1. (1) It is the responsibility of each life insurer to use only such methods of allocation as will produce a suitable and equitable distribution of income and expenses by lines of business. Unless impractical or unfeasible, an insurer may use only such methods of allocation in its distribution of income and expenses within annual statement lines of business as are compatible with the methods it uses for distribution between annual statement lines of business.

2. (2) Each life insurer shall maintain records sufficient detail to show fully:

   1. (i) the system actually used for allocation of income and expenses;
   2. (ii) the actual bases of allocation;

   3. (iii) the actual monetary distribution of the respective items of income, salaries, wages, expenses, and taxes to:

      1. (a) units of activity or functions, if any distribution is made on such basis;
      2. (b) fund accounts, if any distribution is made on the basis thereof, reflecting separately, for each fund, premiums or considerations, investment income, capital gains and losses, benefit payments, expenses, and provision for reserves;
      3. (c) annual statement lines of business;
      4. (d) companies; and
      5. (e) a recapitulation and reconciliation of clauses (a), (b), (c) and (d) of this subparagraph with the insurer's books of account and annual statement.
3. (3) Such records shall be classified and indexed in such form as to permit ready identification between the item allocated and the basis upon which it was allocated, and shall be maintained in such a manner as to be readily accessible for examination. These records shall bear a date and shall identify the person responsible for the preparation thereof.
4. (4) Bases of allocation shall be reviewed periodically to ascertain their suitability for continued use.

5. (5) Allocations of income and expenses between companies shall be treated in the same manner as if made for major annual statement lines of business.

   (b) Premium income (receipts).

6. (1) Premiums or considerations shall be allocated directly, either through the books of account or by memorandum records to major annual statement lines of business. In the case of insurance on the debit basis, the total premiums may be distributed among the major annual statement lines of business on the basis of the relative proportions of premiums in force, properly weighted to reflect premium collection frequency.

7. (2) Premiums on secondary annual statement lines of business which are not allocated directly to such lines of business may be distributed on the basis of:

   1. (i) the premiums in force; or
   2. (ii) actual analyses of premium receipts covering test periods of sufficient length of time to assure the reliability of the sample.

8. (3) When the distribution is made on the basis of premiums in force:

   1. (i) the in-force records shall segregate first-year, single and renewal premiums;
   2. (ii) the distribution shall be made separately for first-year and renewal premiums; and

   3. (iii) adequate controls shall be maintained to assure the accuracy of the in-force records.

      (c) Net investment income (receipts).

9. (1) The cost of granting and servicing premium notes and policy loans and liens shall be allocated to investment expenses. The resulting net income on premium notes and policy loans and liens may be distributed to those lines of business which produced such income. In making such distribution, due consideration shall be given to the variation in the interest rate and incidence of expense on such notes, loans and liens. Any miscellaneous interest income arising from policy or annuity transactions may be allocated directly to the line of business producing such income.

10. (2) Net investment income, after adjustment, if any, as permitted by the preceding paragraph shall be distributed to major annual statement lines of business either:

    1. (i) in proportion to the total mean policy reserves and liabilities of each of such major annual statement lines of business; or
    2. (ii) in proportion to the total mean funds of each of such major annual statement lines of business. If the reserve method pursuant to subparagraph (i) of this paragraph, is so used, it shall also be used in distributing net investment income to each secondary annual statement line of business. If the fund method pursuant to subparagraph (ii) of this paragraph, is so used, either the reserve method or the fund method shall be used in distributing net investment income to each secondary annual statement line of business.

11. (3) In lieu of the methods specified in the preceding paragraph, a life insurer may distribute net investment income by an investment year method if its use of such method complies with the rules stated in section 91.5 of this Part.

    (d) Other income (receipts).

    Reserves and reserve adjustments received from reinsurers shall be allocated directly to the appropriate line of business. All other sundry receipts and adjustments shall be allocated to the appropriate line of business consonant with the nature of the transaction.

    (e) Commissions.

12. (1) Commissions on premiums and considerations shall be allocated directly to major annual statement lines of business. In the case of debit business, the total commissions paid may be distributed among the several lines of business on the basis of the relative proportions of such premiums in force, properly weighted to reflect the commission rates payable.

13. (2) To the extent practicable, commissions on secondary annual statement lines of business shall be allocated directly. Where not practicable, the distribution to such lines of business may be made separately for first-year and renewal commissions in proportion to the respective first- year and renewal premiums for each such line of business.

    (f) General expenses, taxes, licenses and fees.

14. (1) In distributing costs to lines of business, each company shall employ those principles and methods that will reasonably reflect the actual incidence of cost by line of business. The relative time spent, the extent of usage and the varying volume of work performed for each line of business shall be considered in distributing cost to major annual statement lines of business and, to the extent practicable, to secondary annual statement lines of business. The costs of any unit of activity in performing work for one line of business and only incidentally for other lines may be allocated entirely to the single line of business.
15. (2) In the application of the principles stated herein, special consideration may be given to a new line of business with respect to the costs of service departments and of executive departments responsible for the general administration of the company to the extent that such costs have not been increased by the addition of such new line of business and to the extent justifiable, special treatment also may be given to combined operations in connection with group business. Operational costs incurred for entering a new line of business, such as calculation of premium rates, preparation and printing of policy forms and rate books, etc., should be allocated directly to the new line of business whether incurred before or after beginning the new line.

16. (3) In the distribution of a specific category of cost to lines of business, an appropriate index of the activity or activities giving rise to such cost shall be used. Such index should fluctuate with the specific category of cost and be capable of measurement. For example, as illustrations of principles only and not of required procedures:

    1. (i) Clerical salaries of operating departments may be distributed to lines of business on the basis of time or salary ratios, the former used where approximately the same average rate of compensation is paid to clerks whose salaries are being distributed.
    2. (ii) The cost of service departments may be distributed to other departments in proportion to the value of the services rendered each department, e.g., the cost of a personnel department may be distributed to other departments on some general basis such as number of clerks; a photostat section on a unit cost basis; or in the case of a central tabulating unit on an hourly rate reflecting the cost for each type of machine used.
    3. (iii) Supervisory costs may be distributed to lines of business in the same proportions as the distribution of the salaries of the persons supervised.
    4. (iv) The cost of executive departments responsible for general administration of the insurer, including the salaries of the executive officer or officers, may be distributed to lines of business in the same proportions as the salaries of all other officers and employees.
    5. (v) Social Security taxes may be distributed to lines of business in proportion to the corresponding distribution of taxable salaries.
    6. (vi) Departmental rent charges may be made in proportion to the amount of floor space occupied and distributed to lines of business on some appropriate basis, such as salaries.
    7. (vii) Costs such as meals for employees, telephone, telegraph, postage, office forms, stationery and supplies may be distributed first to departments on the basis of usage or on an appropriate general basis, and then distributed to lines of business on some appropriate basis, such as salaries.
    8. (viii) In using number of transactions as a basis for distributing costs to lines of business, each type of transaction within an organizational unit may be weighted to reflect its relative cost. The average clerical time or average clerical cost per transaction may be used as a weight or, in special situations such as the approval of death and disability claims, the relative weights may be determined by case studies.
17. (4) Estimates of time spent on activities may be used in the distribution of costs to lines of business only where such activities by their nature are not susceptible of objective measurement or where the cost of making time studies is disproportionate to the expense being distributed or where estimates of time are otherwise clearly appropriate. Where such estimates are made, they shall be made by a person or persons familiar with the nature of the activity and shall be reviewed by an executive responsible for expense allocations.
18. (5) General indexes such as premium volume, number of policies, and insurance in force shall not be used as basis for distributing costs among major annual statement lines of business, except where the incidence of cost is closely related to such general indexes, or except where there is no more appropriate basis for measurement. Such general indexes may not be used in distributing claim costs to secondary annual statement lines of business.
19. (6) The ratio of investment income to total income, the ratio of direct investment expense to total expenses, and any similar formulae shall not be used in distributing costs between insurance and investment expenses, except where there is no more appropriate basis for distribution.

(a) General instructions.