Active Bulletin Notices




PENNSYLVANIA INSURANCE DEPARTMENT NO. 1994-11
DATE: October 3, 1994
SUBJECT: General Account Modified Guaranteed Annuity
TO: Presidents of All Life Insurance Companies and Fraternal Benefit Societies Authorized to Write Business in the Commonwealth of Pennsylvania
FROM: Gregory Martino, Deputy Insurance Commisioner


The purpose of this notice is to inform companies that the Pennsylvania Insurance Department will now consider for approval general account modified guaranteed annuities. When providing general account modified guaranteed annuities, companies shall comply with applicable laws, regulations, guidelines, rules and the requirements of this notice.

DEFINITIONS

A general account modified guaranteed deferred annuity contract is an individual deferred annuity contract, the underlying assets of which are held in the general account and the values of which are subject to a market value adjustment unless held for guarantee periods specified in the contract.

A general account modified guaranteed immediate annuity contract is an individual immediate annuity contract, the underlying assets of, which are held in the general account and the commutation values of which, are subject to a market value adjustment.

Adjusted cash surrender values are the cash values less any surrender charge and after application of a market value adjustment.

Adjusted commutation values are the commutation values after application of a market value adjustment. Adjusted commutation values are hereafter referred to as adjusted cash surrender values for purposes of this notice.

Cash surrender values are the cash values less any surrender charge and prior to the application of any market value adjustment.

Cash values are the cash values prior to the application of any surrender charge and a market value adjustment.

Company is a life insurance company or fraternal benefit society.

Commutation values are the commutation values prior to the application of a market value adjustment. Commutation values are hereafter referred to as cash surrender values for purposes of this notice.

Excess interest is interest that is not guaranteed and is over and above interest at any guaranteed rate in the contract including any guaranteed rate in addition to a minimum guaranteed rate.

Interest credits are all interest that is credited to the contract.

Net adjusted cash surrender values are the cash values less any surrender charge and after the application of a market value adjustment, less any outstanding indebtedness.

Net adjusted commutation values are the commutation values after the application of a market value adjustment, less any outstanding indebtedness. Net adjusted commutation values are hereafter referred to as net adjusted cash surrender values for purposes of this notice.

Prominent type is, for example, all capital letters, contrasting color, underlined or otherwise differentiated from the other type in the form.

AUTHORITY OF INSURER TO ISSUE GENERAL

ACCOUNT MODIFIED GUARANTEED ANNUITY COVERAGE

LICENSING AND APPROVAL TO DO BUSINESS

A company may not solicit or issue in this Commonwealth a general account modified guaranteed annuity contract unless the company is licensed to do a life insurance and annuities business in this Commonwealth.

SALES MATERIAL

A company authorized to transact general account modified guaranteed annuity business in this Commonwealth shall not use any sales material, advertising material, or descriptive literature or other materials of any kind in connection with its general account modified guaranteed annuity business in this Commonwealth which is false, misleading, deceptive or inaccurate.

Any sales material, advertising material, descriptive literature or other materials of any kind, shall clearly disclose that the coverage being solicited is annuity coverage.

The sales material for a deferred annuity contract shall clearly disclose that cash surrender values under the contract may increase or decrease in accordance with a market value adjustment, prior to a date or dates specified in the contract. A disclosure shall be made that the adjusted cash surrender values and paid-up annuity benefits are subject to the minimum values defined in the contract. If the sales material illustrates an increase in values due to a market value adjustment, it shall also illustrate a decrease in values due to a market value adjustment. The sales material shall also include a description of the manner, if any, in which the death benefit will be affected by the market value adjustment.

The sales material for an immediate annuity contract shall clearly disclose that commutation values under the contract may increase or decrease in accordance with a market value adjustment. A disclosure shall be made that the adjusted commutation values are subject to the minimum values defined in the contract. If the sales material illustrates an increase in values due to a market value adjustment, it shall also illustrate a decrease in values due to a market value adjustment.

Before any company solicits or issues any general account modified guaranteed annuity contract in this Commonwealth, the Commissioner may require the filing of a copy of any prospectus or other sales material to be used in connection with the marketing of that insurer's (separate) general account modified guaranteed annuity contract.

REPORTS TO COMMISSIONER

Any company authorized to transact the business of general account modified guaranteed annuities in this Commonwealth shall submit to the Commissioner, in addition to other materials which may be required by this notice or applicable laws, regulations, guidelines or rules, the following.

1) Prior to use in the Commonwealth, the information required by the Information Furnished to Applicants section of this notice.

2) Such additional information concerning its general account modified guaranteed annuity operations, as the Commissioner shall deem necessary.

AUTHORITY OF COMMISSIONER TO DISAPPROVE

Any material required to be filed with and approved by the Commissioner shall be subject to disapproval if at any time it is found by the Commissioner not to comply with the standards established by this notice.

FILING REQUIREMENTS

The filing requirements applicable to general account modified guaranteed annuities shall be those filing requirements otherwise applicable under Pennsylvania insurance laws, regulations, guidelines and rules with respect to individual annuity contract form filings to the extent appropriate with the following additions.

ACTUARIAL MEMORANDUM

The company shall submit an actuarial statement that the market value adjustment formula provides reasonable equity to both the contract owner and the company. The company shall submit an actuarial memorandum indicating the basis for the market value adjustment formula and the basis for the statement that the formula provides reasonable equity to the contract owner and the company.

If the market value adjustment provision refers to an index outside the control of the company, the actuarial memorandum shall indicate the reasonableness of the index. Any request for approval of the substitution of an index outside the control of the company for another such index shall include an actuarial memorandum indicating the reasonableness of the substitute index.

A modification of the market value adjustment formula or any rates or factors used in the formula is subject to the Department's approval. Any modification shall be applied only to new issues, except if the rate or factor used in the formula is no longer available. If the market value adjustment formula is revised, the request for approval shall include an actuarial memorandum submitted in accordance with the requirements of this section of the notice. If any rates or factors used in the formula are revised, the request for approval shall include an actuarial memorandum indicating the reasonableness of the revised rate or factor.

For a deferred annuity contract, the company shall submit a demonstration that the adjusted cash surrender values and paid-up annuity benefits comply with the minimum standards of 410C of The Insurance Company Law.

The actuarial memorandum shall include the methodology, including a numerical example, of the calculation of the reserves.

SUBMISSION LETTER

The submission letter of a general account modified guaranteed annuity filing shall disclose the following.

1) The form being filed provides general account modified guaranteed annuity coverage.

2) The underlying assets of the contract are held in the general account.

CONTRACT REQUIREMENTS

All of the provisions of Section 410B and Section 410C of the Insurance Company Law and other applicable sections of the Pennsylvania insurance laws, regulations, guidelines and rules apply to general account modified guaranteed annuities with the following additions and notes.

ADDITIONS

1) The adjusted cash surrender values and paid-up annuity benefits of a deferred annuity contract shall comply with the minimum standards of Section 410C of the Insurance Company Law.

The adjusted commutation values of an immediate annuity contract shall equal at least the present value of the remaining payments computed using an interest rate no more than 1% (100 basis points) higher than the interest rate used in computing the annuity benefits.

2) The contract shall contain sufficient information to determine the cash surrender values and the minimum adjusted cash surrender values and paid-up annuity benefits.

3) For a deferred annuity contract, the death benefit or the determination of the death benefit may be affected by a market value adjustment. Any supplemental benefit based on the contract death benefit, such as an accelerated death benefit, may be affected by a market value adjustment.

4) The complete market value adjustment formula, used in determining adjusted cash surrender values, shall be stated and guaranteed in the contract and shall be applicable for both upward and downward adjustments.

5) A deferred annuity contract shall contain a table of cash surrender values for the lesser of 20 years or the number of years to the maturity date selected by the applicant at issue or the automatic maturity date if the contract does not provide for election. Additionally, a deferred annuity contract that does not designate 65 as the maturity date in permanent, non-variable print shall disclose the cash surrender value at age 65 if such value is not shown in the table. The table shall be based on the interest rate or rates and maximum expense and surrender charges guaranteed at issue. If the contract allows for alternative interest rate guarantee periods after the initial interest rate guarantee period, the table shall be based on the default renewal periods provided in the contract. For contracts that require premiums to be paid after issue, the table shall be based on the stipulated fixed premium; for contracts that permit (but do not require) premiums to be paid after issue, the table shall be based on specified assumed level premiums payable at least one each year. The table shall contain a statement to the effect that the cash surrender values illustrated are subject to a market value adjustment.

6) If (i) surrender charges are a function of a time period other than the period since issue of the contract, and (ii) the schedule of surrender charges for all possible interest rate guarantee periods is not shown in the contract; the contract shall disclose in a prominent location on the table of values page that the values reflect the surrender charges shown on page __ of the contract, that any new schedule of surrender charges not shown in the contract will be furnished to the contract owner prior to the date it becomes effective and that the values beginning the ___ year will be reduced by the application of the additional surrender charges.

7) If the market value adjustment provision refers to an index outside the control of the company, the market value adjustment provision shall provide for substitution if the index is discontinued. The provision shall provide that such substitution is subject to the Department's approval. The request for approval shall include an actuarial memorandum indicating the reasonableness of the substitute index.

8) A contract may provide that the interest credited during a guarantee period may exceed the interest rate guaranteed for that period. The interest credited shall not exceed by more than 1/2 of 1% the guaranteed interest rate. Guaranteed interest credits in any market value adjustment guarantee period shall be reasonably related to the average guaranteed interest credits over that period of time.

9) A contract may provide that if no considerations have been received under a contract for a period of 2 full years and the portion of the paid-up annuity benefit at maturity on the plan stipulated in the contract arising from considerations paid prior to such period would be less than $20 monthly, the company may at its option terminate such contract by payment in cash of the greater of the cash value or the cash value after application of the market value adjustment.

10) A contract may provide for guarantee periods of different specified lengths of time. At the end of the initial guarantee period, the contract may provide for subsequent guarantee period(s) of different specified lengths of time. If the contract does not disclose the available initial and subsequent guarantee periods of time, the company shall supply to the Department certification(s) as to the guarantee periods of time available at issue of the contract and subsequently available. The Department shall be notified of any changes in the certified guarantee periods. The contract shall disclose that any guarantee period shall not exceed 10 years. If the annuitization value is subject to a market value adjustment, the contract shall also disclose that a guarantee period shall not extend more than 6 months beyond the annuitization date in effect at the time the guarantee period is elected.

If at the end of any guarantee period, the contract provides for subsequent guarantee periods of different specified lengths of time, the contract owner shall have the option of electing a guarantee period for any of the available lengths of time. The contract shall provide for a default option if the contract owner does not elect a guarantee period and shall provide that the default option shall not extend the guarantee period more than 6 months beyond the annuitization date in effect at the time the guarantee period is elected.

11) Any contract loan provision shall be constructed so that general account modified guaranteed annuity contract owners who have not exercised such provisions are not disadvantaged by the exercise thereof by other general account modified guaranteed annuity contract owners.

12) A provision allowing contract owners to make partial withdrawals may be included. The partial withdrawal provision shall be constructed so that general account modified guaranteed annuity contract owners who have not exercised the provision are not disadvantaged by the exercise thereof by other general account modified guaranteed annuity contract owners.

13) The cover page of a deferred annuity contract shall contain a statement that cash surrender values may increase or decrease in accordance with a market value adjustment prior to a date or dates specified in the contract, subject to the minimum values defined in the contract. The cover page shall also contain a statement of the effect, if any, that a market value adjustment has on the death benefit. The statement(s) shall appear in a prominent location in prominent type on the cover page.

The cover page of an immediate annuity contract shall contain a statement that commutation values may increase or decrease in accordance with a market value adjustment, subject to the minimum values defined in the contract. The statement shall appear in a prominent location in prominent type on the cover page.

14) The brief description of the contract shall disclose that the coverage provided is annuity coverage.

15) A deferred annuity contract shall provide that the contract owner shall be sent, without charge, at least annually a report, which will serve to keep such contract owner advised of the status of the contract.

16) A contract issued on a participation basis shall provide for the payment of dividend amounts in cash and for the application of the dividend to any stipulated payment or payments to the company under the contract. In addition, a contract may offer an additional dividend option providing that the amount of the dividend may be left on deposit with the company at a specified minimum rate of interest.

NOTE

Section 410E of the Insurance Company Law applies as written to a general account modified guaranteed annuity contract. The contract owner shall receive a full refund of the premium payments made if the contract is returned within 10 days of receipt of the contract. A market value adjustment may not be applied to the premiums paid.

RESERVE LIABILITIES

Reserves are subject to the minimum requirements of Section 301 of the Insurance Department Act. As a minimum, the general account reserve for a contract shall equal the (adjusted] cash surrender value.

Each year in preparing the statement of actuarial opinion on the adequacy of the reserves based on an asset adequacy analysis the appointed actuary shall consider the market value adjustment formula, the interest guarantees and the degree to which projected cash flow of assets and liabilities are matched.

INFORMATION FURNISHED TO APPLICANTS

A company soliciting or issuing in this Commonwealth any general account modified guaranteed annuity contract shall deliver to the applicant for the contract coincident with or prior to the execution of the application, a summary explanation of the principal features of the contract. The summary explanation shall be in non-technical terms and shall explain the principal features of the contract, including a description of the manner in which the cash surrender values will be affected by the market value adjustment and the factors which affect such variation.

The summary explanation of a deferred annuity contract shall also include a description of the manner, if any, in which the death benefit will be affected by the market value adjustment. A disclosure shall be made that the adjusted cash surrender values and paid-up annuity benefits are subject to the minimum values defined in the contract. The explanation shall include a notice of the contract provision concerning a right to return the contract.

The requirement of this section shall be deemed to have been satisfied to the extent that a disclosure containing information required by this section is delivered, in the form of one of the following.

1) A prospectus included in a registration statement, which satisfies the requirements of the Securities and Exchange Commission.

2) The information and reports required by the Employee Retirement Income Security Act of 1974, if the policies are exempted from the registration requirements of the Securities Act of 1933.

3) A summary explanation that provides the information required by this section.

APPLICATIONS

Any application for a general account modified guaranteed deferred annuity contract shall contain, immediately preceding the signature line, a statement that cash surrender values under the contract may increase or decrease in accordance with a market value adjustment prior to a date or dates specified in the contract, subject to the minimum values defined in the contract. Any application shall also contain a statement of the effect, if any, that a market value adjustment has on the death benefit. The statement(s) shall appear in prominent type.

Any application for a general account modified guaranteed immediate annuity contract shall contain, immediately preceding the signature line, a statement that commutation values under the contract may increase or decrease in accordance with a market value adjustment, subject to the minimum values defined in the contract. The statement shall appear in prominent type.

REPORTS TO CONTRACT OWNERS

Any company issuing in this Commonwealth general account modified guaranteed annuity contracts shall provide each general account modified guaranteed deferred annuity contract owner, without charge, at least annually, a report, which will keep such contract owner, advised of the status of the contract. The end of the current report period shall be not more than 2 months previous to the date of the mailing of the report. Such report shall include the following, if applicable.

1) The beginning date and ending date of the current report period.

2) The cash values at the end of the previous report period and at the end of the current report period.

3) The adjusted cash surrender values at the end of the previous report period and at the end of the current report period.

4) A disclosure that the cash values are prior to the application of any surrender charge or market value adjustment.

5) A disclosure of the surrender charge and market value adjustment used to determine the adjusted cash surrender values.

6) A disclosure that, in accordance with the market value adjustment, the adjusted cash surrender values may increase or decrease prior to the next annual report. If any guarantee period would expire prior to the next annual report, a disclosure as to when a market value adjustment would not be applied.

7) A disclosure that the adjusted cash surrender values are subject to the minimum values defined in the contract.

As an alternative to the reporting required by 3) and 5), any such report may provide cash surrender values, with a prominent type disclosure that all values are prior to the application of the market value adjustment formula. In addition, the alternative report shall disclose that the adjusted cash surrender values are available upon request. The alternative report shall supply instructions as to how to obtain this information. One of the methods of obtaining the information is by use of a toll free company number. Any company using this alternative reporting shall make such information available to the contract owner within two business days of the inquiry at no charge to the contract owner.

ILLUSTRATIVE REPORT

If an illustrative report is provided to a contract owner, the report shall disclose in prominent print in close proximity to the projected cash values that the projected cash values are subject to a surrender charge and a market value adjustment as provided in the contract.

FOREIGN COMPANIES

If the law or regulation in the place of domicile of a foreign company provides a degree of protection to the contract owners and the public which is substantially similar to that provided by this notice, the Commissioner, to the extent the Commissioner deems it appropriate, may consider compliance with such law or regulation as compliance with this notice.

AUTHORIZATION OF AGENTS

No person, corporation, partnership or other legal entity may sell or offer for sale in this Commonwealth any general account modified guaranteed annuity contract registered as a security with the Securities and Exchange Commission unless licensed to sell separate account annuities in this Commonwealth. If any general account modified guaranteed annuity contract is not registered as a security with the Securities and Exchange Commission, no person, corporation, partnership or other legal entity may sell or offer for sale in this commonwealth such contract unless licensed to sell life insurance and annuities or separate account annuities.

RESERVATION OF RIGHTS

The Department reserves the right at any time to impose standards for general account modified guaranteed annuities in addition to the standards established by this notice.