Cal. Code Regs. tit. 10 § 2523.6
Appendix A
Illustrations of indexing methods dependent upon changes in CMT levels
Example 1: Method -- For each calendar year, the rate is set based on the monthly average from November of the preceding year. Each month, a potential rate will be calculated based upon the previous month's CMT average. If the potential rate differs from the actual rate by more than 25 basis points ("bps"), the actual rate will be updated. This continues until the end of the calendar year, when the rate is automatically reset based upon the monthly average from November again.
| Date | 5 Year CMT Monthly Average | Potential Nonforfeiture ("NF") rate | Actual NF Rate | Comments |
| Nov. 2003 | 3.0% | N/a | N/a | Monthly rate for Jan. 2004 -- 1.75% (3.0% - 125 bps) |
| Dec. 2003 | 3.0% | N/a | N/a | |
| Jan. 2004 | 3.1% | N/a | 1.75% | Based on Nov. 2003 |
| Feb. 2004 | 3.2% | 1.85% | 1.75% | No change since |
| (3.1% - 125 bps) | difference between actual rate and potential rate is less than 25 bps | |||
| March 2004 | 3.3% | 1.95% | 1.75% | No change since difference is only 20 bps. Note that result of March CMT means April actual rate will change. |
| April 2004 | 3.3% | 2.05% | 2.05% | Potential rate (2.05%) differs from actual rate (1.75%) by more than 25 bps, so update actual rate. |
| May 2004 | 3.1% | 2.05% | 2.05% | |
| June 2004 | 3.1% | 1.85% | 2.05% | |
| July 2004 | 2.6% | 1.85% | 2.05% | 5 year CMT dropped this month, so next month potential NF rate will drop. Since more than 25 bps change, actual NF rate changes. |
| Aug. 2004 | 2.6% | 1.35% | 1.35% | |
| Sept. 2004 | 2.6% | 1.35% | 1.35% | |
| Oct. 2004 | 2.6% | 1.35% | 1.35% | |
| Nov. 2004 | 2.7% | 1.35% | 1.35% | Monthly rate for Jan. 2005 -- 1.45% (2.7% - 125 bps) |
| Dec. 2004 | 3.0% | 1.45% | 1.35% | Less than 25 bps change |
| Jan. 2005 | 2.8% | N/a | 1.45% | Based on Nov. 2004 |
| Feb. 2005 | 2.8% | 1.55% | 1.45% | Less than 25 bps change |
| March 2005 | 2.8% | 1.55% | 1.45% | |
| April 2005 | 2.8% | 1.55% | 1.45% | |
| May 2005 | 3.25% | 1.55% | 1.45% | |
| June 2005 | 3.25% | 2.0% | 2.0% | Update rate since more than 25 bps change from potential rate to actual rate. |
| July 2005 | 3.25% | 2.0% | 2.0% |
Example 2 -- relatively level interest rate environment
Method -- This example starts with an initial NF rate based on a single point in time. Once this initial rate is determined, it is in effect until the potential rate differs from the actual rate by more than 25 bps. This example does not automatically set each calendar year from a set month. For this example, the initial rate is set for the contract form based off a one month average with a one month lag for a contract form that will launch in January of 2004. March potential rate is based off of January CMT rates, April potential rate is determined from February CMT rates and so on. So for issues in January 2004, the rate is based on November 2003 monthly average. For all issues after January 2004, the actual rate will change only if it differs from the potential rate by more than 25 bps. These examples will look at what happens in relatively level interest rate environment -- keeping in mind that the NF rate MUST be updated so all 5 year CMT rates upon which the nonforfeiture rate is based occur within 15 months from contract issue date.
| Date | 5 Year CMT Monthly Average | Potential NF Rate | Actual NF Rate | Comments |
| Nov. 2003 | 3.0% | N/a | N/a | Month for base rate -- "sets a starting peg in the ground" |
| Dec. 2003 | 3.1% | N/a | N/a | One month lag |
| Jan. 2004 | 3.1% | 1.75% | 1.75% | Initial Rate for block |
| Feb. 2004 | 3.3% | 1.85% | 1.75% | |
| March 2004 | 3.5% | 1.85% | 1.75% | |
| April 2004 | 3.5% | 2.05% | 2.05% | |
| May 2004 | 3.5% | 2.25% | 2.05% | |
| June 2004 | 3.5% | 2.25% | 2.05% | |
| July 2004 | 3.5% | 2.25% | 2.05% | |
| Aug. 2004 | 3.5% | 2.25% | 2.05% | |
| Sept. 2004 | 3.5% | 2.25% | 2.05% | |
| Oct. 2004 | 3.5% | 2.25% | 2.05% | |
| Nov. 2004 | 3.5% | 2.25% | 2.05% | |
| Dec. 2004 | 3.5% | 2.25% | 2.05% | |
| Jan. 2005 | 3.5% | 2.25% | 2.05% | |
| Feb. 2005 | 3.5% | 2.25% | 2.05% | |
| March 2005 | 3.5% | 2.25% | 2.05% | |
| April 2005 | 3.5% | 2.25% | 2.05% | |
| May 2005 | 3.5% | 2.25% | 2.25% | Since CMT rate that determined actual NF rate of 2.05% occurred more than 15 months ago, the actual rate MUST be updated. Given the method, this means this rate is based on March CMT rate (monthly average with a one month lag -- see description in method for this example). |
| June 2005 | 3.5% | 2.25% | 2.25% | |
| July 2005 | 3.5% | 2.25% | 2.25% |
Example 3 -- Shows what to do when 1% floor comes into play
Method -- This example starts with an initial NF rate based on a single point in time. The potential rate is determined based on the preceding month CMT average. If the potential rate differs from the actual rate by more than 25 bps, the actual rate is updated. This example shows how to handle statutory minimums (use the same logic for maximums).
| Date | 5 Year CMT Monthly Average | Potential NF Rate | Actual NF Rate | Comments |
| Dec. 2003 | 2.4% | N/a | N/a | Starting month for the block -- this sets the "peg in the ground" |
| Jan. 2004 | 2.3% | 1.15% | 1.15% | Initial Rate for block |
| Feb. 2004 | 2.3% | 1.05% | 1.15% | |
| March 2004 | 2.25% | 1.05% | 1.15% | |
| April 2004 | 2.25% | 1.0% | 1.15% | |
| May 2004 | 2.1% | 1.0% | 1.15% | |
| June 2004 | 2.1% | 0.85% | 1.0% | The potential rate is not subject to statutory minimums and maximums. It must be unbounded in order to determine if a change of more than 25 bps has occurred. In this case, it has, so the actual rate is updated, factoring in statutory minimums and maximums. |
| July 2004 | 2.1% | 0.85% | 1.0% | |
| Aug. 2004 | 2.1% | 0.85% | 1.0% |
Example 4 -- real life 5 year CMT averages
Method -- Monthly average 5 year CMT with a one month lag time. NF rate is held constant as long as the potential nonforfeiture rate is within a range of plus or minus 50 bps from the current nonforfeiture rate. Sources -- http://www.federalreserve.gov/releases/h15/current/h15.pdf and http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/index.html
| (1) CMT Rate | (2) Potential NF Rate | (3) Actual NF Rate | |||
| July 2002 | 3.81 | N/a | 2.95 | Assumed as a given | |
| Aug. 2002 | 3.29 | 2.55 | 2.95 | ||
| Sept. 2002 | 2.94 | 2.05 | 2.05 | ||
| Oct. 2002 | 2.95 | 1.70 | 2.05 | ||
| Nov. 2002 | 3.05 | 1.70 | 2.05 | ||
| Dec. 2002 | 3.03 | 1.80 | 2.05 | ||
| Jan. 2003 | 3.05 | 1.80 | 2.05 | ||
| Feb. 2003 | 2.90 | 1.80 | 2.05 | ||
| March 2003 | 2.78 | 1.65 | 2.05 | ||
| April 2003 | 2.93 | 1.55 | 2.05 | ||
| May 2003 | 2.52 | 1.70 | 2.05 | ||
| June 2003 | 2.27 | 1.25 | 1.25 | ||
| July 2003 | 2.87 | 1.00 | 1.25 | ||
| Aug. 2003 | 3.37 | 1.60 | 1.25 |
Note -- the above examples are just that -- examples. There are many more methods that could be used that may also be appropriate.
Appendix B
Transfer of minimum nonforfeiture amount for Section 2523.4 of this Article.
This example will show a simple demonstration of how the minimum nonforfeiture amount is to be transferred in an equity-indexed annuity ("EIA") under Section 2523.4. Assume that the 5 year CMT is 3.75%. This results in a fixed annuity nonforfeiture rate of 2.5%. Further assume that the equity-indexed benefit receives the additional 100 basis points ("bps") reduction, so its nonforfeiture rate is 1.5%. This contract has a fixed interest option within an EIA. The policyholder may transfer money on any contract anniversary. Assuming there are transfers, the minimum nonforfeiture amount is path dependent. The minimum nonforfeiture amount will roll forward and get transferred back and forth at the benefit level, then added together to determine the minimum nonforfeiture amount for the contract. Note that there are slight rounding differences.
Year 1
Policyholder initially allocates 50% of premium each to fixed and equity-indexed benefits.
EIA benefit = 50% * (100,000 * 87.5% - $50) * 1.015 = 44,380.88
Fixed benefit = 50% * (100,000 * 87.5% - $50) * 1.025 = 44,818.13
The total minimum nonforfeiture amount is 44,380.88 + 44,818.13 = 89,199.00.
Year 2
At the end of year 1, assume that due to market performance, the contract value is now allocated 60% in the equity-indexed benefit and 40% in the fixed benefit. The policyholder decides to re-allocate his contract value so that it is again at 50% in the equity-indexed benefit and 50% in the fixed interest benefit. This means that 1/6 th (10% out of the 60%) of the equity-indexed contract value is transferred to the fixed interest contract value. Thus, 1/6 th of the equity-indexed nonforfeiture amount is transferred to the fixed nonforfeiture amount. The results follow:
EIA benefit = 44,380.88 - 7,396.81 = 36,984.06.
Fixed benefit = 44,818.13 + 7,396.81 = 52,214.94.
Note that the total minimum nonforfeiture amount remains level at 89,199.00.
Year 2 calculations are identical to year 1 with the adjusted starting values. Note that since contract value is again split 50% each, the contract charge is also allocated 50% to each benefit.
EIA benefit = (36,984.06 - 50% * $50)* 1.015 = 37,513.45
Fixed benefit = (52,214.94 - 50% * $50)* 1.025 = 53,494.68
Total = 91,008.13
With different starting allocations and re-allocations, all the calculations operate the same, but would be adjusted accordingly.
Appendix C
Initial Actuarial Certification of Compliance with California Insurance Code Chapter 1, Part 2, Division 2, Article 3B, Standard Nonforfeiture Law for Individual Deferred Annuities, Sections 10168 to 10168.10 and California Code of Regulations Title 10, Chapter 5, Subchapter 3, Article 10.2, Annuity Nonforfeiture, Sections 2523 to 2523.6 for Equity Indexed Annuities
For use with Equity-Indexed Annuity contract forms pursuant to California Code of Regulations, Title 10, Section 2523.5(b)(3).
I, (state name and professional designation) am responsible for evaluating compliance with California Insurance Code Chapter 1, Part 2, Division 2, Article 3B, Standard Nonforfeiture Law for Individual Deferred Annuities, Sections 10168 to 10168.10, and California Code of Regulations, Title 10, Chapter 5, Subchapter 3, Article 10.2, Annuity Nonforfeiture, Sections 2523 to 2523.6 for (name of insurance company). I have reviewed (identify contract form) and am familiar with California Insurance Code Sections 10168 to 10168.10 and California Code of Regulations, Title 10, Sections 2523 to 2523.6 as they pertain to equity-indexed annuities. I have also reviewed the methodology that will be used in calculating and setting assumptions for the additional reduction in nonforfeiture rate for equity-indexed annuities. Based on my review, I certify that the methodology used for (identify contract form) meets the minimum requirements of California Insurance Code Sections 10168 to 10168.10 and California Code of Regulations, Title 10, Sections 2523 to 2523.6.
______________________________
(Name of actuary)
______________________________
(Signature of actuary)
______________________________
(Date of certification)
Appendix D
Actuarial Certification of Compliance with California Code of Regulations Title 10, Chapter 5, Subchapter 3, Article 10.2, Annuity Nonforfeiture, Sections 2523 to 2523.6 for Equity Indexed Annuities
For use in certifying compliance with California Code of Regulations Title 10, Chapter 5, Subchapter 3, Article 10.2, Annuity Nonforfeiture, Sections 2523 to 2523.6.
I, (state name and professional designation) am responsible for evaluating compliance with California Insurance Code Chapter 1, Part 2, Division 2, Article 3B, Standard Nonforfeiture Law for Individual Deferred Annuities, Sections 10168 to 10168.10 and California Code of Regulations, Title 10, Chapter 5, Subchapter 3, Article 10.2, Annuity Nonforfeiture, Sections 2523 to 2523.6 for (name of insurance company). I am familiar with California Insurance Code Sections 10168 to 10168.10 and California Code of Regulations, Title 10, Sections 2523 to 2523.6 as they pertain to equity indexed annuities. I have reviewed the equity index features of (identify all contract forms covered by this certification) for ongoing compliance with the requirements of California Code of Regulations, Title 10, Sections 2523 to 2523.6 that deal with the additional reduction relating to equity-indexed annuities. I have reviewed the assumptions used to support the additional reduction that is permitted to be used with equity-indexed annuities.
Based on my review, I certify that the additional reduction used to determine nonforfeiture values provided under the policy forms identified above met the requirements of California Code of Regulations, Title 10, Sections 2523 to 2523.6 as it relates to equity-indexed annuities in force as of December 31, (previous calendar year).
______________________________
(Name of actuary)
______________________________
(Signature of actuary)
______________________________
(Date of certification)
Cal. Code Regs. Tit. 10, § 2523.6