Conn. Agencies Regs. § 38a-459-8 - Reserves for synthetic guaranteed investment contracts
(a) An insurance company, at all times, shall
hold minimum reserves in the general account or one or more separate accounts,
as appropriate, equal to the excess, if any, of the value of the guaranteed
contract liabilities, determined in accordance with subsections (f) and (g) of
this section, over the market value of the assets in the segregated portfolio
less the deductions provided for in subsection (b) of this section. The reserve
requirements of this section shall be applied on a contract by contract
basis.
(b) In determining
compliance with the asset maintenance requirement and the reserve for
guaranteed contract liabilities, the insurance company shall deduct a
percentage of the market value of an asset as follows:
(1)
(A) For
debt instruments, the percentage shall be the National Association of Insurance
Commissioners asset valuation reserve "reserve objective factor," as set forth
in the instructions for the National Association of Insurance Commissioners
Annual and Quarterly Statement Blank, but the factor shall be increased by 50
percent for the purpose of this calculation if the difference in durations of
the assets and liabilities is more than 184 days.
(B) Notwithstanding the provisions of
subparagraph (A) of this subdivision, in the event that, under the terms of a
synthetic guaranteed investment contract, the asset default for debt
instruments is borne solely by the contract holder, there shall be no asset
valuation reserve percentage deduction from the market value of an asset, for
purposes of complying with the asset maintenance requirement and the reserve
for guaranteed contract liabilities specified in subsection (a) of this
section.
(2) For assets
that are not debt instruments, the percentage shall be the National Association
of Insurance Commissioners asset valuation reserve "maximum reserve factor," as
set forth in the instructions for the National Association of Insurance
Commissioners Annual and Quarterly Statement Blank.
(c) To the extent that guaranteed contract
liabilities are denominated in the currency of a foreign country and are
supported by segregated portfolio assets denominated in the currency of the
foreign country, the percentage deduction for these assets shall be the
percentage deduction for a substantially similar investment denominated in the
currency of the United States.
(d)
To the extent that guaranteed contract liabilities are denominated in the
currency of the United States and are supported by segregated portfolio assets
denominated in the currency of a foreign country, and to the extent that
guaranteed contract liabilities are denominated in the currency of a foreign
country and are supported by segregated portfolio assets denominated in the
currency of the United States, the deduction for debt instruments under
subsection (b) of this section shall be increased by 15 percent of the market
value of the assets unless the currency exchange risk on the assets has been
adequately hedged, in which case the percentage deduction under subsection (b)
of this section shall be increased by one-half percent. No guaranteed contract
liabilities denominated in the currency of a foreign country shall be supported
by segregated portfolio assets denominated in the currency of another foreign
country without the approval of the insurance commissioner. For purposes of
this section, the currency exchange risk on an asset is deemed adequately
hedged if:
(1) It is an obligation of
(A) A jurisdiction rated in one of the two
highest rating categories by an independent, nationally-recognized United
States rating agency acceptable to the insurance commissioner;
(B) Any political subdivision or other
governmental unit of such a jurisdiction, or any agency or instrumentality of a
jurisdiction, political subdivision, or other governmental unit; or
(C) An institution that is organized under
the laws of any such jurisdiction; and
(2) The principal amount of the obligation
and scheduled interest payments on the obligation are at all times hedged
against the United States dollar pursuant to contracts or agreements that are:
(A) Issued by or traded on a securities
exchange or board of trade regulated under the laws of the United States,
Canada, or a province of Canada;
(B) Entered into with a United States banking
institution that has assets in excess of $5 billion and has obligations
outstanding, or has a parent corporation that has obligations outstanding,
rated in one of the two highest rating categories by an independent,
nationally-recognized United States rating agency, or with a broker-dealer
registered with the Securities and Exchange Commission that has net capital in
excess of $250 million; or
(C)
Entered into with any other banking institution that has assets in excess of $5
billion and that has obligations outstanding, or has a parent corporation that
has obligations outstanding, rated in one of the two highest rating categories
by an independent, nationally-recognized United States rating agency and that
is organized under the laws of a jurisdiction that is rated in one of the two
highest rating categories by an independent, nationally-recognized United
States rating agency.
(e) A contract may provide for the allocation
to one or more separate accounts of all or any portion of the amount needed to
meet the asset maintenance requirement. If the contract provides that the
assets in the separate account shall not be chargeable with liabilities arising
out of any other business of the insurance company, the insurance company shall
maintain in a distinct separate account that is so chargeable:
(1) That portion of the amount needed to meet
the asset maintenance requirement that has been allocated to separate accounts;
less
(2) The amounts contributed to
separate accounts by the contract holder in accordance with the contract and
the earnings on the contract.
(f) For purposes of this section, the minimum
value of guaranteed contract liabilities is defined to be the sum of the
expected guaranteed contract benefits, each discounted at a rate corresponding
to the expected time of payment of the contract benefit that is not greater
than the rate supportable by the expected return from the segregated portfolio
assets (and in no event greater than the blended spot rate) as described in the
plan of operation (pursuant to section
38a-459-3
of the Regulations of Connecticut State Agencies) or the actuarial opinion and
memorandum (pursuant to subsection (h) of this section), except that if the
expected time of payment of a contract benefit is more than 30 years, it shall
be discounted from the expected date of payment to year 30 at a rate of no more
than 80 percent of the thirty year blended spot rate and from year 30 to the
date of valuation at a rate not greater than the thirty year blended spot
rate.
(g) In calculating the
minimum value of guaranteed contract benefits:
(1) All guaranteed benefits potentially
available to the contract holder on an ongoing basis shall be considered in the
valuation process and analysis, and the reserve held has to be sufficient to
fund the greatest present value of each independent guaranteed contract
benefit. For purposes of this subdivision, the right granted to the contract
holder to exit the contract by discharging the insurance company of its
guarantee obligation under the contract and taking control of the assets in the
segregated portfolio shall not be considered a guaranteed benefit.
(2) To the extent that future guaranteed cash
flows are dependent upon the benefit responsiveness of an employer-sponsored
plan (e.g., the ability of a plan participant to elect to receive a benefit or
make an investment transfer), a best estimate based on insurance company
experience or other reasonable criteria if insurance company experience is not
available shall be used in the projections of future cash flows.
(3) The minimum value of guaranteed contract
benefits under a contract issued to a pooled fund representing multiple
employer-sponsored plans shall be determined so as to reflect projected plan
sponsor contract value withdrawals available to the member plans in such pooled
fund. Projections of such future cash flows shall take into account known plan
sponsor withdrawals and an estimate of future plan sponsor withdrawals. The
estimate shall be based on company experience and other relevant criteria and
shall include a margin for adverse deviation from such company experience and
other relevant criteria. An insurance company shall determine a single
valuation rate, consistent with subsection (f) of this section, that shall be
equal to the lesser of the (i) expected return from the segregated portfolio of
assets or (ii) blended spot rate based on the duration of the segregated
portfolio of assets. The single valuation rate shall be used to model future
market values of the segregated portfolio assets. Future credited interest
rates shall be modeled according to the contractually defined crediting rate
formula. Modeled future contract values shall reflect modeled future market
values, modeled future credit interest rates, known future plan sponsor
withdrawals, the estimate of future plan sponsor withdrawals, future
withdrawals consistent with subdivision (2) of this subsection and any
remaining final payment at the modeled contract termination date. The present
values of all withdrawals and termination payments modeled under this
subdivision shall be discounted by using the single valuation rate and the
modeled times of those withdrawals and payments. The sum of these present
values shall be deemed the minimum value of the guaranteed contract liabilities
for a pooled fund contract.
(h) An insurance company that issues a
synthetic guaranteed investment contract subject to sections
38a-459-1
to
38a-459-9,
inclusive, of the Regulations of Connecticut State Agencies shall submit an
actuarial opinion and, upon request, a memorandum to the insurance commissioner
annually by March 1 following the December 31 valuation date showing the status
of the accounts as of the prior December 31. The actuarial opinion and
memorandum shall be in form and substance satisfactory to the insurance
commissioner.
(i) The actuarial
memorandum required by subsection (h) of this section is a memorandum as set
forth in subdivision (3) of section
38a-78(c)
of the Connecticut General Statutes. The actuarial memorandum may include any
matter required by section
38a-78
of the Connecticut General Statutes and is subject to the confidentiality
protections of subdivision (7) of section
38a-78(c)
of the Connecticut General Statutes.
(j) Except in cases of fraud or willful
misconduct, the valuation actuary shall not be liable for damages to any person
(other than the insurance company or the insurance commissioner) for any act,
error, omission, decision, or conduct with respect to the actuary's
opinion.
(k) The statement of
actuarial opinion submitted shall consist of:
(1) A paragraph identifying the valuation
actuary and the valuation actuary's qualification;
(2) A scope paragraph identifying the
subjects on which the opinion is to be expressed and describing the scope of
the valuation actuary's work;
(3) A
reliance paragraph describing those areas, if any, where the valuation actuary
has deferred to other experts in developing data, procedures, or
assumptions;
(4) An opinion
paragraph expressing the valuation actuary's opinion with respect to the
matters described in subsection (l) of this section; and
(5) One or more additional paragraphs as
needed in individual insurance company cases as follows:
(A) If the valuation actuary considers it
necessary to state a qualification of the valuation actuary's
opinion;
(B) If the valuation
actuary has to disclose an inconsistency in the method of analysis used at the
prior opinion date with that used for this opinion;
(C) If the valuation actuary chooses to add a
paragraph briefly describing the assumptions that form the basis of the
actuarial opinion.
(l) The actuarial opinion shall state that
after taking into account any risk charge payable, the segregated portfolio
assets, and the amount of any reserve liability with respect to the asset
maintenance requirement, the account assets make adequate provision for
contract liabilities. The opinion shall also state:
(1) That reserves for contract liabilities
are calculated pursuant to the requirements of subsection (a) of this
section;
(2) That after taking into
account any reserve liability with respect to the asset maintenance
requirement, the amount of the account assets satisfied the asset maintenance
requirement;
(3) That the
fixed-income segregated portfolio conformed to and justified the rates used to
discount contract liabilities for valuation pursuant to subsection (f) of this
section;
(4) Whether any rates
used, pursuant to subsection (f) of this section, to discount guaranteed
contract liabilities and other items applicable to the segregated portfolio
were modified from the rate or rates described in the plan of operation
pursuant to section
38a-459-3
of the Regulations of Connecticut State Agencies; and
(5) That the level of risk charges, if any,
retained in the general account was appropriate in view of such factors as the
nature of the guaranteed contract liabilities and losses experienced in
connection with account contracts and other pricing factors.
(m) The opinion shall be
accompanied by a certificate of an officer of the insurance company responsible
for monitoring compliance with the asset maintenance requirements for synthetic
guaranteed investment contracts describing the extent to and manner in which,
during the preceding year:
(1) Actual benefit
payments conformed to the benefit payment estimated to be made as described in
the plan of operation;
(2) The
determination of the fair market value of the segregated portfolio conformed to
the valuation procedures described in the plan of operation, including a
statement of the procedures and sources used during the year; and
(3) Any assets were transferred to or from
the insurance company's general account, or any amounts were paid to the
insurance company by any contract holder to support the insurance company's
guarantee.
(n) The
actuarial memorandum shall:
(1) Substantially
conform with those portions of section
38a-459-17
of the Regulations of Connecticut State Agencies that are applicable to asset
adequacy testing and either:
(A) Demonstrate
the adequacy of account assets based upon cash flow analysis, or
(B) Explain why cash flow testing analysis is
not appropriate, describe the alternative methodology of asset adequacy testing
used, and demonstrate the adequacy of account assets under that
methodology;
(2) Clearly
describe the assumptions the valuation actuary used in support of the actuarial
opinion, including any assumptions made in projecting cash flows under each
class of assets, and any dynamic portfolio hedging techniques utilized and the
tests performed on the utilization of the techniques. As used in this section,
"dynamic portfolio hedging techniques" includes techniques whereby an
underlying portfolio of liabilities and their corresponding assets are hedged
through the purchase or sale (owned or not owned by the hedger) of a hedging
instrument, and such purchase or sale is managed so as to decrease the
probability or severity of loss of the underlying portfolio due to changes in
economic, market, insurable, or other events and the hedge is regularly
adjusted or re-balanced through additional purchases or sales of assets,
liabilities, or financial instruments (including options, futures, and
derivatives) at regular, small intervals as the risks and characteristics of
the underlying portfolio change, in a manner that incorporates recent
events;
(3) Clearly describe how
the valuation actuary has reflected the cost of capital;
(4) Clearly describe how the valuation
actuary has reflected the risk of default and downgrades on obligations and
mortgage loans, including obligations and mortgage loans that are not
investment grade;
(5) Clearly
describe how the valuation actuary has reflected withdrawal risks, if
applicable, including a discussion of the positioning of the contracts within
the benefit withdrawal priority order pertaining to the contracts, the impact
of any dynamic lapse assumption and the results of sensitivity testing the
estimate of future plan sponsor withdrawals pursuant to subsection (g)(3) of
this section;
(6) If the plan of
operation provides for investments in segregated portfolio assets other than
United States government obligations, demonstrate that the rates used to
discount contract liabilities accurately reflect expected investment returns,
taking into account any foreign exchange risks;
(7) If the contracts provide that in certain
circumstances they would cease to be funded by a segregated portfolio and
instead become contracts funded by the general account, clearly describe how
any increased reserves would be provided for if and to the extent these
circumstances occurred;
(8) State
the amount of account assets maintained in a separate account that are not
chargeable with liabilities arising out of any other business of the insurance
company;
(9) State the amount of
reserves and supporting assets as of December 31 and where the reserves are
shown in the annual statement;
(10)
State the amount of any contingency reserve carried as part of
surplus;
(11) State the market
value of the segregated asset portfolio; and
(12) Where separate account assets are not
chargeable with liabilities arising out of any other business of the insurance
company, describe how the level of risk charges payable to the general account
provides an appropriate compensation for the risk taken by the general
account.
(o) When the
insurance company issues a synthetic guaranteed investment contract complying
with asset maintenance requirements it need not maintain an asset valuation
reserve with respect to those account assets.
(p) Reserves for synthetic guaranteed
investment contracts subject to sections
38a-459-1
to
38a-459-9,
inclusive, of the Regulations of Connecticut State Agencies shall be an amount
equal to the sum of the following:
(1) The
amounts determined as the minimum reserve as required under subsection (a) of
this section;
(2) Any additional
amount determined by the insurance company's valuation actuary as necessary to
make adequate provision for all contract liabilities; and
(3) Any additional amount determined as
necessary by the insurance commissioner due to the nature of the
benefits.
(q) The amount
of any reserves required by this section shall be established by either:
(1) Allocating sufficient assets to one or
more separate accounts; or
(2)
Setting up the additional reserves in the general account.
Notes
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