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Life Illustrations Practice Note A PUBLIC POLICY PRACTICE NOTE Life Insurance Illustrations: Application of the NAIC Life Insurance Illustrations Model Regulation and Actuarial Standard of Practice No. 24 February 2018 Updated February 2019 Developed by the Life Illustrations Work Group of the American Academy of Actuaries A PUBLIC POLICY PRACTICE NOTE Life Insurance Illustrations: Application of the NAIC Life Insurance Illustrations Model Regulation and Actuarial Standard of Practice No. 24 February 2018 Updated February 2019 to reflect implications from the 2017 passage of the Tax Cuts and Jobs Act (Pub.L. 115-97) Developed by the Life Illustrations Work Group of the American Academy of Actuaries The American Academy of Actuaries is a 19,500-member professional association whose mission is to serve the public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States. © 2019 American Academy of Actuaries. All rights reserved. LIFE ILLUSTRATIONS PRACTICE NOTE This practice note was prepared by the Illustrations Work Group (IWG), a work group organized by the Life Products Committee under the Life Practice Council of the American Academy of Actuaries. The IWG was charged with updating this practice note to better reflect current practices actuaries are using when complying with ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation, which was revised and adopted in December 2016. This practice note incorporates and updates the previously separate document Practice Note Addendum: Compliance with Actuarial Guideline XLIX (August 2015). Due to the unique nature of indexed life products and the requirements of Actuarial Guideline XLIX, the practice note has a specific section (Section 4) addressing policies with index-based interest crediting. Section 4 of the practice notes addresses index-based interest products specifically, whereas the other sections address questions/issues that apply to all illustrated products, including indexed life products. The practice note should be read in its entirety to get a more complete view of practices. This practice note is not a promulgation of the Actuarial Standards Board, is not an actuarial standard of practice, is not binding upon any actuary, and is not a definitive statement as to what constitutes generally accepted practice in the area under discussion. Events occurring subsequent to this publication of the practice note may make the practices described in this practice note irrelevant or obsolete. This practice note represents a description of practices believed by the IWG to be commonly employed by actuaries in the United States in 2017. The purpose of the practice note is to assist actuaries in performing professional services in compliance with ASOP No. 24 and to provide information to actuaries on current or emerging practices in which their peers are engaged. Actuaries are not in any way recommended to or required to comply with this practice note or to conform their work to the practices described in this practice note. No representation of completeness is made; other approaches also may be in common use. © 2019 American Academy of Actuaries. All rights reserved. LIFE ILLUSTRATIONS PRACTICE NOTE Throughout this practice note, the authors have suggested sections of the Life Insurance Illustration Model Regulation, ASOP No. 24, and Actuarial Guideline XLIX that the authors believe may be “pertinent” to the various questions posed. Such statements are only illustrative but are not intended to indicate that the list of suggested Model, ASOP, or AG 49 provisions is exhaustive. ASOP No. 1, Section 4.3 states that: “Actuaries are responsible for determining which ASOPs apply to the task at hand.” Please note that bolded words in the “Pertinent Sections of the ASOP” refer to ASOP defined terms, and actuaries should refer to the ASOP for those definitions. Illustrations Work Group Donna Megregian, MAAA, FSA, Chairperson Gayle Donato, MAAA, FSA, Vice-Chairperson Francis Radnoti, MAAA, FSA, Vice-Chairperson Noel Abkemeier, MAAA, FSA Alan Hendren, MAAA, FSA Erik Anderson, MAAA, FSA Brian Lessing, MAAA, FSA Susan Bartholf, MAAA, FSA Cande Olsen, MAAA, FSA Delmer Borah, MAAA, FSA Linda Rodway, MAAA, FSA Paul Fischer, MAAA, FSA Mike Theisz, MAAA, FSA Laura Hanson, MAAA, FSA Carmen Walter, MAAA, FSA We welcome your comments and suggestions for additional questions to be addressed by this practice note. Please address all communications to the Academy’s life policy analyst, at [email protected]. 1850 M Street N.W., Suite 300 Washington, D.C. 20036-5805 © 2019 American Academy of Actuaries. All rights reserved. LIFE ILLUSTRATIONS PRACTICE NOTE Table of Contents Definitions........................................................................................................................... 2 1. Experience Assumptions ............................................................................................. 3 2. Investment Return Factors .......................................................................................... 9 3. Illustrated Interest Crediting Rates ........................................................................... 17 4. Index-Based Interest ................................................................................................. 21 5. Mortality ................................................................................................................... 42 6. Investment Income Allocation .................................................................................. 46 7. Expenses ................................................................................................................... 48 8. Generally Recognized Expense Table (GRET) ........................................................ 56 9. Federal Income Taxes ............................................................................................... 61 10. Disciplined Current Scale ......................................................................................... 64 11. Similar Products and Policy Forms ........................................................................... 68 12. Riders ........................................................................................................................ 70 13. Self-Support and Lapse-Support Testing .................................................................. 71 14. Policy Loans .............................................................................................................. 81 15. Two-Tiered Products ................................................................................................ 84 16. In-force Policies ........................................................................................................ 86 17. Reinsurance ............................................................................................................. 103 18. Sample Certification ............................................................................................... 108 American Academy of Actuaries www.actuary.org 1 LIFE ILLUSTRATIONS PRACTICE NOTE Definitions 1) ASOP: Actuarial Standard of Practice No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation (unless specific reference is made to another particular actuarial standard of practice). 2) Model: NAIC Life Insurance Illustrations Model Regulation (#582). 3) AG 49 or AG: Actuarial Guideline XLIX, Application of the Life Illustration Model Regulation to Policies with Indexed-Based Interest as adopted on August 29, 2016. 4) Benchmark maximum illustrated rate: The maximum illustrated rate calculated in Sections 4.A and 4.B of the AG. The benchmark maximum illustrated rate limits the illustrated rate for each account in the policy. 5) AG 49 lookback approach: The approach described in Sections 4.A and 4.B of the AG. 6) BIA: Benchmark Index Account, as defined under Section 3 of AG 49. 7) DCS: A disciplined current scale, which is defined in the Model to mean a scale of nonguaranteed elements constituting a limit on illustrations currently being illustrated by an insurer that is reasonably based on actual recent historical experience, as certified annually by an illustration actuary designated by the insurer. 8) GRET: Model, Section 1.K(1) c: A generally recognized expense table based on fully allocated expenses representing a significant portion of insurance companies and approved for use by the NAIC or by the commissioner. American Academy of Actuaries www.actuary.org 2 LIFE ILLUSTRATIONS PRACTICE NOTE 1. Experience Assumptions Q 1.1: What are the time frames contemplated by the terminology “actual recent historical experience” in Section 2.3 of the ASOP in determining appropriate experience assumptions for testing the DCS? Pertinent Sections of the ASOP: Section 2.3 Disciplined Current Scale—A scale of nonguaranteed elements, certified annually by the illustration actuary, constituting a limit on illustrations currently being illustrated by an insurer that is reasonably based on actual recent historical experience and that satisfies the requirements set forth in the Model. Section 3.4.1 Assumptions Underlying the Disciplined Current Scale – The actuary should use experience as analyzed within the insurer’s nonguaranteed element
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