Bulletin 95-09

Office of the Chief Actuary State of California Department of Insurance
425 Market Street, Sixth Floor
San Francisco, CA 94105

Date: September 1, 1995
To: All Admitted Life and Disability Insurers and Other Interested Person
Subject: Rates of Interest for Minimum Reserves and Non-forfeiture Values - 1996 Life Insurance; 1995 Annuities
This replaces Bulletin No. 94-7.

Attached is Table 1 showing the rates of interest to be used for determining minimum reserves and non-forfeiture values according to Sections 10163.2(i) and 10489.4 of the California Insurance Code applicable to life insurance policies issued in 1996 and annuity contracts issued or undergoing a change in fund in 1995. Also shown in Table 1 are the interest rates applicable to life insurance policies issued in 1982 through 1996 and to annuity contracts issued or funded in 1981 through 1995. The Moody's Corporate Bond Yield Averages used in these calculations are those for the period ending June 30 for each calendar year shown. These were:

                                  

Average over period ending June 30
Calendar Year	Of a 12-Month Period	Of a 36-Month Period
1979	9.49%	8.92%
1980	11.51	9.89
1981	13.71	11.57
1982	15.70	13.64
1983	13.39	14.26
1984	13.22	14.10
1985	13.01	13.21
1986	10.75	12.33
1987	9.40	11.05
1988	10.32	10.15
1989	10.09	9.93
1990	9.52	9.97
1991	9.63	9.74
1992	8.88	9.34
1993	8.13	8.88
1994	7.52	8.18
1995	8.42	8.03

 

Appendix A is a brief background outline of the basis for the calculation of the interest rates shown in Table 1.

CHUCK QUACKENBUSH
Insurance Commissioner

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Table 1

Statutory Calendar Year Interest Rates Based on NAIC Standard Valuation and Non-forfeiture Forfeiture laws

A. Life Insurance Guarantee Duration (Years) Calendar Valuation Non-forfeiture Year Interest Rate

Interest Rate	(100%)	(125%)
10 or less
82	6.75	8.50
83-86	7.25	9.00
87	6.50	8.25
88-93	6.00	7.50
94	5.50	7.00
95-96	5.50	7.00
More than 10, not more than 20
82	6.25	7.75
83-86	6.75	8.50
87-93	6.00	7.50
94	5.25	6.50
95-96	5.25	6.50
More than 20
82	5.50	7.00
83-86	6.00	7.50
87-92	5.50	7.00
93-94	5.00	6.25
95-96	4.50	5.75

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B. Single premium immediate annuities, and annuity benefits involving life contingencies arising from other annuities with cash settlement options and from guaranteed interest contracts with cash settlement options.

Year	Interest Rate	Year	Interest Rate
81	11.50	88-89	8.75
82	13.25	90-91	8.25
83-84	11.25	92	7.75
85	11.00	93	7.00
86	9.25	94	6.50
87	8.00	95	7.25

 

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C. Other Annuities and Guaranteed Interest Contracts;

Contracts Valued on An Issue Year Basis
Cash Settlement Options?	Future Interest Guarantee?	Valued on Guarantee Duration (Years)	Valuation Interest Rate for Plan Type
			Year	A	B	C
Yes	Yes	5 or Less
			81	11.50	9.50	8.25
			82	13.25	10.50	9.25
			83	11.25	9.25	8.25
			84	11.25	9.25	8.00
			85	11.00	9.00	8.00
			86	9.25	7.75	6.75
			87	8.00	6.75	6.25
			88	8.75	7.50	6.75
			89	8.75	7.25	6.50
			90-91	8.25	7.00	6.25
			92	7.75	6.50	6.00
			93	7.00	6.00	5.50
Yes	Yes	More than 5 But Not More than 10
			81	11.00	9.50	8.25
			82	12.50	10.50	9.25
			83	10.75	9.25	8.25
			84	10.75	9.25	8.00
			85	10.50	9.00	8.00
			86	8.75	7.75	6.75
			87	7.75	6.75	6.25
			88	8.50	7.50	6.75
			89	8.25	7.25	6.50
			90-91	8.00	7.00	6.25
			92	7.50	6.50	6.00
			93	6.75	6.00	5.50
Yes	Yes	More than 10 But Not More than 20
			81	7.75	6.75	6.25
			82	8.50	7.25	6.75
			83-4	8.25	7.00	6.75
			85	8.25	7.00	6.50
			86	7.50	6.50	6.00
			87	7.00	6.00	5.75
			88-89	7.25	6.25	6.00
			90-91	7.00	6.25	5.75
			92	6.75	6.00	5.75
			93	6.25	5.50	5.25
Yes	Yes	More than 20
			81	6.25	5.50	5.50
			82	6.75	6.00	6.00
			83-84	6.75	5.75	5.75
			85	6.50	5.75	5.75
			86	6.00	5.50	5.50
			87	5.75	5.25	5.25
			88-89	6.00	5.25	5.25
			90-91	5.75	5.25	5.25
			92	5.75	5.00	5.00
			93	5.25	4.75	4.75
Yes	No	5 or Less
			81	12.00	10.00	9.00
			82	13.75	11.25	10.00
			83	11.75	9.75	8.75
			84	11.75	9.75	8.50
			85	11.50	9.50	8.50
			86	9.50	8.00	7.25
			87	8.50	7.25	6.50
			88	9.25	7.75	7.00
			89	9.00	7.50	7.00
			90	8.50	7.25	6.50
			91	8.75	7.25	6.75
			92	8.00	6.75	6.25
			93	7.25	6.25	5.75
Yes	NO	More than 5 But Not More than 10
			81	11.50	10.00	9.00
			82	13.25	11.25	10.00
			83	11.25	9.75	8.75
			84	11.25	9.75	8.50
			85	11.00	9.50	8.50
			86	9.25	8.00	7.25
			87	8.00	7.25	6.50
			88	8.75	7.75	7.00
			89	8.75	7.50	7.00
			90	8.25	7.25	6.50
			91	8.25	7.25	6.75
			92	7.75	6.75	6.25
			93	7.00	6.25	5.75
Yes	No	More than 10 But Not More than 20
			81	8.00	7.00	6.75
			82	8.75	7.50	7.25
			83-84	8.75	7.50	7.00
			85	8.50	7.50	7.00
			86	7.75	6.75	6.50
			87	7.25	6.50	6.00
			88-91	7.50	6.50	6.25
			92	7.00	6.25	6.00
			93	6.50	5.75	5.50
Yes	No	More than 20
			81	6.75	6.00	6.00
			82	7.25	6.25	6.25
			83-84	7.00	6.25	6.25
			85	7.00	6.25	6.25
			86	6.50	5.75	5.75
			87	6.00	5.50	5.50
			88	6.25	5.75	5.75
			89-91	6.25	5.50	5.50
			92	6.00	5.25	5.25
			93	5.50	5.00	5.00
Yes	Yes or No	5 or Less
			81	11.50	Not Applicable for Any Guaranteed Duration for Plan Types B and C
			82	13.25
			83-84	11.25
			85	11.00
			86	9.25
			87	8.00
			88-89	8.75
			90-91	8.25
			92	7.75
			93	7.00
Yes	Yes or No	More than 5 But Not More than 10
			81	11.00
			82	12.50
			83-84	10.75
			85	10.50
			86	8.75
			87	7.75
			88	8.50
			89	8.25
			90-91	8.00
			92	7.50
			93	6.75
Yes	Yes or No	More than 10 But Not More than 20
			81	10.00
			82	11.25
			83-84	9.75
			85	9.50
			86	8.00
			87	7.25
			88	7.75
			89	7.50
			90-91	7.25
			92	6.75
			93	6.25
		More than 20
			81	7.75
			82	8.75
			83	7.75
			84-85	7.50
			86	6.50
			87	6.00
			88-89	6.25
			90-91	6.00
			92	5.75
			93	5.25
Contracts Valued On A Change In Fund Basis
			81	13.25	12.00	9.00
			82	15.00	13.75	10.00
			83	12.75	11.75	8.75
			84	12.75	11.75	8.50
			85	12.50	11.50	8.50
			86	10.25	9.50	7.25
			87	9.00	8.50	6.50
			88	10.00	9.25	7.00
			89	9.75	9.00	7.00
			90	9.25	8.50	6.50
			91	9.25	8.75	6.75
			92	8.50	8.00	6.25
			93	7.75	7.25	5.75
		More than 5 But No More than 10
			81	12.75	12.00	9.00
			82	14.50	13.75	10.00
			83	12.25	11.75	8.75
			84	12.25	11.75	8.50
			85	12.00	11.50	8.50
			86	10.00	9.50	7.25
			87	8.75	8.50	6.50
			88	9.50	9.25	7.00
			89	9.50	9.00	7.00
			90	8.75	8.50	6.50
			91	9.00	8.75	6.75
			92	8.25	8.00	6.25
			93	7.50	7.25	5.75
		More than 10 But Not More than 20
			81	11.50	11.00	8.25
			82	13.25	12.50	9.25
			83	11.25	10.75	8.25
			84	11.25	10.75	8.00
			85	11.00	10.50	8.00
			86	9.25	8.75	6.75
			87	8.00	7.75	6.25
			88	8.75	8.50	6.75
			89	8.75	8.25	6.50
			90-91	8.25	8.00	6.25
			92	7.75	7.50	6.00
			93	7.00	6.75	5.50
		More than 20
			81	9.50	9.50	7.25
			82	10.50	10.50	8.00
			83	9.25	9.25	7.25
			84	9.25	9.25	7.00
			85	9.00	9.00	7.00
			86	7.75	7.75	6.00
			87	6.75	6.75	5.50
			88	7.50	7.50	6.00
			89	7.25	7.25	5.75
			90	7.00	7.00	5.50
			91	7.00	7.00	5.75
			92	6.50	6.50	5.25
			93	6.00	6.00	5.00
		5 or Less
			81	13.75	12.75	9.50
			82	15.75	14.50	10.50
			83	13.50	12.25	9.25
			84	13.25	12.25	9.25
			85	13.00	12.00	9.00
			86	10.75	10.00	7.75
			87	9.50	8.75	6.75
			88	10.25	9.50	7.50
			89	10.00	9.50	7.25
			90	9.50	8.75	7.00
			91	9.75	9.00	7.00
			92	9.00	8.25	6.50
			93	8.25	7.50	6.00
		More than 5 But Not More than 10
			81	13.25	12.75	9.50
			82	15.00	14.50	10.50
			83	12.75	12.25	9.25
			84	12.75	12.25	9.25
			85	12.50	12.00	9.00
			86	10.25	10.00	7.75
			87	9.00	8.75	6.75
			88	10.00	9.50	7.50
			89	9.75	9.50	7.25
			90	9.25	8.75	7.00
			91	9.25	9.00	7.00
			92	8.50	8.25	6.50
			93	7.75	7.50	6.00
		More than 10 But Not More than 20
			81	12.00	11.50	9.00
			83	11.75	11.2	8.75
			84	11.75	11.2	8.50
			85	11.50	11.0	8.50
			86	9.50	9.25	7.25
			87	8.50	8.00	6.50
			88	9.25	8.75	7.00
			89	9.00	8.75	7.00
			90	8.50	8.25	6.50
			91	8.75	8.25	6.75
			92	8.00	7.75	6.25
			93	7.25	7.00	5.75
		More than 20
			81	10.00	10.00	7.75
			82	11.25	11.2	8.75
			83	9.75	9.75	7.75
			84	9.75	9.75	7.50
			85	9.50	9.50	7.50
			86	8.00	8.00	6.50
			87	7.25	7.25	6.00
			88	7.75	7.75	6.25
			89	7.50	7.50	6.25
			90-91	7.25	7.25	6.00
			92	6.75	6.75	5.75
			93	6.25	6.25	5.25

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Guarantee Duration (Years)

This is defined in three ways:

1. For Life Insurance: The guarantee duration is the maximum number of years the life insurance can remain in force on a basis guaranteed in the policy or under options to convert to plans of life insurance with premium rates or non-forfeiture values or both which are guaranteed in the original policy. (L)
2. For annuities with cash settlement options and guaranteed interest contracts with cash settlement options other than single premium immediate annuities and annuity benefits involving life contingencies arising from other annuities with cash settlement options and guaranteed interest contracts with cash settlement options: The guarantee duration is the number of years for which the contract guarantees interest rates in excess of the calendar year statutory valuation interest rate for life insurance policies with guarantee duration in excess of twenty years. (C)
3. For other annuities with no cash settlement options and for guaranteed interest contracts with no cash settlement options: The guarantee duration is the number of years from the date of issue or date of purchase to the date annuity benefits are scheduled to commence. (N)

Plan Type According To Withdrawal Privileges For Other Annuities And Guaranteed Interest Contracts

The weighting factors used in the formulas vary by plan type as determined by withdrawal privileges.

Type A: At any time the policyholder may withdraw funds only:

1. With an adjustment to reflect change in interest rates or asset values since receipt of the funds by the insurance company, or
2. Without such adjustment, but in installments over five years or more, or
3. As an immediate life annuity, or
4. No withdrawal permitted.

Type B: Before expiration of the interest rate guarantee, the policyholder may withdraw funds only:

1. With an adjustment to reflect changes in interest rates or asset values since receipt of the funds by the insurance company,
2. Without such adjustment, but in installments over five years or more, or
3. No withdrawal permitted.

At the end of the interest rate guarantee, funds may be withdrawn without such adjustment in a single sum or installment over less than five years.

Type C: The policyholder may withdraw funds before expiration of interest rate guarantee in a single sum or installments over less than five years either:

1. Without adjustment to reflect changes in interest rates or asset values since receipt of funds by the insurance company, or
2. Subject only to a fixed surrender charge stipulated in the contract as a percentage of the fund.

Determination Of The Maximum Valuation Rate Of Interest

Using all of the factors as defined above, a schematic diagram of the process for determining the maximum valuation rate interest is shown in Exhibit 1 which contains cross references in parentheses to letters or numbers in parentheses in the preceding text of this appendix.

The Maximum Rate Of Interest For Non-forfeiture Values

The maximum rate of interest specified for non-forfeiture values is 125 percent of the corresponding rate calculated for valuation purposes. For the maximum statutory rate of interest for non-forfeiture value purposes, the results are rounded to the nearest one-quarter of one percent, with results exactly midway rounded to the higher one-quarter of one percent.

Issue Year or Change-In-Fund Basis

A company may elect to value guaranteed interest contracts with cash settlement options and annuities with cash settlement options on either an issue year basis or on a change-in-fund basis. Guaranteed interest contracts with no cash settlement options and other annuities with no cash settlement options must be valued on an issue year basis. As used in this section, an issue year basis of valuation refers to a valuation basis under which the interest rate used to determine the minimum valuation standard for the entire duration of the annuity or guaranteed interest contract is the calendar year valuation interest rate for the year of issue or year of purchase of the annuity or guaranteed interest contract, and the change-in-fund basis of valuation refers to a valuation basis under which the interest rate used to determine the minimum valuation standard applicable to each change in the fund held under the annuity or guaranteed interest contract is the calendar year valuation interest rate for the year of the change in the fund.

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Exhibit 1

Statutory Valuation Interest Rate Determination

Results are rounded to the nearer one-quarter of one percent with results exactly midway rounded to the lower one-quarter of one percent. For life insurance the statutory interest rate is changed only if the change is a half percent or more from that of the previous year.

All Life Insurance (For changes in I of at least .5%)
Determination of		Guarantee Duration (Years)		Weighting Factor (W)
R by	I by	More than	Not More Than		Definition
(YI- 1),(12/36)	(A)	0	10	(L)	.50
		10	20	(L)	.45
		20	--	(L)	.35
Single premium immediate annuities, etc.
(YI),(12)	(B)	--	--	--	.80

     

Annuities and guaranteed interest contracts valued on an issue year basis
Determination of		Guarantee Duration (Years)			By Plan Type
R by	I by	More than	Not More Than		A	B	C
(YI),(12)	(B)	0	5	(C)	.80	.60	.50
				(N)	.80	--	--
(YI),(12)	(B)	5	10	(C)	.75	.60	.50
				(N)	.75	--	--
(YI),(12/36)	(A)	10	20	(C)	.65	.50	.45
(YI),(12)	(B)	10	20	(N)	.65	--	--
(YI),(12/36)	(A)	20	--	(C)	.45	.35	.35
(YI),(12)	(B)	20	--	(N)	.45	--	--

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Annuities and guaranteed interest valuation on a change-in-fund basis
Determination of		Guarantee Duration (Years)			By Plan Type
R by	I by	More than	Not More Than		A	B	C
(YF),(12)	(B)	0	5	(C)	.95	.85	.55
(YF),(12)	(B)	5	10	(C)	.90	.85	.55
(YF),(12)	(B)	10	20	(C)	.80	.75	.50

NOTE: The change-in-fund basis values the original amount deposited at the interest rate in effect when it was deposited; all changes to the fund thereafter, including interest on the original deposit, are valued at the rates in effect when they occurred. Annuities and guaranteed interest contracts with cash settlement options which do not guarantee interest on considerations received more than one year after issue or purchase on an issue year valuation basis, or received more than 12 months beyond the valuation date on a change in fund basis, use the weighting factors indicated above increased by .05.

Any questions regarding this bulletin should be addressed to:

W. Harold Phillips, FSA, MAAA
Senior Life Actuary
California Department of Insurance
Ronald Reagan State Building
300 South Spring Street, South Tower
Los Angeles, CA 90013

Telephone: (213) 346-6174
Fax: (213) 897-9761

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APPENDIX A

Basis For Interest Rate Calculations
Reference Interest Rate R

Features in the determination of the value of R include:

1. The source: Moody's Corporate Bond Yield Average - Monthly Average Corporates as published by Moody's Investors Services, Inc.
2. The averaging period:
   1. Averaging over a period of twelve months. (12) Used in Formula B
   2. The lesser of the average over a period of thirty-six months and the average over a period of twelve months. (12/36) Used in Formula A
3. The end of the averaging period is June 30 of the calendar year:
   1. of issue or purchase. (YI)
   2. next preceding the year of issue. (YI-1)
   3. of the change in fund. (YF)

Formula For Determining The Maximum Valuation Interest Rate, I

There are two formulae used to calculate:

• (A) I = .03+W(R₁-.03)+(W/2)(R₂ -.09)
• (B) I = .03+W(R-.03)

Where:

• R₁ is the lesser of R and .09
• R₂ is the greater of R and .09
• R is the reference interest rate
• W is the weighting factor

    
    

Life Insurance (Formula A) Annuities
Calendar Year	R	R	R	Calendar Year	Formula A		Formula B
					R1	R2	R1	R2
81	9.89	9.00	9.89	81	11.57	9.00	11.57	13.71
82	11.57	9.00	11.57	82	13.64	9.00	13.64	15.70
84	13.39	9.00	13.39	84	13.22	9.00	13.22	13.22
85	13.22	9.00	13.22	85	13.01	9.00	13.01	13.01
86	13.01	9.00	13.01	86	10.75	9.00	10.75	10.75
87	10.75	9.00	10.75	87	9.40	9.00	9.40	9.40
88	9.40	9.00	9.40	88	10.15	9.00	10.15	10.32
89	10.15	9.00	10.15	89	9.93	9.00	9.93	10.09
90	9.93	9.00	9.93	90	9.52	9.00	9.52	9.52
92	9.63	9.00	9.63	92	8.88	8.88	9.00	8.88
93	8.88	8.88	9.00	93	8.13	8.13	9.00	8.13
94	8.13	8.13	9.00	94	7.52	7.52	9.00	7.52
95	7.52	7.52	9.00	95	8.03	8.03	9.00	8.42
96	8.03	8.03	9.00	95	8.03	8.03	9.00	8.42

 

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