(b) Definitions, for purposes of this section:

1. (1) Secondary guarantee has the meaning contained in section 98.7(b)(1)(i) of this Part.
2. (2) Secondary guarantee period has the meaning contained in section 98.7(b)(1)(ii) of this Part.
3. (3) Fully fund the guarantee means that the secondary guarantee would be realized with no further premium payment required for the remainder of the secondary guarantee period.

4. (4) Shadow account means the accumulation of premiums less withdrawals calculated in a similar manner as the account value, except with interest credits, mortality charges and/or expense charges that may be different than used to calculate the account value. The resulting value is such that the policy will not lapse if this value as of any given date is greater than or equal to zero or exceeds a certain dollar amount.

   (c) Reserve methodology.

5. (1) Unless otherwise stated, this section applies to policies issued on or after January 1, 2000.

6. (2) Subparagraphs (i) through (viii) of this paragraph describe various examples of policy features that constitute guarantees. These subparagraphs also provide reserve methodologies that must be used for determining reserves for these products. For policy features not specifically described herein, the methodologies used to value such products must be consistent with those described in this Part.

   1. (i) In certain cases when there is a limit on the insurer's ability to increase premiums:

      1. (a) For example, an initial level premium rate is guaranteed for 10 years followed by increased guaranteed premiums for an additional 20 years. However, an insurer may not increase premiums after year 10 (i.e., the initial premium continues to be charged) unless some contractually specified event occurs.
      2. (b) In the reserve calculation, an initial reserve segment of 30 years must be used. Since the contract contains provisions that limit the insurer's ability to increase premiums, the initial premium shall be treated as guaranteed for the entire 30-year period. It would be contrary to the conservative nature of statutory accounting to treat this policy the same as one in which the ability to raise premiums is unrestricted.

   2. (ii) In certain cases when there is a refund option:

      1. (a) For example, a term policy has an illustrated level premium for 30 years, the first 10 of which are guaranteed. Additionally, there is a refund option that provides that a specified refund will be paid if the premium ever increases. The refund must be requested within a limited time (e.g., 30 days) of receiving notice of the increase. Coverage terminates if the option is exercised.
      2. (b) Regarding the reserve calculation, this example differs from the one in subparagraph (i) of this paragraph, in that there is no specified event that has to occur in order for the insurer to impose a premium increase; however, the insurer must provide an additional benefit to the policyholder if it exercises this right. Thus the insurer does not have an unrestricted right to impose an increase after 10 years. If the contract contains provisions that require additional benefits be provided to the policyholder in the event of a premium increase, even if these benefits are lost if not claimed within a stated time frame, then the initial premiums shall be treated as guaranteed for the entire 30-year period. It would be contrary to the conservative nature of statutory accounting to treat this policy the same as one in which the ability to raise premiums does not require that additional benefits be provided. Therefore, the initial segment for this policy is 30 years.

   3. (iii) In certain cases when there are policyholder protections against premiums being increased:

      1. (a) For example, an initial level premium rate is guaranteed for 10 years followed by increased guaranteed premiums for an additional 20 years. However, after year 10, the policyholder is protected against premiums being increased above the initial level, with the protection provided by a second insurer (i.e., not the direct writer) through either reinsurance, a second policy issued to the policyholder, or an agreement between the insurers.
      2. (b) Regarding the reserve calculation, the combined reserves of the direct writer and the second insurer shall be no less than the amount which the direct writer would hold if there were no second insurer and the initial reserve segment were 30 years. If this condition is not met, reserve credits for the direct writer shall be disallowed. The reserve held by the direct writer shall be based on the initial level premium being guaranteed for 30 years.

   4. (iv) In certain cases when net costs to the policyholder are lower than the gross premium:

      1. (a) For example, a product specifies gross premiums with a guaranteed dividend or guaranteed refund schedule, or by some other means guarantees a net cost to the policyholder that is lower than the gross premium.
      2. (b) Regarding the reserve calculation, the net amount of premium (i.e., gross premium less dividends or refunds) shall be used. This represents the amount the insured actually pays for coverage.
      3. (c) For products reinsured on either a coinsurance or modified coinsurance basis, the reinsurer's reserve calculation shall also be based on the net premium (i.e., gross premiums less dividends or refunds guaranteed to be paid to the policyholder).

   5. (v) In certain cases when a re-entry provision is contained in the policy:

      1. (a) For example, a term life insurance product with a re-entry provision has an initial rate guarantee for 10 years, with minimal or non-existent re-entry underwriting, allowing the policyholder to re-enter for an additional 20 years at specified rates. Similarly, a universal life policy has provisions such that, if the universal life policy lapses prior to the 10th policy anniversary because the actual accumulation value (or cash value, depending on design) falls below zero but specified premiums have been paid, a substitute policy is guaranteed to be issued providing the same amount of insurance coverage at the same specified premium for the remainder of the 10-year period plus an additional 20 years.
      2. (b) Regarding the reserve calculation, the re-entry periods and premiums shall be treated as a continuation of the initial guarantees for reserve calculation purposes. The initial reserve segment applicable to the original policy shall be 30 years if the specified premium for the substitute policy is not high enough to trigger a new reserve segment. When the substitute policy is issued, reserves shall be determined as if the coverage had been issued at the issue age and issue date of the original policy. Effectively, the insurer has guaranteed coverage for 30 years at the time the initial policy is issued, and the reserves established shall reflect that guarantee.

   6. (vi) In certain cases when net reinsurance payments remain unchanged after a change in premium is made:

      1. (a) For example, a reinsurance treaty provides for 30 years of level premiums on a current scale but directly guarantees those premiums for only the first 10 years. However, if the reinsurer increases the premiums after 10 years, the reinsurer agrees to increase the expense allowance such that the net payments (i.e., premium minus expense allowance) by the direct writer remains unchanged.
      2. (b) Reserve treatment and applicability date for this policy feature are contained in section 98.4(q) of this Part.

   7. (vii) In certain cases when a universal life policy has a cumulative catch-up provision:

      1. (a) For example, a universal life insurance policy has a cumulative premium catch-up provision in which coverage is guaranteed to remain in force as long as a specified premium is paid each year. If the insured is paying less than is required to maintain the guarantee, there is an unlimited right to the policyholder to make up past premium deficiencies.
      2. (b) Regarding the reserve calculation, when a policy contains more than one secondary guarantee, the minimum reserve shall be the greatest of the respective minimum reserves at that valuation date of each unexpired secondary guarantee, ignoring all other secondary guarantees. Since secondary guarantees with catch-up provisions are capable of being reinstated up to the end of the secondary guarantee period, they constitute unexpired secondary guarantees that must be incorporated into the calculation of the greatest of the respective minimum reserves at the valuation date of each unexpired secondary guarantee, ignoring all other secondary guarantees.
      3. (c) The basic and deficiency reserves for a secondary guarantee with a catch-up provision shall be computed as if the specified premium requirement had been met. The basic reserve shall be reduced by the product of the catch-up amount, if any, which would be required on the valuation date, and the ratio of the initial (i.e., before adjustment) basic reserve to the sum of the initial basic and deficiency reserves. In no event shall the reduced basic reserve be reduced below zero. The deficiency reserve shall be reduced by the product of the catch-up amount, if any, which would be required on the valuation date and the ratio of the initial deficiency reserve to the sum of the initial basic and deficiency reserves. In no event shall the reduced deficiency reserve be reduced below zero.
      4. (d) If a universal life policy with a premium catch-up provision has a shadow account value below the level necessary to maintain the secondary guarantee, then the reserve for the secondary guarantee shall be valued according to the provisions of this subparagraph. The basic and deficiency reserves, before deduction for the catch-up amount, shall be calculated as specified in subparagraph (viii) of this paragraph.

   8. (viii) When a universal life policy guarantees coverage to remain in force as long as the accumulation of premiums paid satisfies the secondary guarantee requirement, for policies issued on or after January 1, 2003, the steps specified in clauses (a) through (i) of this subparagraph must be used to calculate the reserves.

      1. (a) Derive the minimum gross premiums, determined at issue, that will satisfy the secondary guarantee requirement.

         1. (1) For purposes of applying section 98.7(b)(1) of this Part, the specified premiums are the minimum gross premiums derived in clause (a) of this subparagraph. Consistent with section 98.5 of this Part, items in clauses (c) through (i) of this subparagraph shall be calculated on a segmented basis, using the segments that section 98.5 of this Part defines for the product. Therefore, in clauses (c) through (i) of this subparagraph, the term fully fund the guarantee shall mean fully funding the guarantee to the end of each possible segment. The term remainder of the secondary guarantee period shall mean the remainder of each possible segment. The reserve shall be no less than the greatest reserve determined by applying the methodology of this subparagraph to the end of each possible segment.

            1. (i) For policies issued on or after January 1, 2007, except for policies issued on or after January 1, 2015 and prior to January 1, 2017, or on or after January 1, 2015 and prior to January 1, 2020 if optionally elected under item (iii) of this subclause, for purposes of applying section 98.7(b)(1) of this Part, an insurer may use a lapse rate of no more than two percent per year for the first five years, followed by no more than one percent per year to the policy anniversary specified in the following table based on issue age, and zero percent per year thereafter. If the period of time from the date of policy issuance to the date of the applicable policy anniversary age in the table is less than five years, then an insurer may use a lapse rate of no more than two percent per year for that period of time, and zero percent per year thereafter.

               Issue age	Policy anniversary after which the lapse rate is zero
               0-50	30th policy anniversary
               51-60	Policy anniversary age 80
               61-70	20th policy anniversary
               71-89	Policy anniversary age 90
               90 and over	No lapse

            2. (ii) For policies issued on or after January 1, 2015 and prior to January 1, 2017, or on or after January 1, 2015 and prior to January 1, 2020 if optionally elected under item (iii) of this subclause, for the purposes of applying section 98.7(b)(1) of this Part, an insurer may use a lapse rate of no more than two percent per year for the first five years, followed by no more than one percent per year for the remaining life of the contract.
            3. (iii) An insurer that as of December 31, 2016 utilized the provisions of item (ii) of this subclause for any policies issued on or after January 1, 2015 and prior to January 1, 2017, may elect to continue to apply the provisions of said item to policies issued on or after January 1, 2017 and prior to January 1, 2020, provided that:

            (2)

         (b)

(B) The insurer provides written notification to the superintendent by February 28, 2020.

1. (c) Determine the amount of actual premium payments in excess of the minimum gross premiums. For policies utilizing shadow accounts, this will be the amount of the shadow account. For policies with no shadow accounts but which specify cumulative premium requirements, this excess will be the amount of the cumulative premiums paid in excess of the cumulative premium requirements; the cumulative premium payments and requirements shall include any interest credited under the secondary guarantee, with interest credited at the rate specified under the secondary guarantee.

2. (d) Complete the calculation of the pre-funding ratio as follows:

   1. (1) As of the valuation date for the policy being valued, for policies utilizing shadow accounts, determine the minimum amount of shadow account required to fully fund the guarantee. For policies with no shadow accounts but that specify cumulative premium requirements, determine the amount of the cumulative premiums paid in excess of the cumulative premium requirements that would result in no future premium requirements to fully fund the guarantee. The cumulative premium payments and requirements shall include any interest credited under the secondary guarantee, with interest credited at the rate specified under the secondary guarantee. For any policy for which the secondary guarantee can not be fully funded in advance, solve for the minimum sum of any possible excess funding, either the amount in the shadow account or excess cumulative premium payments depending on the product design, and the present value of future premiums, using the maximum allowable valuation interest rate and the minimum mortality standards allowable for calculating basic reserves, that would fully fund the guarantee. Additionally, for policies issued on or after July 1, 2005, the amount determined in this clause is to then be divided by 0.93.
   2. (2) The result from clause (c) of this subparagraph, shall be divided by the number determined in subclause (1) of this clause, with the resulting ratio capped at one. This ratio is intended to measure the level of prefunding for the secondary guarantee that is used to establish reserves. Assumptions within the numerator and denominator of this ratio therefore must be consistent in order to appropriately reflect the level of prefunding. A ratio of one shall result for any secondary guarantee which is fully funded on the valuation date.
3. (e) Compute the net single premium on the valuation date for the coverage provided by the secondary guarantee for the remainder of the secondary guarantee period, using the applicable valuation table and select factors as prescribed in section 98.4(a) of this Part, or Part 100 of this Title (Regulation 179), if applicable. For purposes of calculating the net single premium for policies issued on or after January 1, 2007, except for policies issued on or after January 1, 2015 and prior to January 1, 2017, or on or after January 1, 2015 and prior to January 1, 2020 if optionally elected under item (b)(2)(iii) of this subparagraph, a lapse rate subject to the same criteria as the lapse rate used in applying item (b)(2)(i) of this subparagraph may be used. For policies issued on or after January 1, 2015 and prior to January 1, 2017, or on or after January 1, 2015 and prior to January 1, 2020 if optionally elected under item (b)(2)(iii) of this subparagraph, a lapse rate subject to the same criteria as the lapse rate used in applying item (b)(2)(ii) of this subparagraph may be used.
4. (f) Determine the net amount of additional premiums by multiplying the ratio from clause (d) of this subparagraph, by the difference between the net single premium from clause (e) of this subparagraph and the basic and deficiency reserve, if any, computed in clause (b) of this subparagraph.
5. (g) Compute the reduced deficiency reserve by multiplying the deficiency reserve, if any, by one minus the ratio from clause (d) of this subparagraph, but not less than zero. This reduced deficiency reserve is the deficiency reserve to be used for purposes of section 98.7(b)(1)(vi)(a) of this Part.

6. (h) Complete the next step in the calculation of the reserve as follows:

   1. (1) The actual reserve used for purposes of section 98.7(b)(1)(vi)(a) of this Part is the lesser of:

      1. (i) the net single premium from clause (e) of this subparagraph; and
      2. (ii) the amount of the excess from clause (f) of this subparagraph plus the basic reserve and the deficiency reserve, if any, computed in clause (b) of this subparagraph. Reduce this result by the applicable policy surrender charges, i.e., the account value less the cash surrender value. For policies issued on or after July 1, 2005, multiply the surrender charge by the ratio of the net level premium for the secondary guarantee period divided by the net level premium for whole life insurance.
   2. (2) Calculate both net premiums using the maximum allowable valuation interest rate and the minimum mortality standards allowable for calculating basic reserves. However, except for policies issued on or after January 1, 2007, if no future premiums are required to support the guarantee period being valued, there is no reduction for surrender charges. If the resulting amount is less than the sum of the basic and deficiency reserve from clause (b) of this subparagraph, then the basic and deficiency reserves to be used for the purposes of section 98.7(b)(1)(vi)(a) of this Part are those calculated in clause (b) of this subparagraph, and no further calculation is required.
7. (i) Compute an increased basic reserve by subtracting the reduced deficiency reserve in clause (g) of this subparagraph from the reserve computed in clause (h) of this subparagraph. This increased basic reserve is the basic reserve to be used for purposes of section 98.7(b)(1)(vi)(a) of this Part.
8. (j) With respect to any policy issued pursuant to this subparagraph, on or after January 1, 2007, the insurer shall annually submit an actuarial opinion and memorandum on or before March 1st, in form and substance satisfactory to the superintendent, which satisfies the requirements of Part 95 of this Title (Regulation 126). Reserves established in accordance with this subparagraph shall be increased by any additional reserves required by the stand-alone asset adequacy analysis.