Proposed Revision of ASOP No. 24 – NAIC Life Insurance Illustrations Model Regulation

NAIC Life Insurance Illustrations Model Regulation

Exposure Draft

March 2024

TRANSMITTAL MEMORANDUM

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in the NAIC Life Insurance Illustrations Model Regulation

FROM: Actuarial Standards Board (ASB)

SUBJECT: Proposed Revision of Actuarial Standard of Practice No. 24

This document contains the third exposure draft of a revision of ASOP No. 24, now titled NAIC Life Insurance Illustrations Model Regulation. Please review this exposure draft and give the ASB the benefit of your comments and suggestions. Each comment letter received by the comment deadline will receive consideration by the drafting committee and the ASB.

The ASB appreciates comments and suggestions on all areas of this proposed standard. The ASB requests comments be provided using the Comments Template that can be found here and submitted electronically to comments@actuary.org. Include the phrase [“ASOP No. 24 COMMENTS”] in the subject line of your message. Also, please indicate in the template whether your comments are being submitted on your own behalf or on behalf of a company.

The ASB posts all signed comments received on its website to encourage transparency and dialogue. Comments received after the deadline may not be considered. Anonymous comments will not be considered by the ASB nor posted on the website. Comments will be posted in the order that they are received. The ASB disclaims any responsibility for the content of the comments, which are solely the responsibility of those who submit them.

For more information on the exposure process, please see the ASB Procedures Manual.

Deadline for receipt of comments: July 1, 2024

History of the Standard

The National Association of Insurance Commissioners (NAIC) Life Insurance Illustrations Model Regulation (Model) and ASOP No. 24 were developed contemporaneously in the early 1990s, and the Model delegated certain authority for development of guidance in determining the disciplined current scale to the ASOP. The ASB adopted ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation, in 1995.

Since the promulgation of the original standard, life insurance product innovation has continued. In 2007, ASOP No. 24 was revised to update and reflect current, appropriate actuarial practices with respect to illustrations prepared in conformity with the Model. In 2015, the NAIC released Actuarial Guideline XLIX (AG 49) to clarify certain requirements of the Model related to policies with index-based interest credits and further amended AG 49 in September 2016. In December 2016, ASOP No. 24 was revised to reflect the changes effected through AG 49 and to clarify certain guidance.

In 2020, the NAIC released Actuarial Guideline XLIX-A (AG 49-A) for illustrations of policies with indexed credits linked to an index or indices sold on or after December 14, 2020. The NAIC also amended AG 49 to sunset its applicability to illustrations of policies sold on or after this date and to allow insurers to elect to apply AG 49-A to new illustrations of policies sold prior to this date that otherwise would be subject to AG 49. AG 49-A was subsequently revised in 2023.

In 2021, the ASB decided to revise this ASOP to reflect the changes effected through AG 49-A. The ASOP was also made consistent with the current ASOP style and format.

First Exposure Draft

The first exposure draft was released in July 2021 with a comment deadline of September 30, 2021. Two comment letters were received and considered in making changes that were reflected in the second exposure draft.

Second Exposure Draft

The second exposure draft was released in July 2023 with a comment deadline of September 15, 2023. Six comment letters were received and considered in making changes that are reflected in the third exposure draft. For a summary of issues contained in these comment letters, please see appendix 2.

Notable Changes from the Second Exposure Draft

Notable changes made to the exposure draft are summarized below. Notable changes do not include changes made to improve readability, clarity, or consistency. Section numbers reflect this document.

1. In section 3.2.1, guidance on adjustments to actual experience was revised.
2. In section 3.2.2, guidance on the timeframe was revised.
3. In section 3.2.3, guidance on hedge costs was added.
4. In section 3.2.11, guidance on consistency of experience factors was added.
5. In section 3.3, guidance on hypothetical accounts was added.
6. In section 4.2, disclosures for methods and models were added.
7. In section 4.2, a disclosure for actions or events reflected in the experience factors for which experience has not yet emerged was added.

Notable Changes from the Existing ASOP

Notable changes made to the existing ASOP are summarized below. Notable changes do not include changes made to improve readability, clarity, or consistency. Section numbers reflect this document.

1. In section 2.2, a new term “applicable actuarial guideline (applicable AG),” defined to include AG 49 and AG 49-A, was introduced to genericize the guidance throughout the ASOP.
2. In section 3.1, the regulatory requirements were updated to include an applicable AG.
3. Sections on appointment as illustration actuary and illustrated scale requirements were deleted.
4. Section 3.2.1 was revised to explicitly recognize that experience factors may be developed based on a combination of the types of sources specified in this ASOP.
5. Section 3.2.2 was revised and updated to include a reference to the scope of and any limitations imposed by an applicable AG.
6. In section 3.2.3, guidance on hedge costs was added.
7. Section 3.2.4 now references morbidity and policyholder behavior.
8. In section 3.2.6, the language on other expenses was revised.
9. In section 3.2.11, guidance on consistency of experience factors was added.
10. In section 3.3, guidance on hypothetical accounts was added.
11. In section 3.4, the summary of Model requirements for the self-support test was replaced by a reference to the Model. The references to AG 49 were replaced with a reference to an applicable AG.
12. In section 3.8, the guidance was expanded to cover projections, models, and supporting analysis and to require the actuary to refer to ASOP Nos. 41, Actuarial Communications, and 56, Modeling.
13. Guidance on reliance was added in sections 3.9 and 3.10.
14. The guidance on certification disclosures was replaced with a reference to disclosures required by applicable law based on the Model in new section 4.1.
15. Disclosures were added in section 4 related to guidance in section 3.

Request for Comments

The ASB appreciates comments and suggestions on all areas of this proposed standard submitted through the Comments Template. Rationale and recommended wording for any suggested changes would be helpful.

The ASB thanks everyone who took the time to contribute comments and suggestions on the previous exposure drafts. The ASB would also like to thank Alicia Carter for her contributions to earlier drafts of this ASOP.

The ASB voted in March 2024 to approve this exposure draft.

Task Force to Revise ASOP No. 24
Brian R. Lessing, Chairperson
Delmer F. Borah	Donna C. Megregian
Jacqueline Fallon	Linda D. Rodway

 

Life Committee of the ASB
Matt A. Monson, Chairperson
Lisa S. Kuklinski	Jeremy Starr
Donna C. Megregian	Su Su

 

Actuarial Standards Board
Kevin M. Dyke, Chairperson
Laura A. Hanson	Gabriel R. Schiminovich
Richard A. Lassow	Judy K. Stromback
David E. Neve	Alisa L. Swann
Christopher F. Noble	Patrick B. Woods

 

The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.

 

PROPOSED REVISION OF
ACTUARIAL STANDARD OF PRACTICE NO. 24

NAIC LIFE INSURANCE ILLUSTRATIONS MODEL REGULATION

STANDARD OF PRACTICE

Section 1: Purpose, Scope, Cross References, and Effective Date

1.1 Purpose

This actuarial standard of practice (ASOP or standard) provides guidance to actuaries when performing actuarial services in support of a certification or representation that life insurance illustrated scales are in conformity with the National Association of Insurance Commissioners (NAIC) Life Insurance Illustrations Model Regulation (Model) or applicable actuarial guidelines (applicable AGs).

1.2 Scope

This standard applies to actuaries when performing actuarial services in support of a certification or representation that life insurance illustrated scales are in conformity with the Model or applicable AGs. Such a certification or representation may be made in an illustration actuary’s certification pursuant to applicable law (statutes, regulations, and other legally binding authority) based on the Model or may be made in the absence of an applicable law based on the Model.

This standard does not apply to actuaries when performing actuarial services with respect to the determination of a currently payable scale. When determining a currently payable scale or determining scales for illustrations not included in the scope of this ASOP, the actuary should refer to ASOP No. 2, Nonguaranteed Elements for Life Insurance and Annuity Products, or ASOP No. 15, Dividends for Individual Participating Life Insurance, Annuities, and Disability Insurance.

If the actuary determines that the guidance in this standard conflicts with any other ASOP, this standard governs.

If a conflict exists between this standard and applicable law, the actuary should comply with applicable law. If the actuary departs from the guidance set forth in this standard in order to comply with applicable law, or for any other reason the actuary deems appropriate, the actuary should refer to section 4.

1.3 Cross References

When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should follow the guidance in this standard to the extent it is applicable and appropriate.

1.4 Effective Date

This standard is effective for actuarial services performed on or after two months after adoption by the Actuarial Standards Board.

Section 2: Definitions

The terms below are defined for use in this standard and appear in bold throughout the ASOP. Definitions in sections 2.3, 2.4, 2.7, 2.8, and 2.9 are intended to conform to those in the Model. The actuary should also refer to ASOP No. 1, Introductory Actuarial Standard of Practice, for definitions and discussions of common terms, which do not appear in bold in this standard.

2.1 Actual Experience

Historical results and trends in those results.

2.2 Applicable Actuarial Guideline (Applicable AG)

An NAIC actuarial guideline that provides guidance on the application of the Model. Such actuarial guidelines include NAIC Actuarial Guideline XLIX (AG 49) and Actuarial Guideline XLIX-A (AG 49-A).

2.3 Currently Payable Scale

A scale of nonguaranteed elements in effect for a policy form as of the preparation date of the illustration or declared to become effective within the next 95 days.

2.4 Disciplined Current Scale

A scale of nonguaranteed elements for a policy form, certified annually by the illustration actuary, constituting a limit on illustrations currently being illustrated by an insurer that is reasonably based on recent actual experience and that satisfies the requirements set forth in the Model.

2.5 Experience Factor

A numerical value or set of numerical values that reasonably represents recent actual experience for a policy form. Examples of experience factors include rates of mortality, expense, investment income, persistency, and taxes.

2.6 Experience Factor Class

A group of policies for which nonguaranteed elements are determined by using common values of a particular experience factor.

2.7 Illustrated Scale

A scale of nonguaranteed elements currently being illustrated that is not more favorable to the policyholder than the lesser of the disciplined current scale or the currently payable scale.

2.8 Illustration Actuary

An actuary who is appointed in accordance with the requirements set forth in the Model.

2.9 Nonguaranteed Element

Any element within an insurance policy that affects policy costs or values that is not guaranteed or not determined at issue. A nonguaranteed element may provide a more favorable value to the policyholder than that guaranteed at the time of issue of the policy. Examples of nonguaranteed elements include policy dividends, excess interest credits, mortality charges, expense charges, indeterminate premiums, and index parameters such as cap rates and participation rates.

2.10 Nonguaranteed Element Framework

The structure by which the insurer determines nonguaranteed elements. This includes the assignment of policies to experience factor classes, the method of allocating income and costs, and the structure of the formulas or other methods of using experience factors. For participating policies, this would include the dividend framework defined in ASOP No. 15. For life policies within the scope of ASOP No. 2, the nonguaranteed element framework would include the concepts of policy class, determination policy, and anticipated experience factors.

Section 3: Analysis of Issues and Recommended Practices

3.1 Requirements of the Model and Applicable AGs

The Model contains detailed instructions, tech­nical requirements, and prohibitions regarding many aspects of life insurance illustrations. The actuary should be familiar with the Model, any applicable state law based on the Model (including state variations), and any applicable AG.

When an illustration falls within the scope of an applicable AG, the actuary should take into account the applicable AG when determining whether the illustrated scale conforms with the Model.

3.2 Experience Factors Underlying the Disciplined Current Scale

When setting experience factors underlying the disciplined current scale, the actuary should use recent actual experience that is representative of the policy form and reflective of the insurer’s nonguaranteed element framework.

As required by the Model, the actuary should use experience factors that do not include any projected trends of improvements in experience or any assumed improvements in experience beyond the effective date of the illustrated scale.

In addition, the actuary should take into account the following when setting experience factors.

3.2.1 Sources of Actual Experience

When setting experience factors underlying the disciplined current scale, the actuary should use one or more of the following sources of actual experience (listed in the order of preference)

1. 1. company experience for the experience factor class;
   2. company experience for similar experience factor classes;
   3. experience from other companies, including industry experience; and
   4. other relevant sources.

To the extent that recent actual experience is not credible, representative of a policy form, or reflective of recent product or nonguaranteed element changes, the actuary should consider making adjustments to the actual experience. When determining the extent to which experience is credible, the actuary should refer to ASOP No. 25, Credibility Procedures.

If the actuary uses the Generally Recognized Expense Table (GRET) to set certain expense experience factors as discussed in section 3.2.6, the guidance in section 3.2.1 is not applicable for such expense experience factors.

3.2.2 Investment Return

When setting investment return experience factors, the actuary should

1. 1. use a reasonable method for allocating investment income to policies, such as the portfolio, segmentation, or investment generation method;
   2. reflect recent actual experience, net of default costs, of the assets supporting the policies; and
   3. reflect the insurer’s actual practice for nonguaranteed elements with respect to realized and unrealized capital gains and losses, investment hedges, policy loans, and other investment items.

The actuary may develop investment return experience factors net of investment expenses or, alternatively, may include investment expenses in the expense experience factors.

When setting investment return experience factors that are dependent on index returns, the actuary should also take into account the characteristics of the underlying index or indices and use a timeframe that reflects business and economic cycles.

When setting investment return experience factors for policies within the scope of an applicable AG, the actuary should also conform to any limitations imposed by an applicable AG for the assumed earned interest rate underlying the disciplined current scale.

3.2.3 Hedge Costs

When setting experience factors for the cost of hedging policy features that are dependent on index returns, the actuary should take into account the characteristics of the underlying index or indices and the timeframe that is used to determine index parameters under the insurer’s nonguaranteed element framework.

3.2.4 Mortality, Morbidity, and Policyholder Behavior

When setting mortality, morbidity, and policyholder behavior experience factors, the actuary should adjust the recent actual experience if necessary to be representative of the policy form. When doing so, the actuary should take into account the insurer’s underwriting practices, experience factor classes, nonguaranteed element framework, and distinctions such as age, gender, duration, marketing method, plan, size of policy, policy provisions, and risk class.

3.2.5 Direct Sales Expenses

When setting direct sales expense experience factors, the actuary should take into account agent commissions, overrides, and other direct compensation determined by formula or incurred as a consequence of sales in a manner consistent with new business activities that generate the cost.

3.2.6 Other Expenses

When setting experience factors for expenses other than direct sales expenses, the actuary should use one of the following methods:

1. 1. Fully Allocated—Unit expenses that reflect the recent actual total expenses incurred by the insurer for both in-force and newly issued policies.
   2. Marginally Allocated—Unit expenses that reflect the recent actual direct expenses (expenses that can be specifically related to a particular policy form) incurred by the insurer but do not reflect indirect expenses (such as corporate overhead and general advertising).
   3. GRET—Unit expenses that are approved for use by the NAIC or by the commissioner and are obtained from an industry expense study based on fully allocated expenses.

If no GRET is approved and available, the actuary should use fully allocated expenses. If a GRET is approved and available, the actuary may use the GRET, fully allocated expenses, or marginally allocated expenses. However, the actuary may use marginally allocated expenses only if they generate aggregate expenses that are greater than those generated by using the GRET.

The actuary should use a single expense experience factor method for all policy forms tested. For example, the actuary should not use marginal expenses for one policy form and fully allocated expenses for another policy form.

Once the expense experience factor method has been selected, the actuary should use the same method for the entire certification year.

When calculating unit expenses, the actuary should use average policy size and sales volume assumptions that are appropriate for the policy form. When allocating direct expenses, the actuary should assign those expenses to the groups of policies generating the related costs. When allocating indirect expenses, the actuary should reflect the insurer’s method for allocating expenses used in its nonguaranteed element framework. In addition, the actuary may spread nonrecurring costs over a reasonable number of years (for example, system development costs over the system’s lifetime).

3.2.7 Taxes

When setting tax experience factors, the actuary should reflect all cash flows arising from applicable taxes. The actuary should take into account the impact of income taxes by duration. The actuary may treat non-income taxes that are classified as investment taxes as a deduction from the investment return or may reflect them separately. The actuary may include other categories of taxes, such as premium taxes or employment taxes, separately or include them in the category of other expenses, as outlined in section 3.2.6 above.

The actuary should reflect the insurer’s method for allocating taxes used in its nonguaranteed element framework.

3.2.8 Changes in Methodology

When an insurer changes its methodology in determining nonguaranteed elements (for example, changing from a portfolio rate methodology to a new money rate methodology for determining interest credits, adopting a new experience study methodology, introducing new methods of grouping policies into classes, or utilizing new methods of allocating expenses), the actuary should appropriately modify the experience factors underlying the disciplined current scale to reflect the new methodology.

3.2.9 Other Lines of Business

If other lines of business are considered investments of the illustrated block of business, the actuary should determine whether cash flows originating in such lines should be reflected in the disciplined current scale. When determining whether and how to reflect these cash flows, the actuary should take into account the time horizon of the investment/investor relationship and the insurer’s actual practice for reflecting these cash flows in determining nonguaranteed elements.

3.2.10 Changes in Actual Experience

When the actuary determines that changes in recent actual experience are significant and ongoing, the actuary should update the experience factors underlying the disciplined current scale.

If the actuary determines that a significant deterioration in an experience factor has occurred and is likely to have continued between the date of the experience study and the effective date of the illustrated scale, the actuary should reflect such deterioration in the experience factors.

When an insurer introduces a change in underwriting practice (for example, adding a new underwriting classification) that is not expected to change the insured population, the actuary should set the experience factors in such a way that actual experience is reproduced in the aggregate.

3.2.11 Consistency of Experience Factors

Where appropriate, the actuary should use experience factors that are reasonably consistent with one another and reflect any interdependencies. For example, the actuary should take into account the relationship between hedge costs and market interest rates and the relationship between policyholder behavior and nonguaranteed elements.

3.3 Hypothetical Accounts

When determining a hypothetical, supportable current annual cap for a hypothetical, supportable index account as described in an applicable AG, the actuary should confirm that the cap would be supportable in the current economic environment. When doing so, the actuary should use a timeframe to evaluate hedge costs that is consistent with the timeframe that is used to determine actual index parameters under the insurer’s nonguaranteed element framework.

3.4 Self-Support Testing

The actuary should perform self-support testing to demonstrate that illustrations are self-supporting as defined in the Model. When doing so, the actuary should use the experience factors underlying the disciplined current scale.

When performing a self-support test for a policy form, the actuary may test underwriting classifications (such as age, gender, and risk class) and policyholder choices (such as policy size, premium payment pattern, dividend option, coverage riders, account allocations, and policy loans) in aggregate if, in the actuary’s professional judgment, such combinations are appropriate. If testing is done in the aggregate, the actuary should select experience factors for the distribution between the underwriting classifications and the distribution between the policyholder choices that are based on recent actual experience, if available, recognizing possible shifts in distribution toward any portions of the business that do not meet the self-support test on a stand-alone basis.

When an illustration falls within the scope of an applicable AG, the actuary should take into account any limitations on aggregation of indexed accounts imposed by the applicable AG.

3.5 Lapse-Support Testing

For illustrations of policies that can develop nonforfeiture values, the actuary should perform lapse-support testing to demonstrate that illustrations are not lapse-supported as defined in the Model. When doing so, the actuary should use the same experience factors and the same level of aggregation as described in section 3.4, changing only the persistency rate experience factor to be 100% after the first five policy years.

When performing a lapse-support test for a policy form, the actuary should assume that benefits that are conditional only upon policy continuation will be provided to all policies in force at the end of year five and surviving to the date of such benefits. For policies that provide benefits that are conditional upon certain premium payment patterns, the actuary should evaluate whether all policies in force at the end of year five will qualify for such benefits and appropriately reflect this evaluation in the lapse-support test.

Although illustrations of policy forms that can never develop nonforfeiture values are exempt from the lapse-support testing requirement, the actuary should confirm that the illustrations of such policy forms are self-supporting.

3.6 Illustrations of Policies In Force One Year or More

For illustrations of policies in force one year or more, the actuary should determine whether the disciplined current scale continues to be in conformity with the Model by (1) testing under sections 3.4 and 3.5, as applicable, or (2) determining that any of the following conditions is met:

1. the currently payable scale has not been changed since the last certification and the illustration actuary determines that ex­perience since the last certification does not warrant changes in the disciplined current scale that would make it significantly less favorable to the policyholder;
2. the currently payable scale has been changed since the development of the disciplined current scale most recently certified only to the extent that changes are reasonably consistent with changes in experience underlying the disciplined current scale; or
3. the currently payable scale has been made less favorable to the policyholder since the last certification and the change is more than the change in experience would dictate.

If the actuary determines that the disciplined current scale is not in conformity with the Model, the actuary should (1) review the experience factors underlying the disciplined current scale and revise as necessary and (2) determine a new disciplined current scale.

For policies in force one year or more that are receiving distributions of accumulated surplus or prior gains (including those resulting from the formation of a closed block), the actuary may include such distributions in the disciplined current scale, but only to the extent that (1) such distributions are currently being paid to the policyholders by the insurer and (2) the insurer has indicated its intent and ability to continue to do so for the foreseeable future. The actuary may use such accumulated surplus or prior gains in con­ducting the tests for self-support and lapse-support.

3.7 Actions or Events for Which Experience Has Not Yet Emerged

When an insurer has taken an action or an event has occurred that may have significant positive or negative effects on future experience, but not enough time has elapsed for the effect of the action or event to be reflected in the insurer’s actual experience, the actuary should consider reflecting the effect of the action or event in the experience factors underlying the disciplined current scale. Examples of such actions or events include the following:

1. change in underwriting standards, such as the introduction or elimination of risk classifications, guaranteed issue, simplified underwriting, or accelerated underwriting programs;
2. change in commission levels;
3. change in investment policies, such as changes in hedging activities and changes in asset class allocations;
4. the addition, removal, or modification of policy features, such as additional benefit riders or index accounts;
5. a revision of nonguaranteed elements, such as cost of insurance charges or index parameters;
6. new or revised reinsurance agreements;
7. a reduction in staff; and
8. an external shock, such as a pandemic.

The actuary should reflect only actions that have already been taken or events that have already occurred.

3.8 Reliance on Others for Data or Other Information, Projections, Models, and Supporting Analysis

The actuary may rely on data or other information, projections, models, and supporting analysis supplied by others. When practicable, the actuary should review the data or other information, projections, models, and supporting analysis for reasonableness and consistency. For further guidance, the actuary should refer to ASOP No. 23, Data Quality, ASOP No. 41, Actuarial Communications, and ASOP No. 56, Modeling.

3.9 Reliance on Assumptions or Methods Selected by Another Party

When relying on experience factors, assumptions, or methods selected by another party, the actuary should review the experience factors, assumptions, or methods for reasonableness and consistency. The actuary should refer to ASOP No. 41 for guidance.

3.10 Reliance on Another Actuary

The actuary may rely on another actuary who has performed actuarial services. However, the relying actuary should be reasonably satisfied that the other actuary is qualified to perform the actuarial service and that the actuarial service was performed in accordance with applicable ASOPs.

3.11 Certification

The Model requires the illustration actuary to certify, for both new business illustrations and in-force illustrations, that (1) the disciplined current scale used in illustrations is in conformity with this standard and (2) the illustrated scales used in insurer-authorized illustrations meet the requirements of the Model.

As required by the Model, the illustration actuary must provide a certification for a new policy form before it is illustrated and must provide an annual certification for all policy forms for which illustrations are used. Additionally, the illustration actuary must file certifications with the board of directors of the insurer and with the commissioner.

3.11.1 Notice of Inability to Certify

If an illustration actuary is unable to certify the illustrated scale for any policy form the insurer intends to use, the actuary must notify the board of directors of the insurer and the commissioner promptly of his or her inability to certify, as required by the Model.

3.11.2 Notice of Error in Certification

If an error in a previous certification is discovered, the illustration actuary (or successor illustration actuary) must promptly notify the board of directors of the insurer and the commissioner, as required by the Model.

The illustration actuary should deem the certification to be in error if the certification would not have been issued or would have been materially altered had the error not been made. The illustration actuary should not deem the certification to be in error solely because of data that became available subsequent to the certification date or solely because of information concerning events that occurred subsequent to the certification date.

3.12 Documentation

The actuary should prepare and retain documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. The actuary should prepare such documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work. The amount, form, and detail of such documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4.

When preparing the documentation related to the certification described in section 3.11, the actuary should include the following:

1. description of, and rationale for, the experience factors underlying the disciplined current scale;
2. description of, and rationale for, any other methods, models, and assumptions used to carry out the tests and demonstrations required by the Model; and
3. demonstration that the self-support and lapse-support tests have been met.

Section 4: Communications and Disclosures

4.1 Required Disclosures in Certifications

When issuing a certification, the illustration actuary must include the disclosures required by applicable law based on the Model (see section 3.11).

4.2 Required Disclosures in Actuarial Reports

When issuing an actuarial report, the actuary should refer to ASOP Nos. 23, 25, 41, and 56. In addition, the actuary should disclose the following in such actuarial reports:

1. whether the disciplined current scale is in conformity with this standard and whether the illustrated scales meet the requirements of the Model (see sections 4, 3.5, 3.6, and 3.11);
2. any assumptions or experience factors used in the analysis, in summary form, and a description of the methods used to set them (see sections 3.2 and 3.3);
3. the methods and models used to carry out the tests required by the Model, in summary form, or a description of which conditions in section 3.6 were met (see sections 3.4, 3.5, and 3.6);
4. any material changes in the methods or models from those used to support the prior certification or representation (see sections 3.2, 3.3, 3.4, 3.5, and 3.6);
5. any actions or events reflected in the experience factors for which experience has not yet emerged (see section 3.7);
6. any reliance on others for data or other information, projections, models, and supporting analysis (see section 3.8);
7. any reliance on experience factors, assumptions, or methods selected by another party (see section 3.9); and
8. any reliance on another actuary (see section 3.10).

4.3 Additional Disclosures in an Actuarial Report

The actuary also should include disclosures in an actuarial report in accordance with ASOP No. 41 for any of the following circumstances:

1. if any material assumption or method was prescribed by applicable law;
2. if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; or
3. if in the actuary’s professional judgment, the actuary has deviated materially from the guidance of this standard.

4.4 Confidential Information

Nothing in this standard is intended to require the actuary to disclose confidential information.

 

Appendix 1

Background and Current Practices

Note: This appendix is provided for informational purposes and is not part of the standard of practice.

Background

Sales illustrations have been of concern to regulators for over a century, going back at least to the Armstrong Commission (1905–1906). Developments prior to 1995 involving insurance products, illustration technology, and the volatility of financial markets led to heightened concern and to the adoption of the NAIC Life Insurance Illustrations Model Regulation (Model) and this ASOP.

Actuaries have been involved in the process of establishing scales of dividends and other nonguaranteed elements to be illustrated by insurance companies for decades. Until the 1980s, nonguaranteed elements were essentially synonymous with par­ticipating dividends, and the sources of scales of illustrated dividends were tables prepared by the respective insurance companies. Since that time, there has been a pro­liferation of policies with nonguaranteed elements other than dividends. Improving technology has also made possible the development of software that enables insurance agents to produce sales illustrations based on a variety of assumptions, potentially with little or no direct involvement on the part of the insurer. The Model assigns major responsibilities to an actuary who is appointed by the insurer.

Illustrations are intended to have two primary uses:

1. to show the buyer the mechanics of the policy, i.e., how a particular financial design or concept works and how policy values or premium payments may change over time; and
2. to show how the policy may fit into the policyholder’s financial plan.

Another common use of illustrations is to compare the cost or performance of different policies, based on the misperception that the sales illustration projects a likely or best estimate of future performance. A sales illustration simply shows the performance of one particular scale of nonguaranteed elements into the future. Actual nonguaranteed elements will almost certainly vary from those illustrated. Different policies will experience different variances from illustrated values.

 

Current Practices

Since the promulgation of the original standard in 1995, product innovation has continued as pricing structures have been refined, secondary guarantees have expanded, additional underwriting classifications have been added, and an increasing variety of policies with index-based interest credits have been developed. Illustration actuaries used their own judgment to interpret the Model for indexed policies, within the constraints of ASOP No. 24. As indexed policies became more common, regulators became concerned that the amount of index-based interest credit being illustrated was unrealistic and that there were more variations between illustrations from different companies than policy features alone would indicate, which could lead to confusion among consumers. In 2015, this lack of uniform practice in Model implementation led regulators to promulgate Actuarial Guideline XLIX (AG 49) to provide guidance on the interpretation of the Model for indexed life insurance policies. AG 49 did not fully capture the illustration implications of innovations in product design that occurred after its introduction. Consumer advocates argued that newer product designs were circumventing AG 49 limits and again illustrations were showing unrealistic returns. In December 2020, Actuarial Guideline XLIX-A (AG 49-A) was promulgated to address newer product designs and enhance guidance for indexed policies. This standard was revised accordingly. The ASB notes that while the standard was being revised, the NAIC was discussing possible further guidance for illustrations of indexed policies.

Some illustrations are not subject to an applicable law based upon the Model or to AG 49 or AG 49-A. Examples include illustrations for policies in jurisdictions that have not adopted such a law and illustrations for policies that are not within the scope of the Model or of the AGs, such as variable life insurance policies offering indexed accounts. Some actuaries certify or represent to boards of directors, customers, agents, or regulators that such illustrations are in accordance with the Model or that they conform with one or more of the AGs.

 

Appendix 2

Comments on the Second Exposure Draft and Responses

The second exposure draft of the proposed revision of ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation, was issued in July 2023 with a comment deadline of September 15, 2023. Six comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” refers to more than one person associated with a particular comment letter. The ASOP No. 24 Task Force and the Life Committee of the Actuarial Standards Board (ASB) carefully considered all comments received, and the ASB reviewed (and modified, where appropriate) the changes proposed by the task force and committee.

Summarized here are the significant issues and questions contained in the comment letters and the responses. Minor wording or punctuation changes that were suggested but not significant are not reflected in the appendix, although they may have been adopted.

The term “reviewers” in appendix 2 includes the ASOP No. 24 Task Force, the ASB Life Committee, and the ASB. The section numbers and titles used in appendix 2 refer to those in the second exposure draft, which are then cross referenced with those in the third exposure draft.