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CA Department of Insurance

Bulletin 99-5 Appendix A

STATE OF CALIFORNIA DEPARTMENT OF INSURANCE
Ronald Reagan Building
300 South Spring Street, 14th Floor
Los Angeles, California 94105

September 1, 1999

APPENDIX A

Basis For Interest Rate Calculations

Reference Interest Rate R

Features in the determination of the value of R include:

1.
The source:
Monthly Average of the Corporate Yield on Seasoned Corporate Bonds as published by Moody's
Investors Services, Inc.
2. The averaging period:
a.
b.
Averaging over a period of twelve months. (12). Used in formula B.
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:
a. of issue or purchase. (YI)
b. next preceding the year of issue. (YI-1)
c. 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

Calendar Formula A Formula B

Year

R R1 R2 Year R R1 R2 R
                   

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

83

13.64

9.00

13.64

83

13.39

9.00

13.39

13.39

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

91

9.52

9.00

9.52

91

9.63

9.00

9.63

9.63

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

96

7.55

7.55

9.00

7.55

97

7.55

7.55

9.00

97

7.74

7.74

9.00

7.74

98

7.74

7.74

9.00

98

7.11

7.11

9.00

7.11

99

7.11

7.11

9.00

99

6.96

6.96

9.00

6.96

2000

6.96

6.96

9.00

 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 nonforfeiture 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 Nonforfeiture Values

The maximum rate of interest specified for nonforfeiture values is 125 percent of the corresponding rate calculated for valuation purposes. For the maximum statutory rate of interest for nonforfeiture 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.

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 % or more from that of the previous year.

Determination of

Guarantee Duration (Years)

Weighting Factor (W)

R by

I by

More than

Not More Than

Definition

All Life Insurance (For changes in I of at least .5%)

(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

By Plan Type

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

--

--

Annuities and guaranteed interest valuation on a change-in-fund basis

(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

(YF),

(12)

(B)

20

--

(C)

.60

.60

.40

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

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