Nonguaranteed Elements for Life Insurance and Annuity Products

Second Exposure Draft

TRANSMITTAL MEMORANDUM

June 2020

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Nonguaranteed Elements for Life Insurance and Annuity Products

FROM: Actuarial Standards Board (ASB)

SUBJ: Proposed Revision of Actuarial Standard of Practice (ASOP) No. 2

This document contains the second exposure draft of a proposed revision of ASOP No. 2, now titled Nonguaranteed Elements for Life Insurance and Annuity Products. Please review this exposure draft and give the ASB the benefit of your comments and suggestions. Each written comment letter or e-mail received by the comment deadline will receive consideration by the drafting committee and the ASB.

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 “ASB COMMENTS” in the subject line of your message. Please note: Any message not containing this exact phrase in the subject line will be deleted by our system’s spam filter. Also, please indicate in the template and in the body of the email if your comments are being submitted on your own behalf or on behalf of a company or organization.

The ASB posts all signed comments received to 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 to 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 in the ASB office: November 13, 2020

History of the Standard

In 1986, the Interim Actuarial Standards Board adopted the original version of ASOP No. 2, which was titled The Redetermination (or Initial Determination) of Non-Guaranteed Charges and/or Benefits for Life Insur­ance and Annuity Contracts. In 1990, the ASB adopted a reformatted version of ASOP No. 2. (Prior to 2013, ASOP No. 2 was numbered ASOP No. 1.)

In 1995, the ASB adopted ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation, which was created in conjunction with the National Association of Insurance Commissioners’ (NAIC) Life Insurance Illustrations Model Regulation (the Model). The Model itself was drafted to accomplish specific regulatory objectives. ASOP No. 24 provides guidance for compliance with the Model. With respect to illustrated nonguaranteed elements (NGEs) for life insurance policies and annuity products that are not subject to or represented as being in accordance with the Model, the 2004 revision of ASOP No. 2 imposed new obligations on the actuary.

Since ASOP No. 2 was last updated in 2004, there has been increased attention to the practices insurers use to determine and manage NGEs within individual life insurance and annuity products. The ASOP is being updated to reflect current practices and provide additional guidance on the determination of NGEs. In developing this revision, the task force reviewed and incorporated concepts from documents that supported the development of the original version of this ASOP in 1986.

First Exposure Draft

The first exposure draft was issued in March 2019 with a comment deadline of July 15, 2019. Sixteen comment letters were received and considered in making changes that are reflected in the second exposure draft.

For a summary of issues contained in these comment letters, please see appendix 2.

Notable Changes from the First Exposure Draft

Notable changes made to the second exposure draft are summarized below. Additional changes were made to improve readability, clarity, or consistency.

  1. Section 1.2 was clarified to state that determinations of NGEs on in-force policies that were issued before the ASOP took effect are in scope.
  2. In section 2.1, reinsurance and taxes were removed from the list of examples of anticipated experience factors and included as items to take into account, if applicable, in sections 3.2 and 3.4.
  3. In section 2.4, the definition of nonguaranteed element (NGE) was expanded to clarify that NGEs reflect expectations of future experience.
  4. In section 2.7, the definition of “policy” was clarified to include any attached rider or endorsement.
  5. In sections 3.2.1 and 3.3.1, language was added to allow the actuary to consider other relevant items or additional factors.
  6. In section 3.4, guidance that the actuary should “take into account illustration requirements” was replaced with guidance that the actuary “may take into account any practical constraints and any other relevant circumstances.”
  7. In section 3.4, guidance was added that would apply if the actuary believes there is a conflict between following the determination policy when determining NGE scales and the guidance in sections 3.2 and 3.2.1.
  8. In section 3.4.1, the requirement to include “pattern of profits” when taking into account “expected profitability” was deleted and consideration of constraints from section 3.4.2.4(c) was moved to a new item (g).
  9. In section 3.4.2.3, a new item (b) was added, item (c) was deleted, and item (f) was modified to require the actuary to take into account, if applicable, “additional factors for which a change may be reflected in the determination of NGEs under section 3.2(b), the terms of the policy, and applicable law.”
  10. In section 3.4.2.4, item (c) was modified to allow for any method that is consistent with sections 3.2(a) and 3.2(b), and the reference to “pattern of profits” was changed to an example. The guidance was also expanded to allow the actuary to use approximation and smoothing methods.
  11. Section 3.4.2.5 was added to allow the actuary to take into account anticipated experience factors that were not part of the previous determination of NGE scales.
  12. A new section 3.9, Reliance on Another Actuary, was added.
  13. In section 4.1, guidance that the actuary should issue an actuarial report in accordance with ASOP No. 41, Actuarial Communications, was restored, and changes were made to reflect changes made in section 3.

Notable Changes to the Existing ASOP Resulting from All Exposures

A cumulative summary of the notable changes from the existing ASOP are summarized below.

  1. In section 1.2, the scope was clarified, and reinsurance transaction-related nonguaranteed elements were excluded from the scope.
  2. In section 2, the definitions were expanded and clarified.
  3. In section 3.1, the concept of an insurer’s NGE framework, which includes the determination policy, how policy classes are established, and the practices used to determine NGE scales, was introduced.
  4. In section 3.2, guidance was expanded for advising on the actuarial aspects of the determination policy, including advice that is consistent with the following:

a. NGE scales are determined with the expectation that they will be revised only if anticipated experience factors have changed since issue or, alternatively, since the previous revision, and

b. NGE scales are determined based on reasonable expectations of future experience and are not determined with the objective of recouping past losses or distributing past gains.

  1. In section 3.3, guidance for establishing or making changes to policy classes was expanded.
  2. In section 3.4, guidance for determining NGE scales to align with the determination policy guidance, terms of the policy, and applicable law was expanded, and new guidance allows the actuary to take into account anticipated experience factors that were not part of the previous determination of NGE scales.
  3. In section 3.5, guidance for recommending NGE scales used in illustrations was updated.
  4. In section 3.6, guidance for regulatory opinions and disclosures was added.
  5. In sections 3.7, 3.8, and 3.9, guidance for relying on data or other information supplied by others, relying on assumptions selected by another party, and reliance on another actuary was added.
  6. In section 3.10, documentation requirements were added.
  7. In section 4, disclosure requirements were added, mostly to address expanded guidance throughout section 3.

Request for Comments

The ASB appreciates comments and suggestions on all areas of this proposed standard. Rationale for any suggested changes would be helpful.

The ASB voted in June 2020 to approve this exposure draft.

Task Force to Revise ASOP No. 2
Gabriel R. Schiminovich, Chairperson
David J. Hippen Linda D. Rodway
Brian R. Lessing Lance E. Schulz
Donna C. Megregian
Life Committee of the ASB
Linda M. Lankowski, Chairperson
Janice A. Duff Henry W. Siegel
Lisa S. Kuklinski Jeremy Starr
Donna C. Megregian
Actuarial Standards Board
Kathleen A. Riley, Chairperson
Robert M. Damler David E. Neve
Mita D. Drazilov Cande J. Olsen
Kevin M. Dyke Barbara L. Snyder
Darrell D. Knapp 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.

ACTUARIAL STANDARD OF PRACTICE NO. 2

Nonguaranteed Elements for Life Insurance and Annuity Products

STANDARD OF PRACTICE

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

1.1 Purpose

This actuarial standard of practice (ASOP) provides guidance to actuaries when performing actuarial services with respect to the determination of nonguaranteed elements (NGEs) for life insurance and annuity products, including riders attached to such products.

1.2 Scope

This standard applies to actuaries when performing actuarial services with respect to the determination and, if applicable, illustration of NGEs for all life insurance and annuity policies written on individual policy forms where NGEs may vary at the discretion of the insurer (except as provided below). This would include determination of NGEs on in-force policies that were issued before the ASOP took effect. Throughout this standard, the term determination includes both initial determination and subsequent redeterminations. The standard also applies to actuaries when performing similar actuarial services for group master contracts with individual certificates where NGEs are determined in a similar manner to products written on individual life and annuity policy forms. Examples of products within the scope of this standard include universal life, indeterminate premium life, and deferred annuity products. Such products may be fixed, variable, or indexed.

Actuarial services for group products with NGEs that are not determined in a similar manner to those written on individual life and annuity policy forms are not in scope. Two examples are traditional group term life insurance and certain retirement funding products (for example, synthetic guaranteed interest contracts). To the extent that actuarial services for a product do not clearly fall into the scope, the actuary should use professional judgment to determine whether the services are in scope.

This standard does not apply to actuaries when performing actuarial services with respect to policyholder dividends, which are covered by ASOP No. 15, Dividends for Individual Participating Life Insurance, Annuities, and Disability Insurance. To the extent that a product involves both NGEs and policyholder dividends, this standard applies to actuaries when performing actuarial services with respect to NGEs, and ASOP No. 15 applies to actuaries when performing actuarial services with respect to policyholder dividends.

This standard does not apply to actuaries when performing actuarial services with respect to the determination of any nonguaranteed element in a reinsurance contract.

This standard does not apply to actuaries when performing actuarial services with respect to illustrations of NGEs subject to ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation.

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

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 consider the guidance in this standard to the extent it is applicable and appropriate.

1.4 Effective Date

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

Section 2. Definitions

The terms below are defined for use in this actuarial standard of practice and appear in bold throughout the ASOP.

2.1 Anticipated Experience Factor

An assumption of future experience used in the determination of NGEs. Examples of anticipated experience factors include rates of investment income, mortality, morbidity, policy persistency, and expense.

2.2 Determination Policy

The insurer’s principles or objectives for determining NGEs. For example, the determination policy could include the insurer’s governing principles and requirements, profitability objectives, capital objectives, guidelines for drafting policy provisions related to NGEs, principles for addressing illustration requirements, and requirements for and frequency of reviews of NGEs on in-force products.

2.3 Guaranteed Element

A premium, value, charge, or benefit that limits an NGE. Guaranteed elements are specified in the policy. Examples of guaranteed elements include maximum premium charges, maximum expense charges, minimum credited interest rates, maximum cost of insurance charges, maximum gross premiums, minimum index parameters, maximum mortality and expense (M&E) risk charges, and maximum policy loan interest rates.

2.4 Nonguaranteed Element (NGE)

Any premium, charge, or benefit within an insurance policy that affects policy costs or values, is not guaranteed in the policy, and can be changed at the discretion of the insurer. An NGE may provide a more favorable value to the policyholder than an element that is guaranteed in the policy. For the purpose of this ASOP, an NGE reflects expectations of future experience as opposed to a dividend, which reflects participation in past experience. Examples of nonguaranteed charges or benefits include credited interest, cost of insurance (COI) charges, bonuses, indeterminate premiums, index parameters, and expense charges.

2.5 NGE Framework

The combination of the determination policy, how policy classes are established, and the practices used to determine NGE scales.

2.6 NGE Scale

A series of one or more premiums, charges, or benefits, which are not guaranteed and can be changed over time. For example, an NGE scale for COI charges could be set based on issue age, underwriting class, and duration.

2.7 Policy

An individual life insurance policy, an individual annuity contract, or a group certificate that has NGEs that operate in substantially the same manner as NGEs in an individual life insurance policy or an individual annuity contract. A policy includes any attached rider or endorsement.

2.8 Policy Class

Policies that are grouped together for the purposes of determining an NGE.

2.9 Profitability Metric

A measurement used to assess a product’s expected level of financial results.

Section 3. Analysis of Issues and Recommended Practices

3.1 NGE Framework

The actuary should understand the insurer’s NGE framework, if any, in relation to the actuarial services requested. The actuary should consider how the NGE framework has been applied in the past in relation to the actuarial services requested, if available.

Examples of items commonly found within the NGE framework include the following

a. a description of the determination policy;

b. the methodology for establishing policy classes;

c. the methodology for evaluating experience and developing anticipated experience factors;

d. the frequency of review of anticipated experience factors and policy classes;

e. the methodology for allocating income and costs;

f. the models or methods used;

g. the marketing objectives, such as distribution strategy, target markets, and competitive objectives;

h. the objectives used in setting profitability metrics;

i. the methodology for determining reserves and capital objectives; and

j. the insurer’s governance process, including the decision and approval process.

If the NGE framework is absent, or in the actuary’s professional judgment, is incomplete or needs to be updated to reflect the current environment, the actuary should recommend that the NGE framework be created, completed, or updated.

3.2 Providing Advice on the Actuarial Aspects of the Determination Policy

The actuary may provide advice on 1) developing or modifying the determination policy, or 2) applying the determination policy.

When providing advice on the actuarial aspects of the determination policy, the actuary should provide advice consistent with the following:

a. NGE scales are determined with the expectation that they will be revised only if anticipated experience factors have changed since issue, or alternatively, since the previous revision; and

b. NGE scales are determined based on reasonable expectations of future experience and are not determined with the objective of recouping past losses or distributing past gains.

3.2.1 Providing Advice on Developing or Modifying the Determination Policy

When advising an insurer on developing or modifying its determination policy, the actuary should take into account the following, if applicable:

a. the policy provisions and applicable law;

b. how anticipated experience factors reflect expectations of future experience;

c. how the variability and credibility of each anticipated experience factor may impact the determination of the NGE scales;

d. the insurer’s marketing objectives;

e. profitability, reserves, capital objectives, reinsurance, and taxes; and

f. periodic review of NGEs in in-force policies, such as the maximum time period between successive insurer reviews of NGEs.

The actuary may take into account other items relevant to the determination policy.

The actuary should document the sources of the determination policy used in developing the advice and how (a)–(f) above and any additional relevant items were taken into account. For example, portions of the determination policy may be found in the insurer’s governance processes, corporate policies, or operating practices.

3.2.2 Providing Advice on Applying the Determination Policy

When advising on applying the determination policy for determining initial NGE scales, evaluating whether to revise existing NGE scales, or revising existing NGE scales, the actuary should take into account the following, if applicable:

a. the need to make additional assumptions about how the determination policy applies to the assignment;

b. guaranteed elements, options, and other relevant provisions of the policy;

c. impacts on or from reserve or capital objectives, or changes in such objectives;

d. impact on or from reinsurance and taxation;

e. applicable law (including, for example, for variable products, any constraints or other requirements imposed by applicable securities law);

f. resources available; and

g. the insurer’s goals, including marketing and financial objectives.

If, in the actuary’s professional judgment, the actuary believes that the determination policy may be inconsistent with the guidance in sections 3.2 and 3.2.1, the actuary should recommend that the determination policy be revised.

3.3 Establishment of or Changes to Policy Classes

When preparing for an assignment, the actuary should review the existing policy classes for the product or similar products within the insurer’s NGE framework.

3.3.1 For Future Sales of a New or Existing Product

If the policy classes for future sales have not been defined in the NGE framework, or if they have been defined, but in the actuary’s professional judgment are incomplete, do not reflect changing circumstances (for example, new underwriting practices, or new profit or marketing objectives), or are inconsistent with the items below, the actuary should recommend the establishment of or changes to the policy classes that are

a. consistent with the guidance in ASOP No. 12, Risk Classification;

b. appropriate for each NGE (a particular policy may be assigned to one or more policy classes at issue based on anticipated experience factors and NGEs, for example, one policy class for credited interest and a different policy class for COI charges);

c. appropriately reflective of differences within anticipated experience factors (for example, smoker versus nonsmoker mortality);

d. refined appropriately to mitigate antiselection; and

e. not expected to be redefined after issue.

When recommending policy classes for future sales, the actuary should take into account the policy provisions, the structure of guaranteed elements and NGEs, the date on which the recommended policy classes would take effect (for example, policies issued before or after a particular date could be in different policy classes), and the underwriting characteristics and marketing objectives for the product. The actuary may also take into account any additional relevant factors.

3.3.2 For In-Force Policies

The actuary should recommend that in-force policies remain assigned to their policy classes, unless there is new information that is material to the anticipated experience factors and supports reassigning the policies to different policy classes. For example, a change in one state’s premium tax that affects some policies within a policy class differently than it affects others could justify reassigning such policies to a different policy class.

In addition, the actuary may recommend combining policy classes if, in the actuary’s professional judgment, such combinations would be appropriate. For example, if the experience for a policy class is not credible, the policy class could be combined with other policy classes for the purposes of determining anticipated experience factors.

When recommending a change in the assignment of policies to policy classes, the actuary should follow the guidance in section 3.3.1.

3.4 Determination Process for NGE Scales

When determining NGE scales for a product in accordance with the NGE framework, the actuary should take into account the determination policy and the following:

a. the appropriateness of the models, methods, and profitability metrics;

b. the relationship of each NGE scale to one or more anticipated experience factors;

c. the consistency of NGE scales with policy provisions;

d. any limits on NGE scales due to regulatory constraints;

e. any limits on NGE scales due to guaranteed elements; and

f. the relationship of NGE scales to reserves, capital, and surplus.

The actuary may take into account any practical constraints and any other relevant circumstances.

The actuary may use approximation methods, such as smoothing and interpolation, when determining NGE scales.

If, in the actuary’s professional judgment, the actuary believes that following the determination policy when determining NGE scales would conflict with the guidance in sections 3.2 and 3.2.1, the actuary should document the conflict and should consider providing advice consistent with section 3.2.2.

3.4.1 Determination Process for Future Sales of a New or Existing Product

When determining NGE scales for future sales of a new or existing product, the actuary should take into account the following:

a. how anticipated experience factors were developed and whether they reflect the product’s features, intended markets, distribution methods, underwriting procedures, and policy classes (see section 3.3.1);

b. how NGE scales are structured to cover costs under the product design, as well as the potential impact on profitability if policyholder behavior varies from expectations;

c. that NGE scales are determined with the expectation that they will not be revised unless the anticipated experience factors change;

d. whether the NGE scales are consistent with the language of the policy;

e. expected profitability;

f. constraints on the ability to revise NGE scales to reflect future changes in anticipated experience factors (for example, guaranteed elements, contractual limitations, development and implementation cost, systems constraints); and

g. how the guidance in section 3.4.2.4 may constrain the ability to revise NGE scales after issue.

The actuary may use prior analysis in the determination of the NGE scales, if appropriate.

The actuary should document the NGE determination process and results, including how items (a)–(g) and any prior analysis were taken into account.

The actuary should consider conducting sensitivity analysis to evaluate the impact of future deviations from the anticipated experience. The actuary should consider recommending how often such anticipated experience factors be reviewed.

3.4.2 Determination Process for In-Force Policies

The determination process for in-force policies consists of reviewing prior determinations, analyzing emerging experience relative to anticipated experience factors, considering whether to recommend a revision in the NGE scales, and, if a revision is to be made, determining the revised NGE scales.

3.4.2.1 Reviewing Prior Determinations

The actuary should review prior determinations, including the original determination in effect at the time of policy issue. This includes information such as previous anticipated experience factors, profitability metrics, pattern of profits, NGE scales, and other assumptions.

If the information related to prior determinations is not available or incomplete, the actuary should reconstruct prior determinations to the extent practicable and necessary for the determination process, and document the methods and assumptions used. If reconstructing the prior determinations is not practicable due to incomplete information or other limitations, the actuary should select and document a reasonable approach to gain an understanding of the prior determination.

3.4.2.2 Analyzing Experience

When analyzing how experience is emerging relative to anticipated experience factors, the actuary should take into account the following, if applicable:

a. the time elapsed since the last analysis of experience;

b. the credibility of experience;

c. the size of the relevant group of policies or policy classes, such as number of policies, premium volume, insurance amount, or account value;

d. the materiality of any change in the experience relative to the existing anticipated experience factors;

e. whether existing anticipated experience factors, including any projected trends, are supported by actual experience; and

f. whether profitability was particularly sensitive to changes in any anticipated experience factors, as disclosed in previous actuarial reports.

The actuary should recommend that the anticipated experience factors be updated, if warranted by the results of the analysis.

The actuary should document how (a)–(f) above and any additional relevant items were taken into account.

3.4.2.3 Considering Whether to Recommend a Revision to NGE Scales

When considering whether to recommend a revision to NGE scales, the actuary should take into account the following, if applicable:

a. time elapsed since NGE scales were last reviewed;

b. the anticipated experience factors that are used for revising NGE scales under the terms of the policy and applicable law;

c. deviations in emerging experience from what was assumed in the prior determination of NGE scales;

d. how any recommended revision could affect reserves, capital, reinsurance, and taxation;

e. the appropriateness of the profitability metrics and objectives. For example, an internal rate of return metric may have been used at issue, but a different metric may be appropriate when applied to in-force products;

f. the change in the prospective profitability due to the change in anticipated experience factors and any additional factors for which a change may be reflected in the determination of NGEs under section 3.2(b), the terms of the policy, and applicable law;

g. the complexity of the analysis needed. For example, when changing credited interest rates, the actuary may limit the analysis to changes in investment income, while other changes, such as COIs, may require more complex analysis and modeling, which could reflect multiple anticipated experience factors and require consideration of other NGEs;

h. whether other analyses, such as sensitivity analysis, are needed;

i. costs, practical implementation difficulties, and materiality of making revisions to the NGE scale; and

j. potential impacts on the policyholder or insurer of revising or not revising NGE scales to reflect changes in anticipated experience factors.

The actuary should document the results of the analysis, including how (a)–(j) above and any additional relevant items were taken into account, whether the actuary recommends a revision or not.

3.4.2.4 Determining the Revised NGE Scales

When determining revised NGE scales, the actuary should take into account the provisions of section 3.4.1(b)-(g) and should

a. identify, under the terms of the policy and applicable law, the anticipated experience factors that may be used when revising NGE scales;

b. base the revision of the NGE scales on changes in the anticipated experience factors identified in (a) above; and

c. determine new NGE scales using a method that is consistent with sections 3.2(a) and 3.2(b). For example, it might be appropriate to use a method to determine new NGE scales such that the prospective profitability from the time of revision, including the prospective pattern of profits by duration, is not materially greater than that using the original NGE scales and original anticipated experience factors, holding all other assumptions constant between the projections.

The actuary may use approximation and smoothing methods that are reasonable in relation to the costs and benefits provided.

The actuary should perform an appropriate level of analysis based on the anticipated experience factors and the type of revision being considered. (For example, changing COIs may require more complex analysis and modeling than changing credited interest rates, as discussed in section 3.4.2.3[g].) The actuary may use relevant prior analysis in making the determination. The actuary should document the results of any analysis used to support the determination of the revised NGE scales, including how the provisions of section 3.4.1 (b)-(g) and any additional relevant items as noted above were taken into account.

3.4.2.5 Additional Considerations

When recommending or determining a revision to NGE scales, the actuary may consider using additional anticipated experience factors that were not part of the previous determination of NGE scales.

3.5 NGEs Used in Illustrations Not Subject to ASOP No. 24

When recommending NGE scales to be used in an illustration not subject to ASOP No. 24, the actuary should follow applicable regulations, guidelines, and standards for illustrations, such as those that are based upon the following:

a. Annuity Disclosure Model Regulation (Model 245); and

b. Variable Life Insurance Model Regulation (Model 270) and NAIC Actuarial Guideline 15.

The actuary should consider conducting tests of illustrated NGE scales to ascertain whether those illustrated NGE scales could be supported by anticipated experience factors and other reasonable assumptions.

3.6 Providing Regulatory Opinions and Disclosures

When providing regulatory opinions and disclosures relating to NGEs, or actuarial services in support of such opinions and disclosures, the actuary should be knowledgeable about the requirements and information necessary to support the opinion or disclosure. Such information may include some or all of the following for the relevant products:

a. the insurer’s NGE framework;

b. the requirements of applicable law;

c. the determination process, including how experience and financial results are emerging; and

d. previous regulatory filings.

3.7 Reliance on Data or Other Information Supplied by Others

When relying on data or other information supplied by others, the actuary should refer to ASOP No. 23, Data Quality, and ASOP No. 41, Actuarial Communications, for guidance.

3.8 Reliance on Assumptions or Methods Selected by Another Party

When relying on assumptions or methods selected by another party, the actuary should refer to ASOP No. 41 for guidance. The actuary should disclose the extent of any such reliance in the actuarial report.

3.9 Reliance on Another Actuary

The actuary may rely on another actuary who has performed actuarial services related to the determination of NGEs. However, the relying actuary should be reasonably satisfied that the other actuary is qualified to perform the actuarial service, the actuarial service was performed in accordance with applicable ASOPs, and the actuarial service performed is appropriate for the objective of the assignment. The actuary should disclose the extent of any such reliance.

3.10 Documentation

In addition to the documentation requirements throughout the rest of section 3, the actuary should consider preparing and retaining documentation to support compliance with the remaining requirements of section 3 and the disclosure requirements of section 4. When preparing any documentation, the actuary should prepare it in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work or could assume the assignment if necessary. The degree of 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.

Section 4. Communications and Disclosures

4.1 Required Disclosures in an Actuarial Report

The actuary should issue an actuarial report in accordance with ASOP No. 41. In issuing the actuarial report, the actuary should refer to ASOP Nos. 12 and 23 and should disclose the following (if applicable):

a. any recommendations that were made with respect to developing, completing, or updating the NGE framework (see section 3.1);

b. advice the actuary provided on developing or modifying the determination policy (see sections 3.2 and 3.2.1);

c. advice the actuary provided on how to apply the determination policy, including any advice that deviated from the determination policy in order to follow the guidance in sections 3.2 or 3.2.1 or that deviated from the guidance in sections 3.2 or 3.2.1 in order to comply with the determination policy, and the rationale for such deviations (see section 3.2.2);

d. recommendations made by the actuary to establish or change policy classes for future sales of a new or existing product (see sections 3.3.1 and 3.4.1[a]);

e. recommendations made by the actuary for reassignment of in-force policies to different policy classes (see section 3.3.2);

f. any conflict with the determination policy and the guidance in sections 3.2 and 3.2.1 when determining NGE scales (see section 3.4);

g. a description of the anticipated experience factors used in the determination of NGEs and any changes to such factors since any prior determination (see sections 3.4.1 and 3.4.2);

h. a description of any material constraints on the ability to revise NGE scales (see sections 3.4.1[f] and [g] and 3.4.2.4);

i. results, observations, or recommendations from the determination process for NGE scales for future sales of a new or existing product, including results and observations from any profitability analysis or sensitivity analysis (see section 3.4.1);

j. observations from the analysis that indicate that the profitability is particularly sensitive to changes in certain anticipated experience factors (see sections 3.4.1 and 3.4.2.3[h]);

k. any use of prior analysis (see section 3.4.1 and 3.4.2.4);

l. any reconstructed prior determinations or reasonable approaches used when reconstructing the prior determinations was not possible (section 3.4.2.1);

m. any recommendation that anticipated experience factors be updated and how these updated factors were taken into account when recommending changes to NGE scales (section 3.4.2.2);

n. observations or recommendations to revise or not revise in-force NGE scales, including results from any profitability or sensitivity analysis (see section 3.4.2.3);

o. results, observations, or recommendations from the determination process used to support any revisions to NGE scales for in-force products, including results and observations from any analysis (see section 3.4.2.4);

p. the circumstances and rationale for using any additional anticipated experience factors that were not part of the previous determination of NGE scales (see section 3.4.2.5); and

q. results from any tests of illustrated NGE scales not subject to ASOP No. 24 to ascertain whether those illustrated NGE scales could be supported by anticipated experience factors and other reasonable assumptions (see section 3.5).

4.2 Additional Disclosures in an Actuarial Report

The actuary should also include the following disclosures, when applicable, in an actuarial report:

a. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, and other legally binding authority);

b. the disclosure in ASOP No. 41, section 4.3, 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; and

c. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has deviated materially from the guidance of this ASOP.

Appendix 1—Background and Current Practices

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

Background

In the mid-1970s, activity increased with respect to individual life and annuity products with nonguaranteed elements (NGEs) as opposed to dividends under traditional participating policies.

Because of the increased activity on these products, they came to represent significant market share and financial significance, and it was deemed necessary to develop an actuarial standard of practice in this area. Thus, the Interim Actuarial Standards Board adopted the original version of ASOP No. 1 in October 1986. (Prior to 2013, ASOP No. 2 was known as ASOP No. 1.) The Actuarial Standards Board adopted a reformatted version of ASOP No. 1 in 1990.

In 1986, the policies in question were still evolving, and there was little standardization in such areas as benefit design, pricing structure, marketing practices, and investment philosophies. It was therefore impossible for the standard to offer guidance on these issues. Rather, the standard reflected that the actuary’s essential obligations were (1) to assure the com­pletion of all activities required to advise the client professionally; and (2) to prepare an actuarial communication for the client presenting this advice.

By the early 2000s, the volume of these products sold had continued to grow, and considerable product innovation had taken place. ASOP No. 1 was revised to reflect this new environment. It was also revised to be consistent, where appropriate, with newer standards ASOP No. 15, Dividend Determination for Participating Individual Life Insurance Policies and Annuity Contracts, and ASOP No. 24, Compliance with the NAIC Life Insurance Illustrations Model Regulation. The resulting revision of ASOP No. 1 was adopted in March 2004.

In May 2011, ASOP No. 1 was updated for deviation language, and in March 2013, it was renumbered ASOP No. 2.

In recent years, further developments affecting products with NGEs have taken place, such as the following:

  • continued increase in the sales of products with NGEs;
  • continued product evolution, including index features, persistency bonuses, living benefit riders, secondary guarantees, and new ancillary benefits;
  • advances in actuarial techniques for modeling, stochastic testing, and sensitivity analysis;
  • changes in life insurance company taxation, reserve valuation, and capital objectives;
  • enhancement of insurer governance procedures with respect to the determination of NGEs;
  • increased public awareness of changes to NGEs for in-force policies; and
  • increased regulation of NGEs, such as the promulgation of New York Regulation 210 in March 2018.

In response to such developments, actuarial practices have evolved, and ASOP No. 2 has been updated to reflect these changes.

Current Practices

The actuary may provide professional services in three principal areas with respect to NGEs. The actuary is normally involved in the determination of NGE scales in accordance with insurer determination policy. The actuary may also be involved in advising the insurer on setting the determination policy or the establishment of or changes to policy classes. When determining NGEs, the actuary considers corporate governance practices, policy administration, regulation, marketing objectives, and consumer expectations, among other factors.

The actuary may be called upon to determine NGE scales for a new product or for future sales of an existing product, or to recommend revising NGE scales for in-force products. Although the steps needed to complete these two broad categories of assignments have many common elements, there are significant differences with respect to the principles, methodologies, and criteria that are commonly followed.

Appendix 2—Comments on the First Exposure Draft and Responses

The first exposure draft of this ASOP, Nonguaranteed Elements for Life Insurance and Annuity Products, was issued in March 2019 with a comment deadline of July 15, 2019. Sixteen 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” may refer to more than one person associated with a particular comment letter. The ASOP No. 2 Task Force carefully considered all comments received, reviewed the exposure draft, and proposed changes. The ASB Life Committee and the ASB reviewed the proposed changes and made modifications where appropriate.

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 this appendix, although they may have been adopted.

The term “reviewers” in appendix 2 includes the ASOP No. 2 Task Force, the ASB Life Committee, and the ASB. Also, unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the first exposure draft.

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