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53108 VM-26

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53108 VM-26

    Attachment Eighteen

    Life and Health Actuarial Task Force

    12/3-4/09

    Credit Life and Disability Reserve Requirements -VM-26

    Draft: 5/31/08

    Adopted by Life and Health Actuarial Task Force, 12/4/09

The NAIC solicits comments on this draft. Comments should be sent to John Engelhardt, NAIC, at JEngelha@naic.org.

    VM-26: CREDIT LIFE AND DISABILITY RESERVE REQUIREMENTS

Table of Contents

Section 1. Purpose

     Definitions

    Section 2. Minimum Standard for Valuation of Credit Life Insurance

    A. Claim Reserves

    B. Contract Reserves

    Section 3. Minimum Standard for Valuation of Credit Disability Insurance

    A. Claim Reserves

    B. Contract Reserves

    Section 4. Additional Reserves for Credit Insurance

    Section 5. Reinsurance

Section 1. Purpose

A. The purpose of this section is to define the minimum valuation standard for credit life insurance and credit disability

    insurance.

B. The method described in this section shall constitute the Commissioners Reserve Valuation Method (CRVM) for

    contracts for which this section is applicable.

Definitions

    A. The term “2001 CSO Mortality Table” means that mortality table, 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 (2nd Quarter 2002). 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.

B. The term “2001 CSO Male Composite Ultimate Mortality Table” means a specific mortality table, included in the

    2001 CSO Mortality Table which contains mortality rates that are composites of smokers and nonsmokers on male

    lives after the select period, including both the age-nearest-birthday and age-last-birthday bases of the mortality

    tables.

C. The term “claim reserve” means a liability established with respect to any incurred contractual benefits not yet paid

    as of the valuation date.

D. The term “company” means a licensed insurer.

E. The term “contract reserve” means a liability established with respect to inforce contracts equal to the excess of the

    present value of claims expected to be incurred after a valuation date over the present value of future valuation net

    premiums.

F. The term “date of disablement” means the earliest date the insured is considered disabled under the definition of

    disability in the contract. Normally this date will coincide with the start of any elimination period.

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    Credit Life and Disability Reserve Requirements -VM-26

    Attachment Eighteen

    Life and Health Actuarial Task Force

    12/3-4/09

G. The term “elimination period” means a specified number of days, weeks, or months starting at the beginning of each

    period of loss, during which no benefits are payable.

H. The term “gross premium” means the amount of premium charged by the company.

    I. The term net premium refund liability means the amount of money the insurance company owes to an insured

    when the insured cancels their loan or insurance prior to its scheduled termination date, net of amounts that the

    insurer will recover from other parties.

J. The term “unearned premium reserve” means that portion of the premium paid or due to the company which is

    applicable to the period of coverage extending beyond the valuation date. Thus, if an annual premium of $120 was

    paid on November 1, $20 would be earned as of December 31 and the remaining $100 would be unearned. The

    unearned premium reserve could be on a gross basis as in this example or on a valuation net premium basis.

Section 2. Minimum Standard for Valuation of Credit Life Insurance

A Claim Reserves

    1. A company shall hold claim reserves for all incurred but unpaid claims on all credit life insurance policies

    as of the valuation date, and shall hold appropriate claim expense reserves for the estimated expense of

    settlement of all incurred but unpaid claims.

    2. A company shall test all claim reserves for prior valuation years for adequacy and reasonableness including

    consideration of any residual unpaid liability.

    3. Assumptions used for setting credit life claim reserves shall be based on the companys experience, if such

    experience is credible, or upon other assumptions designed to place a sound value on the liabilities.

    Assumptions should be adjusted regularly to maintain reasonable margins.

    4. A generally accepted actuarial reserving method or other reasonable method or a combination of methods

    shall be used to estimate credit life insurance claim liabilities. The methods used for estimating liabilities

    generally may be aggregate methods, or various reserve items may be separately valued. Approximations

    based on groupings and averages may also be employed. Adequacy of the claim reserves must be

    determined in the aggregate.

B Contract Reserves

    1. If separate benefits are included in a credit life insurance contract, the reserve for each benefit must comply

    with these requirements.

    2. Reserves must be based on actuarial assumptions that 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.

    3. Reserves must be established for all unmatured contractual obligations, which have not matured, of the

    company arising out of the provisions of the credit life insurance contract and must be computed in

    accordance with presently accepted Actuarial Standards of Practice.

    4. The reserve method for use in determining the minimum standard for valuation of credit life insurance is

    the Commissioners Reserve Valuation Method specified in section VM-5 of this valuation manual. If

    benefits are guaranteed for less than one year, the method produces a reserve equal to the mortality cost

    from the valuation date to the end of the coverage period.

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    Life and Health Actuarial Task Force

    12/3-4/09

    5. The interest rates for use in determining the minimum standard for valuation of credit life insurance are the

    calendar year statutory valuation interest rates specified in section VM-5 of this valuation manual.

6. The minimum mortality assumptions for use in determining the minimum standard for valuation of credit

    life insurance for both male and female insured individuals is the 2001 CSO Male Composite Ultimate

    Mortality Table. If a credit life insurance policy or certificate insures two lives, the minimum standard shall

    be twice the mortality in the 2001 CSO Male Composite Ultimate Mortality Table based on the age of the

    older insured.

7. Use of approximations are permitted, such as those involving age groupings; average amounts of indemnity;

    grouping of similar contract forms; the computation of the reserve for one contract benefit as a percentage

    of, or by other relation to, the aggregate contract reserves exclusive of the benefit or benefits so valued; and

    the use of group methods and approximate averages for fractions of a year or otherwise.

    Section 3. Minimum Standard for Valuation of Credit Disability Insurance

    A. Claim Reserves

1. A company shall hold claim reserves for all incurred but unpaid claims on all credit disability insurance

    policies, which is measured as the present value of future benefits or amounts not yet due as of the

    valuation date that are expected to arise under claims that have been incurred as of the valuation date, and

    shall hold appropriate claim expense reserves for the estimated expense of settlement of all incurred but

    unpaid claims.

2. A company shall test all claim reserves for prior valuation years for adequacy and reasonableness using

    claim runoff schedules in accordance with the statutory financial statement including consideration of any

    residual unpaid liability.

3. The maximum interest rate for use in determining the minimum standard for valuation of credit disability

    insurance claim reserves is the maximum rate allowed in section VM-5 of this valuation manual in the

    valuation of whole life insurance issued on the date the credit disability claim was incurred.

4. The morbidity assumption for use in determining the minimum standard for valuation of credit disability

    insurance shall be based on the company’s experience, if such experience is credible, or upon other

    assumptions designed to place a sound value on the liabilities. For claim liabilities and claim reserves to

    reflect “sound values” and/or reasonable margins, valuation tables based on credible experience should be

    adjusted regularly to maintain reasonable margins.

5. A generally accepted actuarial reserving method or other reasonable method or a combination of methods

    shall be used to estimate credit disability insurance claim liabilities. The methods used for estimating

    liabilities generally may be aggregate methods, or various reserve items may be separately valued.

    Approximations based on groupings and averages may also be employed. Adequacy of the claim reserves

    must be determined in the aggregate.

    B. Contract Reserves

1. Contract reserves are required for all contractual obligations, which have not matured, of a company arising

    out of the provisions of a credit disability insurance contract consistent with claim reserves and unearned

    premium reserve, if any, held for their respective obligations.

2. The methods and procedures for determining contract reserves for credit disability insurance must be

    consistent with the methods and procedures for claim reserves for any contract, unless appropriate

    adjustment is made to assure provision for the aggregate liability. The date of incurral must be the same in

    both determinations.

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    Life and Health Actuarial Task Force

    12/3-4/09

    3. The morbidity assumptions for use in determining the minimum standard for valuation of single premium

    credit disability insurance contract reserves are:

    a. For plans having less than a fifteen day elimination period, the 1985 Commissioners Individual

    Disability Table A (85CIDA) with claim incidence rates increased by twelve percent (12%).

    b. For plans having greater than a fourteen-day elimination period, the 85CIDA for a fourteen-day

    elimination period with claim incidence rates increased by twelve percent (12%).

4. The minimum contract reserve for credit disability insurance, other than single premium credit disability

    insurance, is the gross pro-rata unearned premium reserve.

5. The maximum interest rate for use in determining the minimum standard for valuation of single premium

    credit disability insurance contract reserves is the maximum rate allowed in section VM-5 of this valuation

    manual in the valuation of whole life insurance issued on the same date as the credit disability insurance

    contract.

6. A company shall not use a separate mortality assumption for valuation of single premium credit disability

    insurance contract reserves since premium is refunded upon death of the insured.

7. Use of approximations are permitted, such as those involving age groupings, average amounts of indemnity,

    grouping of similar contract forms; the computation of the reserve for one contract benefit as a percentage

    of, or by other relation to, the aggregate contract reserves exclusive of the benefit or benefits so valued; and

    the use of group methods and approximate averages for fractions of a year or otherwise.

8. Annually, a company shall conduct a review of prospective contract liabilities on contracts valued by

    tabular reserves, to determine the continuing adequacy and reasonableness of the tabular reserves. The

    company shall make appropriate increments to such tabular reserves if such tests indicate that the basis of

    such reserves is not adequate.

    Section 4. Additional Reserves for Credit Insurance

    A. For all credit life and disability contracts in the aggregate, if the net premium refund liability exceeds the aggregate

    recorded contract reserve, the company must establish an additional reserve liability. This additional liability is

    equal to the excess of the net refund liability over the contract reserve recorded. The net refund liability may include

    consideration of commission, premium tax, and other expenses recoverable. For example, the insurance company

    may recover amounts from the state for premium taxes and from producers for pre-paid commissions. In all cases,

    such amounts shall be evaluated for probability of recovery.

    Section 5. Reinsurance

    A. Increases to, or credits against, reserves carried, arising because of reinsurance assumed or reinsurance ceded, must

    be determined in a manner consistent with these minimum reserve standards and with all applicable provisions of

    the reinsurance contracts that affect the company’s liabilities. W:\Dec09\TF\LHA\VM-26-Credit-Life-ED4.doc

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