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You are here: Home . rules . 2006 . 1220-059

SUBCHAPTER MM. PREFERRED MORTALITY TABLES

28 TAC §§3.9401 - 3.9404

1. INTRODUCTION. The Texas Department of Insurance proposes new Subchapter MM, §§3.9401-3.9404, concerning the optional use of preferred mortality tables for life insurance policies issued on and after January 1, 2007, excluding any disability and accidental death benefits in such policies. These new sections are necessary to allow the use of preferred mortality tables for valuation purposes only. Insurance Code Article 3.28 authorizes a company to use any ordinary mortality table that is adopted after 1980 by the National Association of Insurance Commissioners and approved by regulation promulgated by the Commissioner. In September 2006, the National Association of Insurance Commissioners adopted ordinary mortality tables that reflect differences in mortality between preferred and standard lives in determining minimum reserve liabilities.

Proposed §3.9401 specifies the purpose of the subchapter. Proposed §3.9402 sets forth definitions used in the subchapter. Proposed §3.9403 allows an insurer to substitute the 2001 Preferred Class Structure Mortality Table in place of the 2001 CSO Smoker or Nonsmoker Mortality Table as the minimum valuation standard for policies issued on or after January 1, 2007 and adopts the 2001 Preferred Class Structure Mortality Table by reference. Proposed §3.9404 sets out conditions on the use of the 2001 Preferred Class Structure Mortality Table and requires each insurer that opts to use the preferred mortality tables to file statistical reports showing experience, which can be used in future updates to the preferred mortality tables.

2. FISCAL NOTE. Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that for each of the first five years the proposed sections will be in effect, there will be no fiscal implications for state or local government as a result of enforcing or administering the sections. There will be no measurable effect on local employment or the local economy as a result of the proposal.

3. PUBLIC BENEFIT/COST NOTE. Ms. Patterson has also determined that for each year of the first five years the proposed new sections are in effect, the anticipated public benefits include enhanced availability of life insurance coverage and reduced need for price increases to cover redundant reserves. Such public benefits are more prominent for term life insurance covering insureds who are in excellent health (super preferred risks) and good health (preferred risks) based on underwriting criteria at issue.

An insurer may use the preferred mortality tables authorized by this rule at its option. Costs for insurers that choose to implement the 2001 Preferred Class Structure Mortality Table include actuarial costs and programming costs. Actuarial costs would include required annual certifications, reserve calculations, workpapers, and reporting of experience, though reporting experience will not be required until reporting requirements have been adopted by the Commissioner. Actuarial hourly rates range from $25 (for actuarial students) to over $200 (for fully credentialed actuaries). Hourly rates for programming would range from $25 to $120. The Department anticipates, however, that costs of compliance will be significantly offset by savings in costs otherwise needed to support redundant reserves such as reinsurance costs. Subsequent and ongoing costs of compliance are believed to be substantially less than the initial costs of compliance. For companies that choose to implement these tables, there will be some fixed costs related to the initial and annual actuarial certification(s). However, most of the impact of these requirements is believed to be more directly correlated to the amount of term life business issued to preferred risks for which a company implements these tables than to the size of the company. Based on input from the insurance industry, reserves may be expected to decrease by an average of 15 percent to 18 percent for issue ages 25 and 35 and an average of 12 percent to 14 percent for issue ages 45 and 55 for term life products using these preferred tables. This is based on a term life coverage of 20 years with level premiums, level death benefits, and a prior reserve table of 2001 CSO Nonsmoker without use of the select factors, with prevalence factors of 35 percent super preferred, 35 percent preferred, and 30 percent residual lives. The reserve reductions by company will vary depending on the prevalence of super preferred, preferred, and residual risks written. (Residual risks are those insureds that were not deemed super preferred or preferred risks based on underwriting criteria at issue.)

Small or micro businesses may be affected to the extent that there are small insurance companies who underwrite preferred risks. Even if the proposal may have an adverse effect on small and micro-business, the proposal is optional for them, as it is for all businesses. The Department has considered the purpose of the applicable statute, which is to enable the use of preferred mortality tables, and has determined that it is neither legal nor feasible to waive the provisions of the proposal for insurers that qualify as small or micro-businesses under Government Code §2006.001 and that opt to use the preferred mortality tables. Additionally, it is the Department's position that to waive or modify the requirements of the proposed amendments for small or micro-businesses could result in a disparate effect on policyholders and other persons affected by the proposed sections.

4. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on February 5, 2007 , to Gene C. Jarmon, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P.O. Box 149104, Austin, TX 78714-9104. An additional copy of the comment must be simultaneously submitted to Betty Patterson, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, TX 78714-9104. Any request for a public hearing should be submitted separately to the Office of the Chief Clerk before the close of the public comment period. If a hearing is held, oral and written comments presented at the hearing will be considered.

5. STATUTORY AUTHORITY. The new sections are proposed under the Insurance Code Article 3.28 and §36.001. Article 3.28, §3(a)(iii) provides for the use of any ordinary mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by regulation promulgated by the Commissioner for use in determining the minimum standard valuation for life insurance policies, excluding any disability and accidental death benefits in such policies. Section 36.001 provides that the Commissioner may adopt any rules necessary and appropriate to implement the powers and duties of the Texas Department of Insurance under the Insurance Code and other laws of this state.

6. CROSS REFERENCE TO STATUTE. The following statutes are affected by this proposal:

Rule Statute

§§3.4051 - 3.4509 Insurance Code Article 3.28

§§3.9101 - 3.9106

7. TEXT.

§3.9401. Purpose. The purpose of this subchapter is to recognize and permit the use of mortality tables that reflect differences in mortality between preferred and standard lives in determining minimum reserve liabilities in accordance with Insurance Code Article 3.28, §3(a)(iii) and §3.4505 of this title (relating to General Calculation requirements for Basic Reserves and Premium Deficiency Reserves).

§3.9402. Definitions. The following words and terms, when used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1) 2001 CSO Mortality Table--Mortality tables, consisting of separate rates of mortality for male and female lives, developed by the American Academy of Actuaries CSO Task Force from the Valuation Basic Mortality Table developed by the Society of Actuaries Individual Life Insurance Valuation Mortality Task Force, and adopted by the NAIC in December 2002. The 2001 CSO Mortality Table is included in the Proceedings of the NAIC (2 nd Quarter 2002) and supplemented by the 2001 CSO Preferred Class Structure Mortality Table defined below. Unless the context indicates otherwise, the 2001 CSO Mortality Table includes both the ultimate form of that table and the select and ultimate form of that table and includes both the smoker and nonsmoker mortality tables and the composite mortality tables. It also includes both the age-nearest-birthday and age-last-birthday bases of the mortality tables. Mortality tables in the 2001 CSO Mortality Table include the following:

(A) 2001 CSO Mortality Table (F)--Mortality table consisting of the rates of mortality for female lives from the 2001 CSO Mortality Table.

(B) 2001 CSO Mortality Table (M)--Mortality table consisting of the rates of mortality for male lives from the 2001 CSO Mortality Table.

(C) Composite mortality tables--Mortality tables with rates of mortality that do not distinguish between smokers and nonsmokers.

(D) Smoker and nonsmoker mortality tables--Mortality tables with separate rates of mortality for smokers and nonsmokers.

(2) 2001 CSO Preferred Class Structure Mortality Table--Mortality tables with separate rates of mortality for super preferred nonsmokers, preferred nonsmokers, residual standard nonsmokers, preferred smokers, and residual standard smoker splits of the 2001 CSO Nonsmoker and Smoker tables as adopted by the NAIC at the September 2006 national meeting and published in the Proceedings of the NAIC (3 rd Quarter 2006). Unless the context indicates otherwise, the 2001 CSO Preferred Class Structure Mortality Table includes both the ultimate form of that table and the select and ultimate form of that table. It includes both the smoker and nonsmoker mortality tables. It includes both the male and female mortality tables and the gender composite mortality tables. It also includes both the age-nearest-birthday and age-last-birthday bases of the mortality table.

(3) Statistical agent--An entity with proven systems for protecting the confidentiality of individual insured and insurer information, demonstrated resources for and history of ongoing electronic communications and data transfer ensuring data integrity with insurers, which are its members or subscribers, and a history of and means for aggregation of data and accurate promulgation of the experience modifications in a timely manner.

§3.9403. 2001 CSO Preferred Class Structure Table.

(a) At the election of the insurer, for each calendar year of issue, for any one or more specified plans of insurance and subject to satisfying the conditions stated in this subchapter, the 2001 CSO Preferred Class Structure Mortality Table may be substituted in place of the 2001 CSO Smoker or Nonsmoker Mortality Table as the minimum valuation standard for policies issued on or after January 1, 2007. No such election shall be made until the insurer demonstrates that at least 20 percent of the business to be valued on this table is in one or more of the preferred classes. A table from the 2001 CSO Preferred Class Structure Mortality Table used in place of a 2001 CSO Mortality Table, pursuant to the requirements of this subchapter, will be treated as part of the 2001 CSO Mortality Table only for purposes of reserve valuation pursuant to the requirements of §§3.9101 - 3.9106 of this title (relating to 2001 CSO Mortality Table).

(b) The Commissioner of Insurance adopts by reference the 2001 CSO Preferred Class Structure Mortality Table. The table is available from the Actuarial Division, Texas Department of Insurance, Mail Code 302-3A, 333 Guadalupe, Austin , Texas 78701 or on the internet by accessing the Department's website at www.tdi.state.tx.us/company/ficso.html

§3.9404. Conditions.

(a) For each plan of insurance with separate rates for preferred and standard nonsmoker lives, an insurer may use the super preferred nonsmoker, preferred nonsmoker, and residual standard nonsmoker tables to substitute for the nonsmoker mortality table found in the 2001 CSO Mortality Table to determine minimum reserves. At the time of election and annually thereafter, except for business valued under the residual standard nonsmoker table, the appointed actuary shall certify that:

(1) the present value of death benefits over the next ten years after the valuation date, using the anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the valuation basic table corresponding to the valuation table being used for that class; and

(2) the present value of death benefits over the future life of the contracts, using anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the valuation basic table corresponding to the valuation table being used for that class.

(b) For each plan of insurance with separate rates for preferred and standard smoker lives, an insurer may use the preferred smoker and residual standard smoker tables to substitute for the smoker mortality table found in the 2001 CSO Mortality Table to determine minimum reserves. At the time of election and annually thereafter, for business valued under the preferred smoker table, the appointed actuary shall certify that:

(1) the present value of death benefits over the next ten years after the valuation date, using the anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the preferred smoker valuation basic table; and

(2) the present value of death benefits over the future life of the contracts, using anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the preferred smoker valuation basic table.

(c) Unless exempted by the commissioner, every insurer using the 2001 CSO Preferred Class Structure Table shall annually file with the commissioner, with the NAIC, or with a statistical agent designated by the NAIC and acceptable to the commissioner, statistical reports showing mortality and such other information as the commissioner may deem necessary or expedient for the administration of the provisions of this regulation. The form of the reports shall be established by the commissioner, or the commissioner may require the use of a form established by the NAIC or by a statistical agent designated by the NAIC and acceptable to the commissioner. The form of the statistical reports shall be promulgated by rule. Insurers are not required to file such statistical reports until such rule has been adopted by the commissioner. At the commissioner' discretion, the commissioner may request mortality and other information at any time.



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