| 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) |
| SUBJECT: | Revision of Actuarial Standard of Practice (ASOP) No. 2 |
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). Not all illustrated life insurance and annuity policies are subject to the Model. The 2004 revision of ASOP No. 2 imposed new obligations on the actuary for policy illustrations not subject to the Model.
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 were reflected in the second exposure draft.
Second Exposure Draft
The second exposure draft was issued in July 2020 with a comment deadline of November 13, 2020. Seven comment letters were received and considered in making changes that are reflected in the final standard.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 second exposure draft are summarized below. Additional changes were made to improve readability, clarity, or consistency.2. In section 2.5, the definition of NGE framework was clarified.
3. In section 2.6, the definition of NGE scales was clarified to include NGE scales that may vary by one or more parameters or may not vary by any parameter, and additional examples were provided.
4. Section 3.1 was updated to eliminate duplication with the definition of NGE framework in section 2.5.
5. In section 3.3.1, language was clarified to recognize that policy classes could be defined at various levels and to include methodology reflecting policy duration, and an example was added.
6. In section 3.4, changes were made to clarify the guidance in instances when following the determination policy would be inconsistent with section 3.2 and to clarify the language to improve alignment with section 3.2.
7. The language in section 3.4.1(g) was clarified to reference the determination policy rather than section 3.4.2.4.
8. In section 3.4.2.4, changes were made to improve consistency with section 3.4.2.3 and to clarify reliance on prior analysis.
9. In section 3.4.2.5, language was added to address circumstances where the insurer allocates past losses or gains.
10. In section 3.5, the language was changed to be consistent with the language in the existing ASOP.
11. In section 4.1, disclosure 4.1(q) was added to reflect changes in section 3.4.2.5.
Notable Changes to the Existing ASOP
A cumulative summary of the notable changes from the existing ASOP are summarized below. Notable changes do not include additional changes made to improve readability, clarity, or consistency.2. In section 2, the definitions were expanded and clarified.
3. In sections 2.5 and 3.1, the concept of an insurer’s NGE framework was defined and 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:
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.
6. In section 3.4, guidance for determining NGE scales was expanded to align with sections 3.2 and 3.3 and to include guidance on additional considerations that were not part of the previous determination of NGE scales.
7. In section 3.5, guidance for recommending NGE scales used in illustrations not subject to ASOP No. 24 was updated.
8. In section 3.6, guidance for providing opinions and disclosures to meet regulatory requirements was added.
9. In sections 3.7, 3.8, and 3.9, guidance for relying on data, projections, and supporting analysis supplied by others, relying on assumptions or methods selected by another party, and reliance on another actuary was added.
10. In section 3.10, documentation requirements were added.
11. In section 4, disclosure requirements were added, mostly to address expanded guidance throughout section 3.
The ASB voted in September 2021 to adopt this standard.
