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You are here: www.tdi.texas.gov . rules . 2008 . 1020-059

SUBCHAPTER JJ. 2001 CSO MORTALITY TABLE 28 TAC §3.9103

SUBCHAPTER OO. PRENEED LIFE INSURANCE MINIMUM MORTALITY STANDARDS FOR DETERMINING RESERVE LIABILITIES AND NONFORFEITURE VALUES 28 TAC §§3.9601 - 3.9606

1. INTRODUCTION. The Texas Department of Insurance proposes an amendment to §3.9103(b) and new Subchapter OO, §§3.9601 - 3.9606, concerning the use of the Ultimate 1980 CSO by insurance companies that issue preneed life insurance policies. The Ultimate CSO refers to the Commissioners 1980 Standard Ordinary Mortality Table without 10-year selection factors. It was incorporated into the National Association of Insurance Commissioners' Standard Valuation Law approved in December 1983. A preneed life insurance policy is a life insurance policy or certificate that is (i) issued on a form that is approved by the Department, (ii) issued by an insurance company licensed by the Department, (iii) issued in conjunction with an insurance-funded prepaid funeral benefits contract, and (iv) which, whether by assignment or otherwise, has the purpose of funding prepaid funeral benefits to be provided at the time of or immediately following the death of the insured. Preneed life insurance does not include an annuity contract or policy. A prepaid funeral benefits contract is a contract or agreement for prepaid funeral benefits subject to the requirements of the Finance Code Chapter 154. The proposed amendment and new sections are necessary to permit life insurance companies to continue to use the Ultimate 1980 CSO for calculating minimum reserves and nonforfeiture values for preneed life insurance policies and certificates. The proposal allows the Ultimate 1980 CSO to be used in determining the minimum standard of valuation of reserves and the minimum standard nonforfeiture values for preneed life insurance policies and certificates issued on or after January 1, 2009. Under existing §3.9103(b), life insurance companies are required to convert from using the Ultimate 1980 CSO to only the 2001 CSO Mortality Table for life insurance policies, including preneed life insurance policies, issued on or after January 1, 2009. In 2004, the Society of Actuaries (SOA) commissioned a study of preneed mortality to examine preneed life insurance mortality based upon mortality experience data collected for the years 2000 - 2004. At that time, the 2001 CSO Mortality Table was recognized as the prevailing table for the purposes of calculating minimum reserves and nonforfeiture values for preneed life insurance policies, both on a statutory basis and on a tax basis. As a part of the SOA study, the research completed in 2008 by the Deloitte University of Connecticut Actuarial Center (Deloitte) determined that the 2001 CSO Mortality Table produced inadequate reserves for preneed life insurance policies. Based upon the Deloitte research, the National Association of Insurance Commissioners (NAIC) in March 2008 adopted the Preneed Life Insurance Minimum Standards for Determining Reserve Liabilities and Nonforfeiture Values Model Regulation (Preneed Mortality Model Regulation). This model regulation prescribes the Ultimate 1980 CSO as the appropriate mortality table to use in determining the minimum standard valuation of reserves and the minimum standard nonforfeiture values for preneed life insurance policies issued on or after January 1, 2009. The proposed new sections and amendment are substantially similar to the Preneed Mortality Model Regulation.

This proposal has two primary purposes. First, the proposal allows life insurance companies that issue preneed life insurance policies to continue to use the Ultimate 1980 CSO on and after January 1, 2009, to determine levels of reserve liabilities and nonforfeiture values relative to the expected mortality for these policies. This replaces the requirement in existing §3.9103(b) that insurers must use the 2001 CSO Mortality Table in determining minimum standards for these policies. Second, the proposal allows, but does not require, insurance companies to use the 2001 CSO Mortality Table as the minimum standard for reserves and minimum standard for nonforfeiture benefits for preneed life insurance policies or certificates issued on or after January 1, 2009, and before January 1, 2012. The proposal requires insurers that opt to use the 2001 CSO Mortality Table for the January 1, 2009 - January 1, 2012 period to use the Ultimate 1980 CSO for all preneed life insurance policies issued on or after January 1, 2012. As demonstrated by the Deloitte study, the use of the Ultimate 1980 CSO by life insurance companies will produce more conservative reserves for preneed life insurance policies as opposed to the inadequate reserves produced using the 2001 CSO Mortality Table. Additionally, adoption of the proposed new sections and amendment to be effective before January 1, 2009, will enable insurance companies currently using the Ultimate 1980 CSO to opt to continue to use that table as the minimum standard of mortality for reserves and nonforfeiture values for preneed life insurance policies issued on or after January 1, 2009. Existing §3.9103(b) requires life insurers to convert to the 2001 CSO Mortality Table by January 1, 2009. This proposal will result in a cost savings to these insurance companies in the amount they would have incurred to convert to the 2001 CSO Mortality Table. Most, if not all, life insurance companies, both large and small, writing preneed life insurance currently use the Ultimate 1980 CSO for their preneed business and have not yet begun the process to convert from the 1980 CSO to the 2001 CSO. This is based upon information filed with the Department and obtained from industry actuaries knowledgeable of small and large companies writing preneed life insurance. According to these industry actuaries, most, if not all, life insurance companies strongly support the adoption of the proposed new sections and amendment. If adopted before the year-end 2008, the insurance companies can continue to use the Ultimate 1980 CSO. If certain specified conditions are met, the proposal also provides insurance companies the option to use the 2001 CSO Mortality Table rather than the Ultimate 1980 CSO for preneed life insurance policies issued on or after January 1, 2009, and before January 1, 2012. The Department anticipates few, if any, insurance companies will elect this option. This is because the Ultimate 1980 CSO produces more appropriate reserves for preneed life insurance policies. Also, most, if not all, life insurance companies will want to avoid incurring the costs to convert to the 2001 CSO Mortality Table. The following is a section-by-section summary of the proposal.

The proposed amendment to §3.9103(b) provides that the requirement that insurance companies use the 2001 CSO Mortality Table in determining minimum standards for policies issued on and after January 1, 2009, is subject to the requirements specified in proposed §§3.9601 - 3.9606. Amendments are also proposed to §3.9103(b) to update the Insurance Code statutory citations. This is necessary to conform the citations to the nonsubstantive Insurance Code revision.

Proposed §3.9601 specifies the purpose and applicability of the subchapter. Proposed §3.9602 sets forth definitions used in the subchapter. Proposed §3.9603 requires an insurance company to use the Ultimate 1980 CSO as the minimum mortality standard for determining reserve liabilities and nonforfeiture values for both male and female insureds for preneed life insurance policies issued on or after January 1, 2009, except as provided under proposed §3.9606. Proposed §3.9604 specifies the interest rates to be used in determining the minimum standard for valuation of reserves and the minimum standard nonforfeiture values for preneed life insurance. Proposed §3.9605 specifies the method used in determining the standard for the minimum valuation of reserves and minimum nonforfeiture values for preneed life insurance. Proposed §3.9606 provides insurance companies, if certain specified conditions are met, with the option to use the 2001 CSO Mortality Table in lieu of the Ultimate 1980 CSO as the minimum standard for determining reserve liabilities and nonforfeiture values for preneed life insurance policies issued on or after January 1, 2009, and before January 1, 2012. The proposed section also requires insurance companies to use the Ultimate 1980 CSO in the calculation of minimum forfeiture values and minimum reserves for preneed life insurance policies issued on or after January 1, 2012.

The Ultimate 1980 CSO is available from the Actuarial Division, Texas Department of Insurance, 333 Guadalupe, Austin, Texas.

2. FISCAL NOTE. Mr. Danny Saenz, Senior Associate Commissioner, Financial Program, has determined that, for each year of the first five years the proposed sections and amendment will be in effect, there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed sections and amendment. The proposal will have no effect on local employment or local economy.

3. PUBLIC BENEFIT/COST NOTE. Mr. Saenz has also determined that for each year of the first five years the proposed sections and amendment are in effect, there are anticipated benefits, which are detailed in the following discussion. There will be no additional costs for life insurance companies that opt to continue to use the Ultimate 1980 CSO for preneed life insurance policies issued on or after January 1, 2009. However, there will be some optional costs that are likely to be minimal for those insurance companies that opt to use the 2001 CSO Mortality Table for preneed life insurance policies issued January 1, 2009, through January 1, 2012.

Anticipated Public Benefits. The anticipated public benefits are: (i) greater assurance that companies that issue preneed life insurance policies will have appropriate levels of reserve liabilities and nonforfeiture values relative to the expected mortality for these policies; and (ii) cost savings by life insurance companies in the amount the companies would have incurred to convert to the 2001 CSO Mortality Table by January 1, 2009, as required under existing §3.9103(b).

Appropriate Levels of Reserves. As explained in the Introduction portion of this proposal notice, a study of preneed mortality commissioned by the Society of Actuaries determined that the 2001 CSO Mortality Table produced inadequate reserves for life insurance policies issued in support of a prepaid funeral benefits contract. A prepaid funeral benefits contract provides preneed funeral benefits at the time of or immediately following the death of the insured. Discussions between industry and regulators resulted in the NAIC adopting the Preneed Life Insurance Minimum Standards for Determining Reserve Liabilities and Nonforfeiture Values Model Regulation. These standards prescribe the Ultimate 1980 CSO as the appropriate mortality table to use in determining the minimum standard valuation of reserves and the minimum standard nonforfeiture values for preneed life insurance policies issued on or after January 1, 2009. As demonstrated by the preneed mortality study, the use of the Ultimate 1980 CSO by life insurance companies will produce more conservative reserves for preneed life insurance policies as opposed to the inadequate reserves produced using the 2001 CSO Mortality Table. Because the proposed new sections and amendment prescribe the Ultimate 1980 CSO for most preneed life insurance policies issued on or after January 1, 2009, and for all preneed life insurance policies issued on or after January 1, 2012, the public will benefit from life insurance companies having more appropriate reserves supporting preneed policy benefits.

Cost Savings Resulting from Not Having to Convert to 2001 CSO Mortality Table. Additionally, adoption of the proposed new sections and amendment to be effective before January 1, 2009, will enable life insurance companies currently using the Ultimate 1980 CSO to opt to continue to use the Ultimate 1980 CSO as the minimum standard of mortality for reserves and nonforfeiture values for preneed life insurance policies issued on or after January 1, 2009. This will result in a cost savings to these life insurance companies in the amount the companies would have incurred to convert to the 2001 CSO Mortality Table by January 1, 2009, as required under existing §3.9103(b).

Estimated Conversion Costs. The following is an analysis of these estimated conversion costs and therefore, the amount of the estimated savings to each company that opts to continue to use the Ultimate 1980 CSO for their preneed business. As noted in the Introduction portion of this proposal notice, the Department estimates that most, if not all, life insurance companies currently use the Ultimate 1980 CSO for their preneed business have not yet begun the process to convert to the 2001 CSO Mortality Table, and will opt to continue to use the Ultimate 1980 CSO for preneed life insurance policies issued on or after January 1, 2009. Thus, the Department anticipates that the vast majority of insurance companies writing preneed business, regardless of size, will realize a cost savings in the amount of costs they would have incurred to convert to the 2001 CSO Mortality Table by January 1, 2009, as required under existing §3.9103(b). Based upon discussions with one industry actuary, the Department estimates that a few life insurance companies may have taken steps toward converting from the Ultimate 1980 CSO to the 2001 CSO Mortality Table for their preneed business, but ceased the conversion in anticipation of the adoption of the proposed new sections and amendment. Any such life insurance companies that may have ceased the process to convert to the 2001 CSO Mortality Table pursuant to existing rule §3.9103(b) will realize cost savings as a result of this proposal. These cost savings are estimated to be greater than the actual implementation costs estimated by the Department when §3.9103(b) was proposed and adopted in 2003. For example, actuarial costs in 2003 were estimated to range from $30 to $100; compliance costs from $20 to $100; and programming costs from $30 to $70. The reason for the increase in these estimated costs is primarily due to an increase in personnel and consultant salaries.

The cost components involved in converting to a mortality table, such as the 2001 CSO Mortality Table, for purposes of minimum reserves and nonforfeiture values, include (i) actuarial costs to develop the minimum reserve and nonforfeiture values using the new mortality table; (ii) the costs to develop new life insurance policy forms to incorporate the new mortality table and to file the new forms with the Department for approval; (iii) the data entry and computer programming costs to calculate the minimum reserve and nonforfeiture values for all ages using the new mortality table; (iv) the costs to market the new 2001 CSO Preneed Life Insurance policies; (v) the annual actuarial and reporting costs to support the adequacy of the reserves produced in using the new 2001 CSO Mortality Table for preneed life insurance business; and (vi) any costs related to determining the mortality basis for tax reserves. The Department anticipates that the expenditures required to convert to a different mortality table would have a more significant economic impact on small life insurance companies than on larger insurance companies because small insurance companies typically do not have the additional capital and resources to handle such a significant change.

Actuarial costs to develop the minimum reserve and nonforfeiture values using the new mortality table. Based upon information obtained from industry actuaries, life insurance companies, and firms handling actuary placements, the following is the Department's approach for determining the minimum valuations for reserves and nonforfeiture using the new mortality table. The Department anticipates that an employee in the company's in-house actuarial department or an employee of a consulting actuarial firm engaged by the company would calculate the minimum valuations for reserves and nonforfeiture using the new mortality table. This calculation could be completed in less than two hours, but the completion time will vary significantly based upon the number and complexity of the preneed policy forms involved and computation systems available to the actuary. The Department estimates that the hourly salary rates for actuarial work will vary significantly depending on whether in-house or consulting actuarial staff is used and could range from $35 (for in-house actuarial students) to over $200 (for fully credentialed consulting actuaries). Based on the foregoing cost analysis approach, each individual insurance company has the information necessary to estimate its own costs to calculate the minimum valuations for reserves and nonforfeiture using the new mortality table.

Costs for developing and filing new policy forms. Based upon discussions with industry actuaries, the following is the Department's cost analysis approach for developing and filing new life insurance policy forms with the Department for approval. A member of the company's actuarial, administrative or compliance department staff or a member of a consulting actuarial firm staff engaged by the company would develop a new policy form to include changes reflecting the new mortality table. The Department estimates that the initial drafting could be completed in less than two hours. A member of a company's management staff also may review and approve the new policy form before the form is submitted to the Department for approval, which could take up to two hours. After drafting the new form, a member of the company's actuarial, administrative or compliance department staff or a member of a consulting actuarial firm staff would submit the new form to the Department for approval. The Department may either approve the new form filing or request additional information or revisions to the form filing. The Department anticipates that any additional information or revisions requested by the Department would take no longer than two to four hours to complete. The time estimates for the individual tasks for developing and filing new life insurance policy forms with the Department will vary based upon various factors, including the number and complexity of the policy forms involved and the hourly rates of the person(s) completing these tasks. Based on the foregoing cost analysis approach, each individual insurance company has the information necessary to estimate its own costs in developing and filing new policy forms to incorporate a new mortality table.

Data entry and programming costs. Based upon discussions with industry actuaries, the Department anticipates that an insurer will incur some data entry and computer programming costs to adjust the company's computer system to calculate the minimum reserve and nonforfeiture values for all ages using the new mortality table. Based upon discussions with industry actuaries, the Department anticipates that a member of the company's actuarial or information technology department staff or a member of a consulting actuarial firm staff engaged by the company would perform these calculations at hourly salary rates ranging from $25 to $120 for in-house staff to over $200 for consulting personnel. The actual costs for these hourly rates will vary significantly depending upon whether consulting personnel or company employees are used. The average number of hours to complete these calculations will vary significantly depending on various factors, including, but not limited to, the number of and complexity of the policy forms, the level of automation of the life insurance company, and the number of similar existing policy forms over which these costs can be spread. Each insurance company has the information necessary to estimate its own data entry and programming costs required to incorporate a new mortality table.

Marketing costs. Based upon discussions with industry actuaries, the Department anticipates that a company will incur costs to market the preneed life insurance policies using a new mortality table, including costs to create and disseminate the new marketing materials. A member of the company's marketing or administrative department staff would create the new marketing materials and distribute them to the marketplace. Based upon discussions with industry actuaries, the Department anticipates that this person's hourly salary rate would range from $25 to $125. The amount of time required to create and distribute the materials would vary widely based upon a number of factors, including, but not limited to, the number of preneed life insurance products offered, the means used to create and disseminate the materials, and the size and locations of the company's potential preneed life insurance market. Based on the foregoing cost analysis approach, each insurance company has the information necessary to estimate its own data entry and programming costs required to incorporate a new mortality table.

Annual actuarial and reporting costs. Based upon discussions with industry actuaries, the Department anticipates that a member of a company's in-house actuarial department staff or a member of a consulting actuarial firm staff engaged by the company would annually prepare and file with the Department actuarial information to support the adequacy of the reserves produced in using a new mortality table such as the 2001 CSO Mortality Table for preneed life insurance business. Based upon discussions with industry actuaries, the Department estimates that the hourly salary rates for actuarial work will vary significantly depending on whether in-house or consulting actuarial staff is used and could range from $35 (for in-house actuarial students) to over $200 (for fully credentialed consulting actuaries). The average number of hours to prepare and file the actuarial information is dependent on many factors, including the adequacy of the reserves obtained using the new mortality table, the number and complexity of the company's preneed life insurance policy forms, the amount of preneed life insurance business involved, systems available for actuarial analysis, and the hourly rates involved. As mentioned in the Introduction portion of this proposal notice, industry actuaries have indicated to the Department that if an insurance company is required to use the 2001 CSO Mortality Table for its preneed policies issued on or after January 1, 2009, the company would still continue to calculate and hold reserve levels similar to those using the 1980 CSO Mortality Table in order to have adequate reserves. According to these industry actuaries, insurance companies, therefore, will incur additional annual actuarial costs to calculate additional reserves to be held to bring reserves up to those reserve levels produced by using the 1980 CSO Mortality Table. Regardless of which new mortality table is used, each insurance company has the information necessary to estimate its own annual actuarial and reporting costs required to incorporate a new mortality table for use with the company's preneed life insurance business.

Tax implications. The NAIC's preneed mortality model regulation prescribes the continued use of the Ultimate 1980 CSO for preneed insurance policies issued on or after January 1, 2009, and this proposal is substantially consistent with the model regulation. Industry actuaries have indicated to the Department that the failure of at least 26 states to adopt the NAIC model regulation by year-end 2008 will mean that the 2001 CSO Mortality Table likely will be the mortality basis for tax reserves in lieu of the Ultimate 1980 CSO contained in the model regulation. Because, for reasons previously explained, the 2001 CSO Mortality Table appears to produce inadequate reserves for preneed life insurance, these industry actuaries believe that the use of the 2001 CSO Mortality Tables could result in less favorable tax treatment for those life insurance companies issuing preneed insurance policies issued on or after January 1, 2009. Each insurance company either has the in-house expertise or has access to consultants who can provide information on the specific tax effects on the company.

Estimated total cost savings. The Department has received an estimated total cost of $2,000 to $3,000 to convert from the Ultimate 1980 CSO mortality table to the 2001 CSO Mortality Table for preneed policies sold in Texas from one industry actuary for a large life insurance company selling preneed life insurance. This estimate, which includes the actuarial, programming, policy form compliance, and marketing costs required for the conversion, is the amount that the actuary estimates that the insurance company will also save by not having to convert from the Ultimate 1980 CSO mortality table to the 2001 CSO Mortality Table as provided under proposed §3.9603. While this is the only total conversion cost estimate that the Department has been able to obtain, this cost information may provide a basis of comparison for use by other insurance companies in estimating the cost savings that will result from not having to convert from the Ultimate 1980 CSO mortality table to the 2001 CSO Mortality Table as provided under proposed §3.9603.

Potential Costs for Persons Required to Comply with the Proposal.

Insurers Currently Using Ultimate 1980 CSO and Opting to Continue to Use that Table. This proposal authorizes life insurance companies to continue to use the Ultimate 1980 CSO for preneed life insurance policies issued on or after January 1, 2009. Based upon preneed policy form filing information submitted to the Department by life insurance companies and information obtained from industry actuaries knowledgeable of small and large life insurance companies writing preneed life insurance, the Department anticipates that most, if not, all life insurance companies currently writing preneed life insurance currently use the Ultimate 1980 CSO for their preneed life insurance business and will opt to continue to use the Ultimate 1980 CSO for preneed life insurance policies issued on or after January 1, 2009. Life insurance companies that opt to continue to use the Ultimate 1980 CSO for preneed life insurance policies issued on or after January 1, 2009, will incur no costs to comply with the proposed new sections and amendment since they can continue to sell their current Ultimate 1980 CSO preneed portfolio of products on and after January 1, 2009, without incurring any additional costs.

Insurers Currently Using the Ultimate 1980 CSO that Opt to Use the 2001 CSO Mortality Table on or After January 1, 2009 and Before January 1, 2012. Proposed new §3.9606 allows a life insurance company the option to use the 2001 CSO Mortality Table in lieu of the Ultimate 1980 CSO as the minimum standard for determining reserve liabilities and nonforfeiture values for preneed life insurance policies issued on or after January 1, 2009, and before January 1, 2012, provided certain specified conditions are met, and requires a life insurance company to use the Ultimate 1980 CSO for preneed life insurance policies issued on or after January 1, 2012. Based upon preneed policy form filing information submitted to the Department by life insurance companies and information provided by industry actuaries, the Department anticipates few, if any, life insurance companies will elect the option under proposed new §3.9606 to use the 2001 CSO Mortality Table for preneed life insurance policies issued on or after January 1, 2009 and before January 1, 2012. This is because the Ultimate 1980 CSO produces more appropriate reserves for preneed life insurance policies and most, if not all, life insurance companies will want to avoid incurring the costs to convert to the 2001 CSO Mortality Table, if given the choice. For the few, if any, life insurance companies using the Ultimate 1980 CSO that opt to use the 2001 CSO Table for preneed life insurance policies issued on or after January 1, 2009, they can either choose to convert to using the 2001 CSO Mortality Table under existing §3.9103(b) for preneed life insurance policies issued before January 1, 2009, or wait and convert to the 2001 CSO Mortality Table under the proposed new §3.9606 for preneed life insurance policies issued on or after January 1, 2009, and before January 1, 2012. The few, if any, life insurance companies that opt for the latter course of action would incur optional costs similar to the costs to convert from the 1980 CSO Mortality Table to the 2001 CSO Mortality Table, which are detailed under the Anticipated Public Benefits portion of this Public Benefit/Cost Note section under the subheading titled Estimated Conversion Costs. Additionally, proposed new §3.9606(b) requires a life insurance company that opts to use the 2001 CSO Mortality Table to provide, as a part of the actuarial opinion memorandum submitted in support of the company's asset adequacy analysis, an annual written notification to the domiciliary commissioner. Thus, insurance companies would incur optional annual reporting costs and costs for an actuarial certification and analysis to support that reserves provided by the 2001 CSO Mortality Table are adequate. Such optional costs would involve actuarial costs and would vary considerably based upon the actuarial hourly rates and the other factors discussed in the Estimated Conversion Costs subsection under the Anticipated Public Benefits portion of this Public Benefit/Cost Note section, such as the number of and complexity of the policy forms, the level of automation of the life insurance company, and the number of similar existing policy forms over which these costs can be spread.

Any life insurance company that opts under proposed new §3.9606(a) to use the 2001 CSO Mortality Table for preneed life insurance policies issued on or after January 1, 2009, and before January 1, 2012, will be required to convert to using only the Ultimate 1980 CSO mortality table for preneed life insurance policies issued on or after January 1, 2012, pursuant to proposed new §3.9606(c). Such conversion costs are expected to be minimal because the Department anticipates that all of these life insurance companies would have previously used the Ultimate 1980 CSO mortality table for minimum reserves and nonforfeiture values for their preneed business. Therefore, these companies already should have the preneed policy forms and systems in place to resume using and selling their Ultimate 1980 CSO preneed products. Although considered highly unlikely by the Department, a life insurance company may opt to use the 2001 CSO Mortality Table under proposed new §3.9606(a) that did not previously use the Ultimate 1980 CSO for their preneed business. The Department anticipates that such a life insurance company would incur costs similar to the costs to convert from the 1980 CSO Mortality Table to the 2001 CSO Mortality Table, which are detailed under the Anticipated Public Benefits portion of this Public Benefit/Cost Note section under the subheading titled Estimated Conversion Costs.

The probable costs of compliance with the rule are primarily the result of the enactment of the Insurance Code Chapter 425 Subchapter B (Standard Valuation Law) and Chapter 1105 (Standard Nonforfeiture Law for Life Insurance), which require life insurance companies to use the 1980 CSO Mortality Table with or without 10-year selection factors (the Ultimate 1980 CSO), or any ordinary mortality table adopted after 1980 by the NAIC that is approved by rules adopted by the Commissioner for use in the calculation of minimum reserves and minimum nonforfeiture values.

4. ECONOMIC IMPACT STATEMENT AND REGULATORY FLEXIBILITY ANALYSIS FOR SMALL AND MICRO BUSINESSES. The Government Code §2006.002(c) requires that if a proposed rule may have an economic impact on small businesses, state agencies must prepare as part of the rulemaking process an economic impact statement that assesses the potential impact of the proposed rule on small businesses and a regulatory flexibility analysis that considers alternative methods of achieving the purpose of the rule. The Government Code §2006.001(a)(2) defines "small business " as a legal entity, including a corporation, partnership, or sole proprietorship, that is formed for the purpose of making a profit, is independently owned and operated, and has fewer than 100 employees or less than $6 million in annual gross receipts. The Government Code §2006.001(a)(1) defines "micro business" as a legal entity, including a corporation, partnership, or sole proprietorship, that is formed for the purpose of making a profit, is independently owned and operated, and has not more than 20 employees. The Government Code §2006.002(f) requires a state agency to adopt provisions concerning micro businesses that are uniform with those provisions outlined in the Government Code §2006.002(b) - (d) for small businesses.

The Department estimates that there are approximately 5 to 30 insurance companies that qualify as small businesses or micro businesses under the Government Code §2006.001(a) that are required to comply with this proposal.

This proposal has two primary purposes. First, the proposal allows life insurance companies that issue preneed life insurance policies to continue to use the Ultimate 1980 CSO on and after January 1, 2009, to determine levels of reserve liabilities and nonforfeiture values relative to the expected mortality for these policies. This replaces the requirement in existing §3.9103(b) that insurers must use the 2001 CSO Mortality Table in determining minimum standards for policies issued on and after January 1, 2009. Second, the proposal allows, but does not require, insurers to use the 2001 CSO Mortality Table as the minimum standard for reserves and minimum standard for nonforfeiture benefits for preneed life insurance policies or certificates issued on or after January 1, 2009, and before January 1, 2012. The proposal requires insurers that opt to use the 2001 CSO Mortality Table for the January 1, 2009 - January 1, 2012 period to use the Ultimate 1980 CSO for all preneed life insurance policies issued on or after January 1, 2012. The probable costs of compliance with the rule are primarily the result of the enactment of the Insurance Code Chapter 425 Subchapter B (Standard Valuation Law) and Chapter 1105 (Standard Nonforfeiture Law for Life Insurance), which require life insurance companies to use the 1980 CSO Mortality Table with or without 10-year selection factors (the Ultimate 1980 CSO), or any ordinary mortality table adopted after 1980 by the NAIC that is approved by rules adopted by the Commissioner for use in the calculation of minimum reserves and minimum nonforfeiture values.

Therefore, the proposal does not add any new requirements or costs with which businesses, regardless of size, must comply that are not already required under existing rules and statutes. As required by the Government Code §2006.002(c), the Department has, therefore, determined that the proposal will not have an adverse economic effect on any small or micro business life insurance companies that are regulated by this proposal. The cost analysis in the Public Benefit/Cost Note part of this proposal notice is also applicable to small and micro business life insurance companies. Under the proposal, small and micro business life insurance companies can continue to use the Ultimate 1980 CSO for their preneed life insurance business and avoid having to incur any costs to convert to the 2001 CSO Mortality Table for policies issued on or after January 1, 2009. Under the proposal, small and micro businesses can opt to convert to the 2001 CSO Mortality Table for their preneed life insurance policies and certificates. However, they are not required to do so either under the proposal or by Insurance Code Chapter 425 Subchapter B (Standard Valuation Law) and Chapter 1105 (Standard Nonforfeiture Law for Life Insurance). In accordance with the Government Code §2006.002(c), the Department has, therefore, determined that a regulatory flexibility analysis is not required because the proposal will not have an adverse impact on small or micro businesses.

5. TAKINGS IMPACT ASSESSMENT. The Department has determined that no private real property interests are affected by this proposal and that this proposal does not restrict or limit an owner's right to property that would otherwise exist in the absence of government action and, therefore, does not constitute a taking or require a takings impact assessment under the Government Code §2007.043.

6. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on December 1, 2008 to Gene C. Jarmon, 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 must be simultaneously submitted to Danny Saenz, Senior Associate Commissioner, Financial Program, Mail Code 305-2A, P. O. Box 149104, Austin, Texas 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, written and oral comments presented at the hearing will be considered.

7. STATUTORY AUTHORITY. The new sections and amendment are proposed under the Insurance Code §§425.058(c), 1105.055(h), and 36.001. Section 425.058(c) provides that for an ordinary life insurance policy issued on the standard basis, excluding any disability or accidental death benefits in the policy and to which Subchapter B, Chapter 1105, applies, the applicable mortality table is the Commissioners 1980 Standard Ordinary Mortality Table; at the insurer's option for one or more specified life insurance plans, the Commissioners 1980 Standard Ordinary Mortality Table with Ten-Year Select Mortality Factors; or any ordinary mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by commissioner rule for use in determining the minimum standard valuation for a policy to which this subdivision applies. Section 1105.055(h) provides that any ordinary mortality table adopted after 1980 by the National Association of Insurance Commissioners that is approved by rules adopted by the Commissioner for use in determining the minimum nonforfeiture standard may be substituted for the Commissioners 1980 Standard Ordinary Mortality Table with or without Ten-Year Select Mortality Factors. 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.

8. CROSS REFERENCE TO STATUTE. The following statutes are affected by this proposal: Insurance Code §425.058 and §1105.055.

9. TEXT.

SUBCHAPTER JJ. 2001 CSO MORTALITY TABLE

3.9103. 2001 CSO Mortality Table.

(a) (No change.)

(b) Subject to the conditions stated in this subchapter, the 2001 CSO Mortality Table shall be used in determining minimum standards for policies issued on and after January 1, 2009, to which Insurance Code §425.058(c) [ Articles 3.28 §3(a)(iii)] and §1055.055(h) [ 3.44a §(8)(e)(6)] and §3.4505 of this chapter [ title] (relating to General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves) are applicable , except as provided in §§3.9601 - 3.9606 of this chapter (relating to Preneed Life Insurance Minimum Mortality Standards for Determining Reserve Liabilities and Nonforfeiture Values) for preneed life insurance policies and certificates.

(c) - (d) (No change.)

SUBCHAPTER OO. PRENEED LIFE INSURANCE MINIMUM MORTALITY STANDARDS FOR DETERMINING RESERVE LIABILITIES AND NONFORFEITURE VALUES

§3.9601. Purpose and Applicability.

(a) The purpose of this subchapter is to establish the minimum mortality standards for reserves and nonforfeiture values for preneed life insurance policies or certificates, and to recognize, permit, and prescribe the use of the Ultimate 1980 CSO in determining the minimum standard of valuation of reserves and the minimum standard nonforfeiture values for preneed life insurance policies or certificates in accordance with §425.058(c) and §1105.055 of the Insurance Code and §3.4505(a) of this chapter (relating to General Calculation Requirements for Basic Reserves and Premium Deficiency Reserves).

(b) This subchapter applies to all preneed life insurance policies and certificates issued on or after January 1, 2009.

§3.9602. 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 2nd Quarter 2002 Proceedings of the NAIC. 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.

(2) Department--The Texas Department of Insurance.

(3) NAIC--National Association of Insurance Commissioners.

(4) Prepaid funeral benefits--As defined in the Finance Code §154.002(9).

(5) Prepaid funeral benefits contract--A contract or agreement for prepaid funeral benefits subject to the requirements of the Finance Code Chapter 154.

(6) Preneed life insurance--A life insurance policy or certificate that is approved by the department, issued by an insurance company licensed by the department, issued in conjunction with an insurance-funded prepaid funeral benefits contract, and which, whether by assignment or otherwise, has the purpose of funding prepaid funeral benefits to be provided at the time of or immediately following the death of the insured. For purposes of this subchapter, the definition of preneed life insurance does not include an annuity contract or policy.

(7) Ultimate 1980 CSO--The Commissioners 1980 Standard Ordinary Mortality Table without 10-year selection factors, incorporated into the 1980 amendments to the NAIC Standard Valuation Law approved in December 1983.

§3.9603. Minimum Valuation Mortality Standards. Except as provided by §3.9606 of this subchapter (relating to Transitional Use of the 2001 CSO Mortality Table), the Ultimate 1980 CSO shall be the minimum mortality standard for determining reserve liabilities and nonforfeiture values for both male and female insureds for preneed life insurance policies issued on or after January 1, 2009.

§3.9604. Minimum Valuation Interest Rate Standards .

(a) The interest rates used in determining the minimum standard for valuation of preneed life insurance shall be the calendar year statutory valuation rates as defined in the Insurance Code Chapter 425 Subchapter B (Standard Valuation Law).

(b) The interest rates used in determining the minimum standard for nonforfeiture values for preneed life insurance shall be the calendar year statutory nonforfeiture interest rates as defined in the Insurance Code Chapter 1105 (Standard Nonforfeiture Law for Life Insurance).

§3.9605. Minimum Valuation Method Standards.

(a) The method used in determining the standard for the minimum valuation of reserves for preneed life insurance shall be the method defined in the Insurance Code Chapter 425 Subchapter B (Standard Valuation Law).

(b) The method used in determining the standard for the minimum nonforfeiture values for preneed life insurance shall be the method defined in the Insurance Code Chapter 1105 (Standard Nonforfeiture Law for Life Insurance).

§3.9606. Transitional Use of the 2001 CSO Mortality Table.

(a) For preneed life insurance policies or certificates issued on or after January 1, 2009, and before January 1, 2012, the 2001 CSO Mortality Table may be used as the minimum standard for reserves and minimum standard for nonforfeiture benefits for both male and female insureds in accordance with the requirements of §§3.9101 - 3.9106 of this chapter (relating to 2001 CSO Mortality Table).

(b) If a company elects to use the 2001 CSO Mortality Table as a minimum standard for any preneed life insurance policy or certificate issued on or after the effective date of this subsection and before January 1, 2012, the company shall provide, as a part of the actuarial opinion memorandum submitted in support of the company's asset adequacy analysis, an annual written notification to the domiciliary commissioner. The notification shall include:

(1) a complete list of all preneed life insurance policy and certificate forms that use the 2001 CSO Mortality Table as a minimum standard;

(2) a certification signed by the appointed actuary stating that the reserve methodology, employed by the company in determining reserves for the preneed life insurance policies or certificates issued after the effective date of this subchapter and using the 2001 CSO Mortality Table as a minimum standard, develops adequate reserves (for the purposes of this certification, the preneed life insurance policies or certificates using the 2001 CSO Mortality Table as a minimum standard cannot be aggregated with any other policies); and

(3) supporting information regarding the adequacy of reserves for preneed life insurance policies or certificates issued after the effective date of this subchapter and using the 2001 CSO Mortality Table as a minimum standard for reserves.

(c) Preneed life insurance policies or certificates issued on or after January 1, 2012, must use the Ultimate 1980 CSO in the calculation of minimum nonforfeiture values and minimum reserves.



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Last updated: 09/06/2014

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