Minimum guaranteed rate of interest in an annuity in CA

Section 4223(c)(2)(C) was amended by Chapter 596 of the Laws of 2004 to change the minimum nonforfeiture interest rate for annuity contracts subject to Section 4223 of the Insurance Law from a specified rate to a rate determined by an index. This change becomes effective May 15, 2005. (Note the other changes to Section 4223 become effective on April 17, 2005)

The change allows for annuity contracts to have the minimum interest rate, as determined by the index, set for the life of the contract or for the minimum interest rate to be subject to periodic redetermination.

The minimum annual effective interest rate is the lesser of 3.0% and a rate determined by the five-year constant maturity treasury rate pursuant to the calculation set forth in Section 4223(c)(2)(F) with a resulting minimum interest rate not less than 1.0%. The minimum annual effective interest rate at issue must be specified in the contract.

Filing of Policy Forms for Approval

Separate submissions must be made for individual annuity contracts and for group annuity contracts and certificates.

Submissions of new or revised contract form(s) being made to comply with the Section 4223(c)(2)(C) change effective May 15, 2005 can be made to the Department at any time. Such submissions must be identified in the “Re or caption of the submission letter as “Section 4223 (c)(2)(C) Interest Rate Change”. The submission is subject to all usual submission requirements e.g. Circular Letter No. 8 (1999) and self–support.

It is recommended that the minimum interest rate(s) set forth in your contract(s) be indicated as variable. This is typically done by the use of brackets ( [ ] ) or underlining with an indication in the submission of how you denote variable material. If material is denoted as variable then a statement of variability must be included. Please see the directions below on the format for the statement of variability. Items 1 and 2 of the directions for the statement of variability need to be completed only if your company intends to use the contract form prior to May 15, 2005.

Please note the use of any variation not specifically approved by the Department would constitute the use of an unapproved form.

Please note that if your company intends to issue the contract form any time prior to May 15, 2005 the minimum interest rate in the contract must be in compliance with the current provisions of Section 4224 (c)(2)(C) law. This can be done if the interest rate has been bracketed and a statement of variability in the format below has been provided. The submission letter must indicate that this is your Company’s intent. If this information is not provided in the submission letter then the approval will be conditioned on the forms not being issued until May 15, 2005.

While the submission may be made on a regular prior approval basis or deemer basis, we encourage the use of the certified process outlined in Circular Letter 6 of 2004 to bring your forms into compliance with the May 15, 2005 change to Section 4223(c)(2)(C).

Please note the basis of calculating the minimum interest rate at the issue of the contract is not required to be set forth in the individual annuity contract nor the group annuity certificate.

Filing of the Statement of Variability

If you have a previously approved contract where the minimum interest rate is bracketed and you have already filed a statement of variability in conjunction with the approval of that contract form and you are not making any other changes to the contract, then you need only file a revised statement of variability for approval. The revised statement of variability must be dated and must identify all affected contract forms (along with the Department file number(s) and approval date(s)) and indicate the following:

1. the current interest rate being used and its effective date;
2. that until May 15, 2005 the company will submit for approval to the Department any changes in the minimum interest rate(s) along with the date of the change;
3. starting May 15, 2005 the minimum interest rate (s) will equal or exceed the rate produced by the procedures filed with the Department; and
4. any such change will be applicable only to new issues.

The Re or caption of the submission letter must state “Section 4223 (c)(2)(C) Interest Rate Change. Please see our instruction below for listing the Statement of Variability in the Re or Caption.

We encourage the use of the Circular Letter No. 6 (2004) procedure but all filing procedures are available for your use. When using Circular Letter No. 6 (2004) the Statement of Variability should be included in the compliance certification. Please see our instructions below for including that Statement of Variability in the Certification.

Filing of the procedures for determining the minimum nonforfeiture rate applicable to a contract at issue

Section 4223(c)(2)(F)(iii) requires the filing of the procedures for determining the minimum nonforfeiture rate applicable to a contract at issue. This applies to both contracts where the minimum guaranteed interest rate is set for the life of the contract and for contracts where the minimum nonforfeiture rate is subject to periodic redetermination.

The procedures may be filed with the policy form submission or may be filed separately. The filing may be made by mail or through SERFF. If filed separately through the mail they should be made to William B. Carmello, Deputy Chief Life Actuary, New York State Department of Financial Services, One Commerce Plaza, Albany, NY, 12257. If filed separately through SERFF the Types of Insurances are "Individual Annuities Misc" and "Group Annuities Misc", as applicable. In each case "No Subtypes" is the subtype and the filing type is "Procedures for minimum annuity interest rate". The Department will acknowledge receipt of the procedures.

If the procedures are filed with the policy forms, the "Re" or caption of the submission letter for submission by mail or section 14 of the NAIC Transmittal Form for submission made by SERFF must include the phrase "Includes Procedures for Determining Minimum Initial Rate".

The procedures and policy forms must be submitted in such a way that there is no ambiguity as to which procedures go with which policy forms at any time.

While it is not the Department's intent to review the substance of the procedures at the time of their filing, you should be aware of the following in developing your procedures:

• (1) You need at least a few days of "lag time" for the index to be published. For example if your procedure is that the rate is calculated on January 1st of each year and is to be based on the average for the previous December then on January 2nd the results for the full month of the previous December would not be available yet.
• (2) The meaning of the words in Section 4233(c)(2)(F) "within the fifteen months prior to the contract issue" can be the source of some confusion. This is true for both the New York Statute and the NAIC Model. The fifteen months here refers to the immediately preceding words " as of a date, or average over a period".

If the calculation is based on a "date" then such date can never be more than fifteen months earlier than the issue date of a contract.

If the calculation is based on an "average over a period" then the earliest date in the period can never be more than fifteen months earlier than the issue date of a contract.

Special filing guidance for contracts where the minimum interest is subject to periodic redetermination over the life of the contract

Submissions for this purpose must be specifically identified by including the phrase " Minimum Annual Interest Rate Subject to Redetermination" in the "Re" or caption of the cover letter and in the case of SERFF submission in Section 14 of the NAIC's Life, Accident & Health, Annuity, Credit Transmittal Document.

The minimum annual effective rate of interest at issue must be set forth in the contract on the specifications or data page and clearly indicate it is subject to redetermination and refer to the appropriate contract provision that explains the redetermination feature (e.g. Please see page xx).

The redetermination date(s) basis, calculation and period must be stated in the contract. The statement as to the redetermination date(s) may be by description as opposed to indicating the specific date(s). For example, redetermination of the minimum guaranteed rate occurs on the third anniversary and each anniversary thereafter.

The cover page of the annuity contract or annuity certificate must state that the minimum annual interest rate is subject to redetermination at the applicable identified periods.

The annual report must include the minimum annual effective rate of interest currently in effect and the next redetermination date.

All approvals (prior to May 15, 2005) will be conditional on the contract forms not being issue until May 15, 2005. All filing procedures are available for making submissions.

Filing Guidance for Submissions Made After the Effective Date of May 15, 2005

On May 15, 2005 it will no longer be necessary to specifically identify the submission in the “Re” or caption as a Section 4223 (c) (2)(C) Interest Rate Change or a Minimum Annual Interest Rate Subject to Redetermination filing. Approvals for contracts will no longer be conditional. All guidance concerning the filing of new or revised contract forms or revised statement(s) of variability provided above remains in effect.

Previously Approved Forms with 3.00% guarantee

Companies with previously approved annuity forms which provide for a 3.00% or greater minimum interest rate guarantee for the life of the contract and where the guarantee was not indicated as variable may continue to use these forms after May 14, 2005 without filing their procedures for determining the minimum guaranteed interest rate for new issues with the Department. In this instance the method (i.e. always 3.00%) is considered to have been included in the contract form which has already been filed with and approved by the Department. Please note if your Company indicated at any time that the previously approved form was being replaced by a subsequent submission, then it is no longer considered to be approved for use.

Including the Statement of Variability in the Re or Caption

The Statement of Variability sets forth alternative contract terms or provisions and is subject to approval. As such it should be listed in the Re or caption of the submission letter (or in section 16 of the NAIC standard transmittal for SERFF submissions). It should be listed in the manner required by Circular Letter 8 of 1999. Circular Letter 8 of 1999 requires three pieces of information for each form being submitted. First is the policy form identification number, then a generic product description (selected from Appendix A of the circular) and last generic form description (selected from Appendix B of the circular).

For a Statement of Variability the generic form description of "Variable Material" should be used from Appendix B.

Consider a company submitting under Circular Letter No. 6 (2004) a new form "ABC pg 3 (05-05)" for an individual fixed annuity contract along with a Statement of Variability. The certification should include "ABC pg 3 (05-05), Statement of Variability for ABC pg 3 (05-05)" as the forms being certified to. If only the State of Variability was being submitted then only "Statement of Variability for ABC pg 3 (05-05)" would appear.

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