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CA Department of Insurance
CA Department of Insurance
CA Department of Insurance

Bulletin 95-8

Office of the Chief Actuary

Bulletin No. 95-8

Date: August 1, 1995

To: All Admitted Life Insurers and Other Interested Parties

Subject: Procedures and Requirements for Implementation of California Insurance Code Section 10506.4 (SB 1001, 1994) Governing Separate Account Products with General Account Guarantees

This Bulletin is issued pursuant to Section 10506.4 of the California Insurance Code (CIC), effective January 1, 1995, which authorizes the Insurance Commissioner to issue a bulletin setting forth reasonable requirements for insurers issuing products authorized by this statute, and further specifies that the bulletin has the same force and effect as regulations issued by the Commissioner. Included in this Bulletin are requirements relating to application procedures for CIC Section 10506.4 financial qualification, and also relating to reserves and reporting requirements by companies so qualified. Please note that this Bulletin does not purport to reiterate or summarize Section 10506.4, so reference to the statute, as well as to this bulletin, is essential to obtain information on all pertinent requirements relating to the newly-authorized insurance products.

  1. Application for Financial Qualification

The following items are required to be submitted in duplicate to the Commissioner (Financial Analysis Division, Life Bureau, 300 South Spring Street, Los Angeles, CA 90013) by insurers applying for financial qualification to issue products authorized by CIC Section 10506.4:

  1. A copy of the California Insurance Department letter conferring variable contract authority (for either variable life or annuity) on the applicant.
  2. A list of the officers who will be responsible for the administration of these products, accompanied by biographical affidavits from those officers who do not already have affidavits on file with the Department or whose affidavits on file were not filed within the previous five (5) years.
  3. A statement that the company meets the financial qualifications of Section 10506.4(d)(1)(A) and (C), with a copy of the assets and liabilities pages (pages 2 and 3) of the most recent financial statements. (If a company ceases to qualify it shall notify the commissioner of this fact, as required by Section 10506.4(d)(3).)
  4. The filing for approval of the policy forms that will be used to provide these products, with document submission form and otherwise following the procedures of Title 10, California Code of Regulations Sections 2200-2218.10 and California Department of Insurance Bulletin 94-6, as applicable. (Future policy filings relating to an existing qualification granted pursuant to Section 10506.4 shall also be subject to these procedures.)
  5. A demonstration that each product meets the requirements of either CIC Section 10506.4(b)(1), (2) or (3). (Future filings relating to an existing qualification granted pursuant to Section 10506.4 shall also provide such demonstration.)
  6. The advance payment of a partial fee of $1000 (Section 10506.4(c)(2)). The total fee will be based on billed hours required by the Department to examine the materials. The difference will be billed later by the Department.
  7. A Method of Operations as outlined in 2. below.
  1. Method of Operations

Each company applying for qualification shall provide a description of its method or plan of operations regarding the proposed contracts, which should include (but not be limited to) the following:

  1. A description of: the contract design and operation for each contract type to be offered under Section 10506.4(b); the withdrawal and conversion privileges and guarantees; and the risks assumed by the insurer.
  2. A statement, with rationale, that issuance of the contract is believed to be not hazardous to the public or to present or future policyholders.
  3. The investment policy and objective of the separate account, including restrictions on asset type, quality, maturity and diversification; whether general account seed money is to be used; a description of any hedging techniques to be employed.
  4. A description of how values are to be determined for all assets, including those assets not publicly traded. (See also Section 5. below, "Valuation of Assets".)
  5. A description of how values of annual statement liabilities are to be determined. A description (with formulas) of how basic reserves and additional reserves are to be computed. The additional reserves are for the general account guarantees. The description should include, where applicable, what asset valuation reserve factors are to be used.
  6. An explanation of how the investment strategy is designed and managed to make it likely that the separate account assets will be sufficient to meet all the guarantees. For contracts under Section 10506.4(b)(3) include a demonstration that the investment strategy is likely to match the performance of the index.
  7. A description of all the fees charged to the separate account, the purpose of the fees and how they are determined.
  8. An actuarial statement that the pricing of any general account guarantees and other fees for administration paid to the general account are reasonable and sufficient, accompanied by a memorandum satisfactory to the Commissioner from the actuary describing the assumptions and calculations supporting the statement.
  9. Projected premium volume and number of policyholders for each type of policy for the balance of the current calendar year and for the next 3 calendar years (California and nationwide, shown separately).
  10. A description of the arrangements to ensure adequate marketing supervision.
  11. A statement of whether or not the contract and/or separate account is SEC registered. If so, submit a copy of the prospectuses.
  12. A statement of the reserve and asset valuation methodology for the product.
  1. Follow-up Method of Operations

Where significant changes occur in the Method of Operations both while an application is pending and after qualification is issued, the company shall notify the Department of such changes.

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  1. Reserve Requirements

For plans under Section 10506.4(b)(1) the reserve shall be determined by either using the same interest rates, mortality tables and methods as for like guarantees under products held in the general account, or using the method described for plans under Section 10506.4(b)(2) below.

For plans under Section 10506.4(b)(2), the reserve shall be determined as follows:

  1. Definitions:

M = The Market value of assets in the separate account.

L = The present value of Liabilities discounting guaranteed benefit cash flows at 105% of the current yield on US government securities with substantially similar maturities. See Section 10506.4(b)(2)(B).

mrf= The weighted (by market value) asset valuation reserve factor for the assets held in the separate account. (See Section 10506.4(b)(2)(B)(i) and (ii).)


for debt instruments, mrf is equal to the asset valuation reserve "maximum reserve factor",

for other assets, mrf = .20, and mrf is reduced by 50% if the difference in duration of the assets and liabilities is one year or less.

F = mrf * M

  1. Conditions:

If M equals or exceeds L + F, the reserve = M.

If L + F exceeds M, the reserve = L + F

A = L + F - M = additional reserves as defined in CIC Sections 10506.4(b)(1)(C) and 10506.4(b)(2)(C) respectively.

For plans under Section 10506.4(b)(3), the basic reserve in the Separate Account statement is the account value defined in the contract as described in the approved Method of Operations. This usually is the market value of assets in the separate account or the value of the guaranteed contractholder liability before any deduction for surrender charges. Additional reserves are required if the appointed actuary (as defined in Title 10, California Code of Regulations Section 2580.3(d)) expects that the future investment performance will not support expenses and contractual guarantees. The basis for making this judgment must be included in the Method of Operations filed for the product.

General Rules Applicable to All Plans:

  1. Reserves are subject to the annual asset adequacy analysis the results of which are described in the actuarial memorandum supporting the actuarial opinion of the company's appointed actuary as required by CIC Section 10489.15 and Title 10, California Code Of Regulations Sections 2580.1 et seq.
  2. The value of assets in the separate account cannot be less than the amount available for lump sum withdrawal by the contractholder. Any deficiency is to be made up by the general account.
  3. Mortality and morbidity tables: use the same tables applicable to similar benefits for which reserves are established in the general account.
  4. Risk reserves shall include:
    1. Gross unearned risk premium. (Analogous to the gross unearned premium reserve.)
    2. At least 10% of the total charges to the separate account (considered to be the risk premium) less claims (including any contribution under (2) above) shall be accumulated without interest. This can be released back to surplus on the maturity date. The maximum reserve for contracts without a maturity date shall be equal to five times the latest annual increment.
  1. Financial Reporting Requirements

Abbreviations: SA - separate account

GA - general account

GAB - general account blank (blue annual statement)

SAB - separate account blank (green annual statement)

The following specifies the annual statement reporting for products covered by this Bulletin. This reporting is consistent with current practices used for market value separate accounts. All reporting contained in the Summary of Operations, page 4 - SAB, is also reflected in the Analysis of Operations by line of Business, page 5, col. 6 - SAB.

Item Line Name Blank Page Line
Deposits GAB 4 1A Deposit type funds
Transfer deposits to SA GAB 4 24A Net transfers to or
(from) SA
Deposits GAB 105 Sch. T Col. 6 Deposit-type
Deposit funds received SAB 4 1.2 Transfers to SA
Premium and other
deposit type funds


Benefit Payments
Item Line Name Blank Page Line
Benefit payments made by GA on behalf of SA GAB 4   Applicable lines 8-16
Transfer to GA from SA for benefit payments GAB 4 24A Net transfers to or
(from) SA
Transfers to GA for SA benefits SAB 4 5 Transfer from SA on
account of contract
GA provides funds to meet guarantees SAB 4 1.5 Aggregate write-ins
for other transfers
to SA


Investment Income
Item Line Blank Page Line Name
Investment income SAB 4 2 Investment income
and capital gains
and losses
Previous item
same as
SAB 4 Exh 1 9 Investment income
and capital gains
and losses


Fees and Expenses
Item Line Blank Page Line Name
Fees and expenses paid by GA on behalf of SA GAB 10 Exh 2 11 Investment expenses
Investment related Fees and expenses paid by GA on
behalf of SA
GAB 4 20-23 Expenses
Insurance related Contractual fees received from SA GAB 4 24A Net transfers to or
(from) SAs contract
Fees paid to GA SAB 4 8.1 Charges for
management, and
contract guarantees
Investment fees and expenses paid directly by SA SAB 6 Exh 1 4 Investment expenses

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Liability for Deposit Funds and Amounts Credited
Item Line Blank Page Line Name
Increase/decrease in liability for premium and other
SAB 4 12 Increase in
liability for
premium and other
deposit funds
Amounts credited to policyholders SAB 4 13 Investment income
and capital gains
and losses credited
on premium and other
deposit funds


Transfers from GA on Account of Guarantees
Item Line Blank Page Line Name
Transfers GAB 4 24A Net transfers to or
(from) SA
Transfers SAB 4 1.5 Aggregate write-ins
for other transfers
to SA


Item Line Blank Page Line Name
SA Asset GAB 2 23 From SA Statement
SA Assets SAB 2 1.5 Applicable lines 1-14


Item Line Blank Page Line Name
GA liabilities GAB 16 Exh 10 2 Guaranteed interest
SA liabilities GAB 3 27 From SA Statement
SA book value
SAB 3 5.2 Guaranteed interest
SA liabilities SAB 3 5.3 Other contract
deposit funds
SA liabilities SAB 11 Exh 10 4.2 Guaranteed interest
SA liabilities SAB 11 Exh 10 4.3 Other contract
deposit funds

Valuation of Assets

For plans under Section 10506.4(b)(1), assets shall be valued either in accordance with the rules applicable to general account assets if reserves are also calculated in accordance with general account rules, or at market value if reserves are calculated in accordance with the rules under Section 4, herein above. For plans under Section 10506.4 (b)(2) and (3), assets shall be valued at market value.

The Notes to Financial Statements, item 17a of the GAB, provides information on the general nature and characteristics of separate account business. This provides separate account data showing: nonguaranteed or guaranteed (indexed or nonindexed) amounts, premiums, assets held at market or amortized cost, withdrawal characteristics, book values and market values.

The notices to the Commissioner pursuant to Sections 10506.4 (d) (3) and (4) shall be made by the insurer to the Department of Insurance, Financial Analysis Division, Life Bureau, 300 South Spring Street, Los Angeles, CA 90013.

The commissioner reserves the right to request additional information and documentation deemed necessary under the circumstances for a more complete understanding and to facilitate consideration of a company's proposed products and Method of Operations.

Questions regarding this Bulletin may be referred to:

W. Harold Phillips,
Senior Life Actuary
Department of Insurance
South Tower, 9th floor
300 South Spring Street
Los Angeles, CA 90013

Telephone: (213) 346-6174

Chuck Quackenbush
Insurance Commissioner

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