California Code of Regulations › Title 10 - Investment › Chapter 5 - Insurance Commissioner › Subchapter 3 - Insurers › Article 10.2 - Annuity Nonforfeiture › Section 2523.6 - Appendices A to D

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
Appendix A
Illustrations of indexing methods dependent upon changes in
					 CMT levels
Example 1: Method -- For each calendar year, the rate is
					 set based on the monthly average from November of the preceding year. Each
					 month, a potential rate will be calculated based upon the previous month's CMT
					 average. If the potential rate differs from the actual rate by more than 25
					 basis points ("bps"), the actual rate will be updated. This continues until the
					 end of the calendar year, when the rate is automatically reset based upon the
					 monthly average from November again.
Date
5
							 Year CMT Monthly Average
Potential
							 Nonforfeiture ("NF") rate
Actual NF
							 Rate
Comments
Nov.
							 2003
3.0%
N/a
N/a
Monthly rate for Jan. 2004 --
							 1.75% (3.0% - 125 bps)
Dec.
							 2003
3.0%
N/a
N/a
Jan.
							 2004
3.1%
N/a
1.75%
Based on Nov. 2003
Feb.
							 2004
3.2%
1.85%
1.75%
No change since
(3.1% - 125 bps)
difference between actual rate and potential rate is less than 25
							 bps
March
							 2004
3.3%
1.95%
1.75%
No change since
							 difference is only 20 bps. Note that result of March CMT means April actual
							 rate will change.
April
							 2004
3.3%
2.05%
2.05%
Potential rate (2.05%)
							 differs from actual rate (1.75%) by more than 25 bps, so update actual
							 rate.
May
							 2004
3.1%
2.05%
2.05%
June
							 2004
3.1%
1.85%
2.05%
July
							 2004
2.6%
1.85%
2.05%
5 year CMT dropped this
							 month, so next month potential NF rate will drop. Since more than 25 bps
							 change, actual NF rate changes.
Aug.
							 2004
2.6%
1.35%
1.35%
Sept.
							 2004
2.6%
1.35%
1.35%
Oct.
							 2004
2.6%
1.35%
1.35%
Nov.
							 2004
2.7%
1.35%
1.35%
Monthly rate for Jan.
							 2005 -- 1.45% (2.7% - 125 bps)
Dec.
							 2004
3.0%
1.45%
1.35%
Less than 25 bps
							 change
Jan.
							 2005
2.8%
N/a
1.45%
Based on Nov. 2004
Feb.
							 2005
2.8%
1.55%
1.45%
Less than 25 bps
							 change
March
							 2005
2.8%
1.55%
1.45%
April
							 2005
2.8%
1.55%
1.45%
May
							 2005
3.25%
1.55%
1.45%
June
							 2005
3.25%
2.0%
2.0%
Update rate since more
							 than 25 bps change from potential rate to actual rate.
July
							 2005
3.25%
2.0%
2.0%
Example 2 -- relatively level interest rate
					 environment
Method -- This example starts with an initial NF rate based
					 on a single point in time. Once this initial rate is determined, it is in
					 effect until the potential rate differs from the actual rate by more than 25
					 bps. This example does not automatically set each calendar year from a set
					 month. For this example, the initial rate is set for the contract form based
					 off a one month average with a one month lag for a contract form that will
					 launch in January of 2004. March potential rate is based off of January CMT
					 rates, April potential rate is determined from February CMT rates and so on. So
					 for issues in January 2004, the rate is based on November 2003 monthly average.
					 For all issues after January 2004, the actual rate will change only if it
					 differs from the potential rate by more than 25 bps. These examples will look
					 at what happens in relatively level interest rate environment -- keeping in
					 mind that the NF rate MUST be updated so all 5 year CMT rates upon which the
					 nonforfeiture rate is based occur within 15 months from contract issue
					 date.
Date
5
							 Year CMT Monthly Average
Potential NF
							 Rate
Actual NF
							 Rate
Comments
Nov.
							 2003
3.0%
N/a
N/a
Month for base rate -- "sets
							 a starting peg in the ground"
Dec.
							 2003
3.1%
N/a
N/a
One month lag
Jan.
							 2004
3.1%
1.75%
1.75%
Initial Rate for
							 block
Feb.
							 2004
3.3%
1.85%
1.75%
March
							 2004
3.5%
1.85%
1.75%
April
							 2004
3.5%
2.05%
2.05%
May
							 2004
3.5%
2.25%
2.05%
June
							 2004
3.5%
2.25%
2.05%
July
							 2004
3.5%
2.25%
2.05%
Aug.
							 2004
3.5%
2.25%
2.05%
Sept.
							 2004
3.5%
2.25%
2.05%
Oct.
							 2004
3.5%
2.25%
2.05%
Nov.
							 2004
3.5%
2.25%
2.05%
Dec.
							 2004
3.5%
2.25%
2.05%
Jan.
							 2005
3.5%
2.25%
2.05%
Feb.
							 2005
3.5%
2.25%
2.05%
March
							 2005
3.5%
2.25%
2.05%
April
							 2005
3.5%
2.25%
2.05%
May
							 2005
3.5%
2.25%
2.25%
Since CMT rate that
							 determined actual NF rate of 2.05% occurred more than 15 months ago, the actual
							 rate MUST be updated. Given the method, this means this rate is based on March
							 CMT rate (monthly average with a one month lag -- see description in method for
							 this example).
June
							 2005
3.5%
2.25%
2.25%
July
							 2005
3.5%
2.25%
2.25%
Example 3 -- Shows what to do when 1% floor comes into
					 play
Method -- This example starts with an initial NF rate based
					 on a single point in time. The potential rate is determined based on the
					 preceding month CMT average. If the potential rate differs from the actual rate
					 by more than 25 bps, the actual rate is updated. This example shows how to
					 handle statutory minimums (use the same logic for maximums).
Date
5
							 Year CMT Monthly Average
Potential NF
							 Rate
Actual NF
							 Rate
Comments
Dec.
							 2003
2.4%
N/a
N/a
Starting month for the block
							 -- this sets the "peg in the ground"
Jan.
							 2004
2.3%
1.15%
1.15%
Initial Rate for
							 block
Feb.
							 2004
2.3%
1.05%
1.15%
March
							 2004
2.25%
1.05%
1.15%
April
							 2004
2.25%
1.0%
1.15%
May
							 2004
2.1%
1.0%
1.15%
June
							 2004
2.1%
0.85%
1.0%
The potential rate is not
							 subject to statutory minimums and maximums. It must be unbounded in order to
							 determine if a change of more than 25 bps has occurred. In this case, it has,
							 so the actual rate is updated, factoring in statutory minimums and
							 maximums.
July
							 2004
2.1%
0.85%
1.0%
Aug.
							 2004
2.1%
0.85%
1.0%
Example 4 -- real life 5 year CMT averages
Method -- Monthly average 5 year CMT with a one month lag
					 time. NF rate is held constant as long as the potential nonforfeiture rate is
					 within a range of plus or minus 50 bps from the current nonforfeiture rate.
					 Sources --
http://www.federalreserve.gov/releases/h15/current/h15.pdf
and
http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/index.html
(1)
CMT
							 Rate
(2)
Potential NF Rate
(3)
Actual NF Rate
July
							 2002
3.81
N/a
2.95
Assumed as a given
Aug.
							 2002
3.29
2.55
2.95
Sept.
							 2002
2.94
2.05
2.05
Oct.
							 2002
2.95
1.70
2.05
Nov.
							 2002
3.05
1.70
2.05
Dec.
							 2002
3.03
1.80
2.05
Jan.
							 2003
3.05
1.80
2.05
Feb.
							 2003
2.90
1.80
2.05
March
							 2003
2.78
1.65
2.05
April
							 2003
2.93
1.55
2.05
May
							 2003
2.52
1.70
2.05
June
							 2003
2.27
1.25
1.25
July
							 2003
2.87
1.00
1.25
Aug.
							 2003
3.37
1.60
1.25
(1) = monthly
				  average 5 year CMT from above-named sources
(2) = monthly average minus 125 bps -- the
				  "potential NF rate," then rounded
(3) = actual rate according to a value
				  triggered method with range of plus or minus 50 bps
Note -- the above examples are just that -- examples. There
					 are many more methods that could be used that may also be appropriate.
Appendix B
Transfer of minimum nonforfeiture amount for Section
					 2523.4 of this Article.
This example will show a simple demonstration of how the
					 minimum nonforfeiture amount is to be transferred in an equity-indexed annuity
					 ("EIA") under Section
					 2523.4. Assume that the 5 year CMT
					 is 3.75%. This results in a fixed annuity nonforfeiture rate of 2.5%. Further
					 assume that the equity-indexed benefit receives the additional 100 basis points
					 ("bps") reduction, so its nonforfeiture rate is 1.5%. This contract has a fixed
					 interest option within an EIA. The policyholder may transfer money on any
					 contract anniversary. Assuming there are transfers, the minimum nonforfeiture
					 amount is path dependent. The minimum nonforfeiture amount will roll forward
					 and get transferred back and forth at the benefit level, then added together to
					 determine the minimum nonforfeiture amount for the contract. Note that there
					 are slight rounding differences.
Year 1
Policyholder initially allocates 50% of premium each to
					 fixed and equity-indexed benefits.
EIA benefit = 50% * (100,000 * 87.5% - $50) * 1.015 =
					 44,380.88
Fixed benefit = 50% * (100,000 * 87.5% - $50) * 1.025 =
					 44,818.13
The total minimum nonforfeiture amount is 44,380.88 +
					 44,818.13 = 89,199.00.
Year 2
At the end of year 1, assume that due to market
					 performance, the
contract value
is now allocated 60% in the
					 equity-indexed benefit and 40% in the fixed benefit. The policyholder decides
					 to re-allocate his contract value so that it is again at 50% in the
					 equity-indexed benefit and 50% in the fixed interest benefit. This means that 
					 1/6 th (10%
					 out of the 60%) of the equity-indexed contract value is transferred to the
					 fixed interest contract value. Thus, 
					 1/6 th of the
					 equity-indexed nonforfeiture amount is transferred to the fixed nonforfeiture
					 amount. The results follow:
EIA benefit = 44,380.88 - 7,396.81 = 36,984.06.
Fixed benefit = 44,818.13 + 7,396.81 = 52,214.94.
Note that the total minimum nonforfeiture amount remains
					 level at 89,199.00.
Year 2 calculations are identical to year 1 with the
					 adjusted starting values. Note that since contract value is again split 50%
					 each, the contract charge is also allocated 50% to each benefit.
EIA benefit = (36,984.06 - 50% * $50)* 1.015 =
					 37,513.45
Fixed benefit = (52,214.94 - 50% * $50)* 1.025 =
					 53,494.68
Total = 91,008.13
With different starting allocations and re-allocations, all
					 the calculations operate the same, but would be adjusted accordingly.
Appendix C
Initial Actuarial Certification of Compliance
					 with California Insurance Code Chapter 1, Part 2, Division 2, Article 3B,
					 Standard Nonforfeiture Law for Individual Deferred Annuities, Sections
					 10168 to
					 10168.10
					 and California Code of Regulations Title 10, Chapter 5, Subchapter 3, Article
					 10.2, Annuity Nonforfeiture, Sections
					 2523 to
					 2523.6 for Equity Indexed
					 Annuities
For use with Equity-Indexed Annuity contract forms pursuant
					 to California Code of Regulations, Title 10, Section
					 2523.5(b)(3).
I, (state name and professional designation) am responsible
					 for evaluating compliance with California Insurance Code Chapter 1, Part 2,
					 Division 2, Article 3B, Standard Nonforfeiture Law for Individual Deferred
					 Annuities, Sections
					 10168 to
					 10168.10,
					 and California Code of Regulations, Title 10, Chapter 5, Subchapter 3, Article
					 10.2, Annuity Nonforfeiture, Sections
					 2523 to
					 2523.6 for (name of insurance
					 company). I have reviewed (identify contract form) and am familiar with
					 California Insurance Code Sections
					 10168 to
					 10168.10
					 and California Code of Regulations, Title 10, Sections
					 2523 to
					 2523.6 as they pertain to
					 equity-indexed annuities. I have also reviewed the methodology that will be
					 used in calculating and setting assumptions for the additional reduction in
					 nonforfeiture rate for equity-indexed annuities. Based on my review, I certify
					 that the methodology used for (identify contract form) meets the minimum
					 requirements of California Insurance Code Sections
					 10168 to
					 10168.10 and California Code of
					 Regulations, Title 10, Sections
					 2523 to
					 2523.6.
______________________________
(Name of actuary)
______________________________
(Signature of actuary)
______________________________
(Date of certification)
Appendix D
Actuarial Certification of Compliance with
					 California Code of Regulations Title 10, Chapter 5, Subchapter 3, Article 10.2,
					 Annuity Nonforfeiture, Sections
					 2523 to
					 2523.6 for Equity Indexed
					 Annuities
For use in certifying compliance with California Code of
					 Regulations Title 10, Chapter 5, Subchapter 3, Article 10.2, Annuity
					 Nonforfeiture, Sections
					 2523 to
					 2523.6.
I, (state name and professional designation) am responsible
					 for evaluating compliance with California Insurance Code Chapter 1, Part 2,
					 Division 2, Article 3B, Standard Nonforfeiture Law for Individual Deferred
					 Annuities, Sections
					 10168 to
					 10168.10 and California Code of
					 Regulations, Title 10, Chapter 5, Subchapter 3, Article 10.2, Annuity
					 Nonforfeiture, Sections
					 2523 to
					 2523.6 for (name of insurance
					 company). I am familiar with California Insurance Code Sections
					 10168 to
					 10168.10 and California Code of
					 Regulations, Title 10, Sections
					 2523 to
					 2523.6 as they pertain to equity
					 indexed annuities. I have reviewed the equity index features of (identify all
					 contract forms covered by this certification) for ongoing compliance with the
					 requirements of California Code of Regulations, Title 10, Sections
					 2523 to
					 2523.6 that deal with the
					 additional reduction relating to equity-indexed annuities. I have reviewed the
					 assumptions used to support the additional reduction that is permitted to be
					 used with equity-indexed annuities.
Based on my review, I certify that the additional reduction
					 used to determine nonforfeiture values provided under the policy forms
					 identified above met the requirements of California Code of Regulations, Title
					 10, Sections
					 2523 to
					 2523.6 as it relates to
					 equity-indexed annuities in force as of December 31, (previous calendar
					 year).
______________________________
(Name of actuary)
______________________________
(Signature of actuary)
______________________________
(Date of certification)
1. New
					 section filed 12-19-2012; operative 12-19-2012 pursuant to Government Code
					 section
					 11343.4
					 (Register 2012, No. 51).