PENNSYLVANIA INSURANCE DEPARTMENT NO. 1994-14
DATE: October 3, 1994
SUBJECT: Separate Account Modified Guaranteed Life Insurance
TO: The Presidents of All Life Insurance Companies and Fraternal Benefit Societies Authorized To Write Business in the Commonwealth of Pennsylvania
FROM: Gregory Martino, Deputy Insurance Commissioner
The purpose of this notice is to inform companies that the Pennsylvania Insurance Department will now consider for approval separate account modified guaranteed life insurance. Such insurance will be considered for approval as a special form of variable life insurance. When providing separate account modified guaranteed life insurance, companies shall comply with applicable laws, regulations, guidelines, rules and the requirements of this notice.
DEFINITIONS
A separate account modified guaranteed life insurance policy is an individual policy of life insurance, the underlying assets of which are held in a separate account, and the values of which are guaranteed if held for guarantee periods specified in the policy. The policy provides for adjusted cash surrender values that are based on a market value adjustment formula if held for shorter periods. The formula may, or may not, reflect the value of assets held in the separate account. The assets underlying the policy shall be in a separate account during the guarantee period or periods when the policy owner can surrender the policy for cash.
Adjusted cash surrender values are the cash values less any surrender charge and after application of a market value adjustment.
Cash surrender values are the cash values less any surrender charge and prior to the application of any market value adjustment.
Cash values are the cash values prior to the application of any surrender charge and a market value adjustment.
Company is a life insurance company or fraternal benefit society.
Excess interest is interest that is not guaranteed and is over and above interest at any guaranteed rate in the policy including any guaranteed rate in addition to a minimum guaranteed rate.
Interest credits are all interest that is credited to the policy.
Net adjusted cash surrender values are the cash values less any surrender charge and after the application of a market value adjustment, less any outstanding indebtedness.
Net cash surrender values are the cash values less any surrender charge and prior to the application of a market value adjustment, less any outstanding indebtedness.
Prominent type is, for example, all capital letters, contrasting color, underlined or otherwise differentiated from the other type in the form.
Separate Account is a separate account established pursuant to Section 406.2 of The Insurance Department Act or pursuant to the corresponding section of the Insurance Laws of the state of domicile of a foreign or alien insurer.
AUTHORITY OF INSURER TO ISSUE SEPARATE ACCOUNT MODIFIED GUARANTEED LIFE INSURANCE
LICENSING AND APPROVAL TO DO BUSINESS
A company may not solicit or issue in this Commonwealth a separate account modified guaranteed life insurance policy unless each of the following conditions have been met:
- The company is licensed to do a life and annuities business in this Commonwealth.
- The company has obtained the written approval of the Commissioner for the issuance of separate account (variable life) policies in this Commonwealth.
SALES MATERIAL
A company authorized to transact separate account modified guaranteed life insurance business in this Commonwealth shall not use any sales material, advertising material, or descriptive literature or other materials of any kind in connection with its separate account modified guaranteed life insurance business in this Commonwealth which is false, misleading, deceptive or inaccurate.
Any sales material, advertising material, descriptive literature or other materials of any kind shall clearly disclose that the insurance coverage being solicited is life insurance coverage.
The sales material shall clearly disclose that cash surrender values under the policy may increase or decrease in accordance with a market value adjustment, prior to a date or dates specified in the policy. If the sales material illustrates an increase in values due to a market value adjustment, it shall also illustrate a decrease in values due to a market value adjustment.
Before any company solicits or issues any separate account modified guaranteed life insurance policy in this Commonwealth, the Commissioner may require, the filing of a copy of any prospectus or other sales material to be used in connection with the marketing of that insurer's separate account modified guaranteed life insurance policy.
REPORTS TO COMMISSION
Any company authorized to transact the business of separate account modified guaranteed life insurance in this Commonwealth shall submit to the Commissioner, in addition to other materials which may be required by this notice or applicable laws, regulations, guidelines or rules, the following.
- A separate account annual statement, which shall include the business of its separate account, modified guaranteed life insurance.
- Prior to use in the Commonwealth, the information required by the Information Furnished to Applicants section of this notice.
- Such additional information concerning its separate account modified guaranteed life insurance operations or separate accounts, as the Commissioner shall deem necessary.
AUTHORITY OF COMMISSIONER TO DISAPPROVE
Any material required to be filed with and approved by the Commissioner shall be subject to disapproval if at any time it is found by the Commissioner not to comply with the standards established by this notice.
FILING REQUIREMENTS
The filing requirements applicable to separate account modified guaranteed life insurance shall be those filing requirements otherwise applicable under Pennsylvania insurance laws, regulations, guidelines (including the Department's Guidelines for the Review of Universal Life Insurance) and rules with respect to individual life insurance policy form filings to the extent appropriate with the following additions.
ACTUARIAL MEMORANDUM
The company shall submit an actuarial statement that the market value adjustment formula provides reasonable equity to both the policy owner and the company. The company shall submit an actuarial memorandum indicating the basis for the market value adjustment formula and the basis for the statement that the formula provides reasonable equity to the policy owner and the company.
If the market value adjustment provision refers to an index outside the control of the company, the actuarial memorandum shall indicate the reasonableness of the index. Any request for approval of the substitution of an index outside the control of the company for another such index shall include an actuarial memorandum indicating the reasonableness of the substitute index.
A modification of the market value adjustment formula or any rates or factors used in the formula is subject to the Department's approval. Any modification shall be applied only to new issues, except if the rate or factor used in the formula is no longer available. If the market value adjustment formula is revised, the request for approval shall include an actuarial memorandum submitted in accordance with the requirements of this section of the notice. If any rates or factors used in the formula are revised, the request for approval shall include an actuarial memorandum indicating the reasonableness of the revised rate or factor.
The company shall file all surrender charges and guaranteed interest rates for each of the currently available guarantee periods. Any subsequent additional guarantee periods and the guaranteed interest rates and surrender charges for such periods or any revisions in previously filed surrender charges must be filed for approval. For flexible premium policies, guaranteed interest rates shall never be less than 3%.
The company shall submit a demonstration that the cash surrender values and nonforfeiture benefits comply with the minimum standards of 410A of the Insurance Company Law.
The actuarial memorandum shall include the methodology, including a numerical example, of the calculation of the reserves.
SUBMISSION LETTER
The submission letter of a separate account modified guaranteed life insurance filing shall disclose the following.
- The form being filed provides separate account modified guaranteed life insurance coverage.
- The underlying assets of the policy are held in a separate account during the period or periods when the policy owner can surrender the policy for cash.
POLICY REQUIREMENTS
All of the provisions of Section 410 and Section 410A of The Insurance Company Law, the Department's Universal Life Insurance Guidelines, and other applicable sections of the Pennsylvania insurance laws, regulations, guidelines and rules apply to separate account modified guaranteed life insurance with the following additions, modifications and notes.
ADDITIONS
1) The cash surrender values and nonforfeiture benefits shall comply with the minimum standards of Section 410A of the Insurance Company Law.
2) The policy shall contain sufficient information to determine the cash surrender values and nonforfeiture benefits.
3) The death benefit or the determination of the death benefit shall be unaffected by a market value adjustment. Any supplemental benefit based on the policy death benefit, such as an accidental death or accelerated death benefit, shall be unaffected by a market value adjustment.
4) The complete market value adjustment formula, used in determining adjusted cash surrender values, shall be stated and guaranteed in the policy and shall be applicable for both upward and downward adjustments.
5) For fixed premium policies, the policy shall contain a 20 year table of cash surrender values and nonforfeiture benefits. The table shall be based on the interest rate or rates and maximum expense and surrender charges guaranteed at issue. If the policy allows for alternative interest rate guarantee periods after the initial interest rate guarantee period, the table shall be based on the default renewal periods provided in the policy. The table shall contain a statement to the effect that the cash surrender values illustrated are subject to a market value adjustment.
6) If (i) surrender charges are a function of a time period other than the period since issue of the policy, and (ii) the schedule of surrender charges for all possible interest rate guarantee periods is not shown in the policy, the policy shall disclose in a prominent location on the table of values page that the values reflect the surrender charges shown on page _ of the policy, that any new schedule of surrender charges not shown in the policy will be furnished to the policy owner prior to the date it becomes effective and that the values beginning the __ year will be reduced by the application of the additional surrender charges.
7) If the market value adjustment provision refers to an index outside the control of the company, the market value adjustment provision shall provide for substitution if the index is discontinued. The provision shall provide that such substitution is subject to the Department's approval. The request for approval shall include an actuarial memorandum indicating the reasonableness of the substitute index.
8) A policy may provide that the interest credited during a guarantee period may exceed the interest rate guaranteed for that period. The interest credited shall not exceed by more than 1/2 of it the guaranteed interest rate. Guaranteed interest credits in any market value adjustment guarantee period shall be reasonably related to the average guaranteed interest credits over that period of time.
9) A policy may provide for guarantee periods of different specified lengths of time. At the end of the initial guarantee period, the policy may provide for subsequent guarantee period(s) of different specified lengths of time. If the policy does not disclose the available initial and subsequent guarantee periods of time, the company shall supply to the Department certification(s) as to the guarantee periods of time available at issue of the policy and subsequently available. The Department shall be notified of any changes in the certified guarantee periods. The policy shall disclose that any guarantee period shall not exceed 10 years. If the annuitization value is subject to a market value adjustment, the contract shall also disclose that a guarantee period shall not extend more than 6 months beyond the annuitization date in effect at the time the guarantee period is elected.
If at the end of any guarantee period the policy provides for subsequent guarantee periods of different specified lengths of time, the policy owner shall have the option of electing a guarantee period for any of the available lengths of time. The policy shall provide for a default option if the policy owner does not elect a guarantee period and shall provide that the default option shall not extend the guarantee period more than 6 months beyond the annuitization date in effect at the time the guarantee period is elected.
10) The cover page shall contain a statement that cash surrender values may increase or decrease in accordance with a market value adjustment prior to a date or dates specified in the policy. The statement shall appear in a prominent location in prominent type on the cover page.
11) The brief description of the policy shall disclose that the coverage provided is life insurance coverage.
12) A policy shall provide that the policy owner shall be sent, without charge, at least annually a report, which will serve to keep such policy owner advised of the status of the policy.
13) A policy issued on a participation basis shall provide for the payment of dividend amounts in cash. In addition, a policy may offer the following additional dividend options.
A) The amount of the dividend may be credited against premium payments.
B) The amount of the dividend may be applied to provide amounts of paid-up insurance with or without a market value adjustment.
C) The amount of the dividend may be deposited in the general account at a specified minimum rate of interest.
D) The amount of the dividend may be applied to provide paid-up amounts of one-year term insurance.
E) The amount of the dividend may be deposited in the separate account at a specified minimum rate of interest subject to a market value adjustment.
14) A supplemental insurance benefit providing for cash surrender values may provide for a market value adjustment, subject to the requirements of this act.
MODIFICATIONS
Section 410(h) of The Insurance Company Law is modified in the following respects:
A) The amount available as a policy loan may be restricted to an amount equal to at least 75% of the policy's adjusted cash surrender value.
B) For fixed premium policies, whenever the indebtedness exceeds the adjusted cash surrender value, the company shall give notice of intent to cancel the policy if the excess indebtedness is not repaid within 31 days after the date of mailing of such notice.
C) The policy loan provision shall be constructed so that separate account modified guaranteed life insurance policy owners who have not exercised such provisions are not disadvantaged by the exercise thereof by other separate account modified guaranteed life insurance policy owners.
D) Amounts paid to the policy owners upon the exercise of any policy loan provision shall be withdrawn from the separate account and shall be returned to the separate account upon repayment.
A provision allowing policy owners to make partial withdrawals may be included. The partial withdrawal provision shall be constructed so that separate account modified guaranteed life insurance policy owners who have not exercised the provision are not disadvantaged by the exercise thereof by other separate account modified guaranteed life insurance policy owners.
NOTE
1) Section 410D of the Insurance Company Law applies as written to a separate account modified guaranteed life insurance policy. The policy owner shall receive a full refund of the premium payments made if the policy is returned within 10 days of receipt of the policy. A market value adjustment may not be applied to the premiums paid.
2) For compliance with Article VII, Section 6 of the Department's Guidelines for the Review of Universal Life Insurance, for flexible premium separate account modified guaranteed life insurance policies, lapse shall occur on the date on which the net adjusted cash surrender values or another value defined in the policy first equal zero.
RESERVE LIABILITIES
Reserves in the separate account for separate account modified guaranteed life insurance policies shall not be less than the reserves established in accordance with the methods and valuation standards defined in Section 301 and Section 303 of the Insurance Department Act with the following exception.
1) The reference interest rate shall equal either 1) the annual market yield to maturity of the assets in the separate account on the date of valuation; or 2) the Moody's Corporate Bond Yield Average Monthly Average Corporates, as published by Moody's Investors Service, Inc., for the month ending on or immediately preceding the date of valuation.
2) The weighting factors defined in Section 301(c)(2)(C)(i) are modified as follows.
Duration Weighting Factors
(years)
10 or less . 90
More than 10, but not more than 20 .85
More than 20 .75
In order for a company to change the method of determining the reference interest rate from method 1) to method 2) or vice versa, the company shall obtain approval from the Insurance Commissioner of Pennsylvania.
As a minimum, the separate account reserve shall be no less than the aggregate adjusted cash surrender value.
A separate statement of actuarial opinion is required on the adequacy of the separate account reserves based on an asset adequacy analysis. In preparing the statement of actuarial opinion, the appointed actuary shall consider the market value adjustment formula, the interest guarantees and the degree to which projected cash flow of assets and liabilities are matched. If the reference interest rate is determined on aforementioned method 2), the appointed actuary shall also consider the difference between the internal rate of return and the reference interest rate.
SEPARATE ACCOUNT
The following requirements apply to the establishment and administration of modified guaranteed life insurance separate accounts by any domestic company.
ESTABLISHMENT AND ADMINISTRATION OF SEPARATE ACCOUNTS
Any domestic company issuing separate account modified guaranteed life insurance shall establish one or more separate accounts pursuant to Section 406.2 of The Insurance Company Law.
If no law or other regulation provides for the custody of separate account assets and if the company is not the custodian of the separate account assets, contracts for custody of the assets shall be in writing and the Commissioner has authority to review and approve both the terms of the policy and the proposed custodian prior to the transfer of custody.
The company may not, without the prior written approval of the Commissioner, employ in a material connection with the handling of separate account assets a person who:
1) Within the last 10 years has been convicted of a felony or a misdemeanor arising out of the conduct of the person involving embezzlement, fraudulent conversion or misappropriation of funds or securities or involving violation of 18 U.S.C. §§ 1341, 1342 or 1343.
2) Within the last 10 years has been found by any state regulatory authority to have violated or has acknowledged violation of any state insurance law involving fraud, deceit or knowing misrepresentation.
3) Within the last 10 years has been found by Federal or State regulatory authorities to have violated or has acknowledged violation of Federal or State securities laws involving fraud, deceit or knowing misrepresentation.
A person with access to the cash, securities or other assets of the separate account shall be under bond in an amount of not less than $100,000.
VALUATION OF SEPARATE ACCOUNT ASSETS
Investments of the separate account shall be valued at their market value on the date of valuation or at amortized cost if it approximates market value.
AMOUNTS IN THE SEPARATE ACCOUNT
The company shall maintain in each separate account assets with a market value, or at amortized cost if it approximates market value, at least equal to the valuation reserves and other policy liabilities with respect to such account.
INVESTMENTS
ASSETS
Assets held in any separate account relating to separate account modified guaranteed life insurance shall be limited to cash, government securities or other securities with a readily ascertainable market value.
ASSET TRANSFERS
Sales, exchanges or other transfers of assets may be made by a company between its separate accounts or between another investment account and one or more of its separate accounts.
WITHDRAWAL ADEQUACY
The separate account shall have sufficient net investment income and readily marketable assets to meet anticipated withdrawals under policies funded by the account.
INVESTMENT PLAN
A domestic company's formal investment plan, as required by Section 404.1(c) of the Insurance Company Law, shall include a discussion of the company's investment strategy for its modified guaranteed life products.
INFORMATION FURNISHED TO APPLICANTS
A company soliciting or issuing in this Commonwealth any separate account modified guaranteed life insurance policy shall deliver to the applicant for the policy coincident with or prior to the execution of the application a summary explanation of the principal features of the policy. The summary explanation shall be in non-technical terms and shall explain the principal features of the policy, including a description of the manner in which the cash surrender values will be affected by the market value adjustment and the factors which affect such variation. The explanation shall include a notice of the policy provision concerning a right to return the policy. The summary explanation may be contained in the disclosure statement required by Subchapter A of Chapter 83, Title 31, Pa. Code.
The requirements of this section shall be deemed to have been satisfied to the extent that a disclosure containing information required by this section is delivered, in the form of one of the following.
1) A prospectus included in a registration statement, which satisfies the requirements of the Securities and Exchange Commission.
2) The information and reports required by the Employee Retirement Income Security Act of 1974, if the policies are exempted from the registration requirements of the Securities Act of 1933.
3) A summary explanation that provides the information required by this section
APPLICATIONS
Any application for a separate account modified guaranteed life insurance policy shall contain, immediately preceding the signature line, a statement that cash surrender values under the policy may increase or decrease in accordance with a market value adjustment prior to a date or dates specified in the policy. The statement must appear in prominent type.
REPORTS TO POLICY OWNERS
Any company issuing in this Commonwealth separate account modified guaranteed life insurance policies shall provide each separate account modified guaranteed life insurance policy owner, without charge, at least annually, a report which will keep such policy owner advised of the status of the policy. The end of the current report period shall be not more than 2 months previous to the date of the mailing of the report. Such report shall include the following, if applicable:
1) The beginning date and ending date of the current report period.
2) The cash values at the end of the previous report period and at the end of the current report period.
3) The adjusted cash surrender values at the end of the previous report period and at the end of the current report period.
4) The total amounts which have been credited or debited to the cash values during the current report period, identifying each by type (e.g., interest, mortality, expense, partial withdrawals, premiums and riders).
5) The current death benefit and current net death benefit at the end of the current report period on each life covered by the policy. In lieu of a net death benefit disclosure, the company shall disclose that the outstanding loans shall be deducted from the current death benefit.
6) The net adjusted cash surrender values of the policy as of the end of the current report period.
7) The amount of outstanding loans, if any, as of the end of the current report period.
8) A disclosure that the cash values are prior to the application of any surrender charge or market value adjustment.
9) A disclosure of the surrender charge and market value adjustment used to determine the adjusted cash surrender values.
10) A disclosure that, in accordance with the market value adjustment formula, the adjusted cash surrender values may increase or decrease prior to the next annual report. If any guarantee period would expire prior to the next annual report, a disclosure as to when a market value adjustment would not be applied.
11) For a fixed premium policy, if assuming guaranteed interest, mortality and expense loads and continued scheduled premium payments, a policy's net adjusted cash surrender values or other values defined in the policy are such that they would not maintain insurance in force until the end of the next reporting period, a notice to this effect shall be included in the report.
12) For a flexible premium policy, if assuming guaranteed interest, mortality and expense loads, a policy's net adjusted cash surrender values or other values defined in the policy will not maintain insurance in force until the end of the next reporting period unless further premium payments are made, a notice to this effect shall be included in the report.
As an alternative to the reporting required by 3) and 9), any such report may provide cash surrender values with a prominent type disclosure that all values are prior to the application of the market value adjustment formula. In addition, the alternative report shall state that the adjusted cash surrender values are available upon request. The alternative report shall supply instructions as to how to obtain this information. One of the methods of obtaining the information is by use of a toll free company number. Any company using this alternative reporting shall make such information available to the policy owner within two business days of the inquiry at no charge to the policy owner.
ILLUSTRATIVE REPORT
If an illustrative report is provided to a policy owner, the report shall disclose in prominent print in close proximity to the projected cash values that the projected cash values are subject to a surrender charge and a market value adjustment as provided in the policy.
FOREIGN COMPANIES
If the law or regulation in the place of domicile of a foreign company provides a degree of protection to the policy owners and the public which is substantially similar to that provided by this notice, the Commissioner, to the extent the Commissioner deems it appropriate, may consider compliance with such law or regulation as compliance with this notice.
AUTHORIZATION OF AGENTS
No person, corporation, partnership or other legal entity may sell or offer for sale in this Commonwealth any separate account modified guaranteed life insurance policy unless licensed to sell life insurance and annuities in this Commonwealth.
RESERVATION OF RIGHTS
The Department reserves the right at any time to impose standards for separate account modified guaranteed life insurance in addition to the standards established by this notice.