Figure: 28 TAC §3.1608(b)(6)

In my opinion the reserves and related actuarial values concerning the statement items identified above:

are computed in accordance with appropriate actuarial standards consistently applied and are fairly stated, in accordance with sound actuarial principles;

are based on actuarial assumptions which 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;

meet the requirements of the insurance law and regulations of the state of (state of domicile) and are at least as great as the minimum aggregate amounts required by the state in which this statement is filed;

are computed on the basis of assumptions consistent with those used in computing the corresponding items in the annual statement of the preceding year-end (with any exceptions as noted below); and

include provision for all actuarial reserves and related statement items which ought to be established.

The reserves and related 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 such assets, and the considerations anticipated to be received and retained under such policies and contracts, make adequate provision, according to appropriate actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the company.

The actuarial methods, considerations and analyses used in forming my opinion conform to the appropriate Standards of Practice as adopted by the Actuarial Standards Board [ , as of October 1, 1994,] which standards 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 which should be considered in reviewing this opinion.

(or)

The following material change(s) which occurred between the date of the statement for which this opinion is applicable and the date of this opinion should be considered in reviewing this opinion: (Describe the change or changes.) Choose whichever of the two immediately preceding statements is appropriate.

The impact of unanticipated events subsequent to the date of this opinion is beyond the scope of this opinion. The analysis of 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.

Signature of Appointed Actuary

Address of Appointed Actuary

Telephone Number of Appointed Actuary

(c)-(e) (No change.)

§3.1609. Description of Actuarial Memorandum.

(a)-(b) (No change.)

(c) Conformity to standards of practice. The memorandum shall include a statement with wording substantially similar to that of this subsection as follows: Actuarial methods, considerations and analyses used in the preparation of this memorandum conform to the appropriate Standards of Practice as adopted by the Actuarial Standards Board, [ as of October 1, 1994] which standards form the basis for this memorandum.



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