Section 98.4(b)(5)(ii) is amended by adding clause (c) to allow for mortality improvement to be used in the application of the X factors for varying premium term life insurance policies issued on or after January 1, 2015.

Section 98.4(b)(5)(iii) is deleted and a new section 98.4(b)(5)(iii)(a) and (b) are added to separate the requirements for policies issued prior to January 1, 2015 and varying premium term life insurance policies issued on or after January 1, 2015. For varying premium term life insurance policies issued on or after January 1, 2015, mortality improvement may be recognized in the application of the X factors.

Section 98.4(b)(5)(vii)(b) is amended to separate the opinion requirements for policies issued prior to January 1, 2015 and varying premium term life insurance policies issued on or after January 1, 2015.

Section 98.6(a) is amended by dividing paragraph (1) into two subparagraphs, and adding new paragraphs (7) through (12), which provide the reserve methodology to be followed for varying premium term life insurance policies issued on or after January 1, 2015.

Section 98.6(b)(1) is amended by renumbering that section to 98.6(b)(1)(i) and adding a new subparagraph (ii) to address the deficiency reserve requirements for varying premium term life insurance policies issued on or after January 1, 2015.

Section 98.6(b)(2) is amended to specify reserve methodology requirements for the calculation of deficiency reserves for varying premium term life insurance policies issued on or after January 1, 2015.

Section 100.1 is amended by adding a new subdivision (c), which recognizes and permits the use of mortality improvement scale LT for varying premium term life insurance.

Section 100.2 is amended by changing the applicability section and clarifying that new section 100.11 applies only to varying premium term life insurance policies.

Section 100.3 is amended by re-lettering existing definitions for technical purposes and adding the new definitions: “mortality improvement scale LT” and “varying premium term life insurance”.

Section 100.6(a)(2) is amended to recognize mortality improvement in the calculation of basic reserves for varying premium term life insurance policies issued on or after January 1, 2015.

Section 100.6(a)(3) is amended to recognize mortality improvement in the calculation of deficiency reserves for varying premium term life insurance policies issued on or after January 1, 2015.

Section 100.6(a)(7) is amended to recognize mortality improvement in the calculation of segmented basic reserves for varying premium term life insurance policies issued on or after January 1, 2015.

Section 100.6(b)(8) is amended to recognize mortality improvement in the calculation of segmented deficiency reserves for varying premium term life insurance policies issued on or after January 1, 2015.

Section 100.11 (“Severability”) is re-numbered as section 100.12, and a new section 100.11 (“Varying Premium Term Life Insurance Mortality Improvement”) is added to provide the mortality improvement factors and formulas for varying premium term life insurance and includes a numerical example for applying the mortality improvement factors and formulas.

1. Statutory authority: The Superintendent’s authority to promulgate the Fifth Amendment to Insurance Regulation 147 (11 NYCRR 98) and Third Amendment to Insurance Regulation 179 (11 NYCRR 100) derives from sections 202 and 302 of the Financial Services Law (“FSL”) and sections 301, 1304, 1308, 4217, 4218, 4221, 4224, 4240, and 4517 of the Insurance Law.

FSL section 202 establishes the office of the Superintendent and designates the Superintendent as the head of the Department of Financial Services (“Department”).

FSL section 302 and Insurance Law section 301 authorize the Superintendent to effectuate any power accorded to the Superintendent by the Insurance Law, the Banking Law, the Financial Services Law, or any other law of this state and to prescribe regulations interpreting the Insurance Law, among other things.

Insurance Law section 1304 requires insurers to maintain reserves for life insurance policies and certificates according to prescribed tables of mortality and rates of interest.

Insurance Law section 1308 sets forth the parameters for reinsuring risks and policy liabilities, and the effect that reinsurance will have on an insurer’s reserves.

Insurance Law section 4217 requires the Superintendent to annually value, or cause to be valued, the reserve liabilities (“reserves”) for all outstanding policies and contracts of every life insurer doing business in New York. Insurance Law section 4217(a)(1) specifies that the Superintendent may certify the amount of any such reserves, specifying the mortality table or tables, rate or rates of interest and methods used in the calculation of reserves.

Insurance Law section 4217(c)(2)(A)(iii) permits, as a minimum standard of valuation for life insurance policies, any ordinary mortality table adopted by the National Association of Insurance Commissioners (“NAIC”) after 1980 and approved by the Superintendent.

Insurance Law section 4217(c)(2)(A)(iv) authorizes the Superintendent to adopt any mortality table or modifications of any table for any specific class of risk.

Insurance Law section 4217(c)(6)(C) provides that reserves, according to the commissioner’s reserve valuation method for life insurance policies that provide for a varying amount of insurance or requiring the payment of varying premiums, shall be calculated by a method consistent with the principles of section 4217(c)(6).

Section 4217(c)(6)(D) permits the Superintendent to issue, by regulation, guidelines for the application of the reserve valuation provisions of section 4217 to such policies and contracts as the Superintendent deems appropriate.

Insurance Law section 4218 requires that when the actual premium charged for life insurance under any life insurance policy is less than the modified net premium calculated on the basis of the commissioner’s reserve valuation method, the minimum reserve required for such policy shall be the greater of either the reserve calculated according to the mortality table, rate of interest, and method actually used for such policy, or the reserve calculated by the commissioner’s reserve valuation method replacing the modified net premium by the actual premium charged for the policy in each contract year for which such modified net premium exceeds the actual premium.

Insurance Law section 4221(k)(9)(B)(vi) permits, for policies of ordinary insurance, the use of any ordinary mortality table adopted by the NAIC after 1980 and approved by the Superintendent, for use in determining the minimum nonforfeiture standard.

Insurance Law section 4224(a)(1) prohibits unfair discrimination between individuals of the same class and of equal expectation of life, in the amount or payment or return of premiums, or rates charged for life insurance policies.

Insurance Law section 4240(d)(6) provides that the reserve liability for variable contracts shall be established in accordance with actuarial procedures that recognize the variable nature of the benefits provided and any mortality guarantees provided in the contract. Section 4240(d)(7) authorizes the Superintendent to promulgate regulations, as may be appropriate, to carry out the provisions of this section.

Insurance Law section 4517(b)(2) provides, with respect to fraternal benefit societies, that reserves according to the commissioner’s reserve valuation method for life insurance certificates that provide for a varying amount of benefits, or requiring the payment of varying premiums, shall be calculated by a method consistent with the principles of subsection (b). Section 4517(c)(2) requires fraternal benefit societies to comply with the minimum valuation standards of Section 4217 of the Insurance Law for life insurance certificates issued on or after January 1, 1980.

2. Legislative objectives: Maintaining solvency of insurers doing business in New York is a principal focus of the Insurance Law. One fundamental way the Insurance Law seeks to ensure solvency is by requiring all insurers and fraternal benefit societies authorized to do business in New York State to hold reserve funds in an amount sufficient to meet the obligations made to policyholders. The Insurance Law prescribes the mortality tables and interest rates to be used for calculating such reserves. At the same time, an insurer benefits when it has adequate capital to use for company expansion, product innovation, and other forms of business development.

3. Needs and benefits: The Superintendent has determined that term life insurance reserves are currently set high relative to actuarial experience due to such factors as: initial non-commission costs associated with the issuance of term life insurance constituting a higher percentage of the first years’ premium compared with whole life insurance premiums; the expiration of term life insurance within 30 or fewer years, which is subject to a lesser degree of reinvestment risk as compared with longer-lasting guarantee products such as whole life insurance and universal life insurance; the impact of lapsation on term life insurance future claims; and improvement in mortality since the NAIC’s last release of the CSO mortality table. To modernize the current regulatory scheme with respect to term life insurance reserves, the Superintendent is amending Insurance Regulations 147 and 179, as discussed in the Superintendent’s letter to state Commissioners, dated March 27, 2014.

Insurance Regulation 147 is amended to replace the current one-year full preliminary term (“FPT”) with a two-year FPT for term life insurance, in recognition that upfront expenses for acquiring and retaining such business represent a higher proportion of premium compared with other types of insurance business (e.g., whole life policies). A two-year FPT will result in a lower proportion of the first and second year premiums being held to pay claims that will not arise until well into the future, leading to a buildup in reserves after the second, rather than first, policy year.

Insurance Regulation 179 is amended consistent with mortality improvement. Because insureds are generally living longer, the amendment applies a 1.0 percent mortality improvement factor to the current mortality table (2001 CSO) for rates associated with calendars years 2009-2048, and applies a 0.5 percent mortality improvement factor for each year thereafter through policy year 30. These factors will apply during the initial level premium period. The Department anticipates that the NAIC will adopt a new mortality table next year, which may result in an additional update to Insurance Regulation 179.

The Department estimates that concurrent amendments to Insurance Regulations 147 and 179 will result in a 30-35 percent reduction in minimum statutory formula reserves for level term life insurance on a prospective basis.

4. Costs: Insurers and fraternal benefit societies that are authorized to do business in New York State that are impacted by these amendments may incur costs to modify existing computer software to incorporate the new methodologies for prospective business, as well as the testing and implementation of the changes to the software, if they choose to make these changes. However, insurers and fraternal benefit societies are not required to make the changes that are prescribed in the amendments, because not applying the changes will result in higher-than-minimum-required reserves and an insurer or fraternal benefit society may choose to hold reserves at an amount that is higher than the minimum level required.

Software modification, testing and implementation costs are estimated to be $10,000 or less. After an insurer has modified its computer systems to comply with these amendments, only minimal additional costs should be anticipated.

The amendments are expected to result in the need for a small amount of training of Department staff. The cost of such training will be absorbed through the Department’s normal budget. There are no costs to other government agencies or local governments.

5. Local government mandates: The amendments impose no new programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district.

6. Paperwork: The amendments do not alter paperwork requirements.

7. Duplication: The amendments do not duplicate any existing laws or regulations.

8. Alternatives: One alternative considered by the Superintendent was to allow company-specific assumptions that were supported by credible experience. However, this amendment provides a more objective and uniform floor on reserves, ensuring that reduced reserves will be held at intended levels. Another alternative considered by the Superintendent was to specify a set percentage of term life insurance reserves resulting from the current standard. However, this method is not actuarially sound because it is not supported by a mortality table. The Department’s Life Bureau reached out to a number of insurers that write term life policies, which included discussions with the affected insurers’ trade association, The Life Insurance Council of New York, on a prior version of these amendments. The Department considered the comments, which focused primarily on tax concerns, it received from the insurers and LICONY when it drafted these proposed amendments. Additionally, the Department considered and made changes to the amendments based on comments that it received from LICONY and an insurer during the public comment period.

9. Federal standards: There are no federal standards in this subject area.

10. Compliance schedule: These amendments apply to policies issued on or after January 1, 2015 and will impact statements due May 15, 2015 and filed thereafter.

The revisions made to the earlier proposed rule have no special bearing on small businesses and no bearing on local governments; therefore, changes made to the last published rule do not necessitate revision to the previously published RFA.

The revisions made to the earlier proposed rule have no bearing on persons or businesses in rural areas who are affected by this rule; therefore, changes made to the last published rule do not necessitate revision to the previously published RAFA.

The revisions made to the earlier proposed rule have no bearing on jobs or employment opportunities; therefore, changes made to the last published rule do not necessitate revision to the previously published JIS.

The Department received public comments on its proposed fifth amendment to Insurance Regulation 147 (11 NYCRR 98). One commentator, noting that subdivisions (a) and (t) of section 98.3 apply only to varying premium term life insurance involving a level premium rate guarantee ending before age 80, suggested that the Department change the “ending before age” to 91. The Department reviewed data currently available and found that there is no data to support mortality improvement at the higher age limit suggested. Therefore, no changes were made to section 98(a) and (t).

A commentator remarked that it is unclear whether section 98.4(b)(5)(vii)(b) applies the mortality improvement to deficiency reserves as well as basic reserves. To make clear that the mortality improvement applies to both basic and deficiency reserves, section 98.4(b)(5)(ii), (iii) and (vii)(b) have been amended.

Another commentator similarly remarked that it is unclear whether section 98.6 applies the mortality improvement to both basic and deficiency reserves. To clarify that the mortality improvement applies to both basic and deficiency reserves, section 98.6(b)(1) and (2) have been revised.

The Department received a comment recommending that section 98.4(b)(5) be revised to include mortality improvement in the X factor tests. The Department agrees with this comment and revised section 98.4(b)(5) accordingly.

The Department disagrees with another commentator’s contention that the reserve methodology prescribed by section 98.6(a)(9) contravenes New York Insurance Law Section 4217. Insurance Law Section 4217(c)(6)(C) allows for reserves set according to the commissioner’s reserve valuation method for life insurance policies to provide for a varying amount of insurance or require the payment of varying premiums to be calculated by a method consistent with the principles of paragraph (6). The methodology described in section 98.6(a)(9) is consistent with the principles espoused in Insurance Law Section 4217. The commentator also recommended that if the new reserve methodology provided in section 98.6(a)(9) is to be used, then it should be referred to as something other than the “commissioners reserve valuation method.” The Department revised the reference to “the commissioners reserve valuation method for varying premium term life insurance.”

One commentator requested that the Department confirm that the proposed formulas in section 98.6(a)(9)(ii)(a) and (b) are intended to represent a single year payment (at the beginning of the first and second years, respectively) of the net level premium for the coverage period after the first two years. The Department confirms that the commentator’s interpretation is correct.

Third Amendment to Insurance Regulation 179 (11 NYCRR 100)

The Department received public comments on its proposed third amendment to Insurance Regulation 179. One commentator, noting that section 100.3(v) applies only to varying premium term life insurance involving a level premium rate guarantee ending before age 80, suggested that the Department change the “ending before age” to 91. The Department reviewed data currently available and found that there is no data to support mortality improvement at the higher age limit suggested. Therefore, no changes were made to section 100.3(v).

A commentator remarked that the mortality improvement scale is referenced inconsistently in the proposed amendment. The Department agrees with this comment, and section 100.11 has been revised to correct the inconsistencies.

Another commentator opined that it is unclear whether the mortality rates as improved by the formula for LT in section 100.11(c)(2) apply to policy years beginning in a specified calendar year. Section 100.3(o) and 100.11(c) have been revised to clearly indicate that the improvement should apply by policy year and not by calendar year.