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Actuarial Guideline XXXVIII (AG 38)

Last Updated 5/27/2021

Actuarial Guideline 38 was created in 2003 to clarify Valuation of Life Insurance Policies Regulation (#830)—commonly referred to as Regulation XXX—which set forth reserve requirements for all universal life products that employ secondary guarantees (ULSG), with or without shadow account funds. Contracts that used specified-premium secondary guarantees were captured by Regulation XXX, which treated them similarly to guaranteed level term contracts. AG 38 was a regulatory response to other more complex contracts that opted for a shadow fund account design in order to compensate for the increased XXX reserve requirements. As the design of ULSG products continued to evolve, a further revision of AG 38 became necessary in 2005 to deal with existence of certain ambiguities in the guideline used by sophisticated shadow fund designs.

Still, despite this revision, there was lack of uniformity in implementation by insurers. Regulators recognized that a number of companies, based on an alternative interpretation of AG 38, designed contracts that may have resulted in an imbalance of guarantees and reserves. The prospect of contracts with inadequate reserves for ULSG policies led some regulators to bring the issue to the NAIC Life Actuarial (A) Task Force (LATF), which put forth a statement on AG 38 in September 2011 to caution about the possibility of some insurers holding "reserves [that] do not properly reflect the full benefits of the secondary guarantee as required by the law, regulation and guideline."

The Joint Working Group (of the Life Insurance and Annuities (A) Committee and Financial Condition (E) Committee) was established to address the issues surrounding AG 38 and to examine the adequacy of the reserve requirements for universal life with secondary guarantee (ULSG) and term universal life products. The Joint Working Group, which is now disbanded, issued the draft framework of how to evaluate policies issued before a specified date (in-force business) as well as policies issued on and after a specified date (prospective business). Policies issued after the effective date of the NAIC's adoption of Principle-Based Reserving (PBR) would be reserved using PBR methodology.

Two alternative revisions to AG 38 have since been adopted. Consistent with the draft framework previously adopted by the NAIC, these alternative revisions to AG 38 take a bifurcated approach to in-force and prospective business. With respect to in-force business, the Working Group adopted a PBR-type gross premium approach that specifies the process to determine minimum reserves, with certain additional safeguards to make sure the reserves are sufficiently conservative. With respect to prospective business, new rules apply to policies written on or after January 1, 2013. Consistent with these new requirements, most policies now follow a safe-harbor reserving methodology that results in reserves closely approximating the reserves you would get under the LATF statement. The NAIC Executive Committee and Plenary voted unanimously to adopt the revisions to AG 38 on September 12, 2012.

The Financial Condition (E) Committee (acting on charges from the Executive (EX) Committee) established in October 2012, the Emerging Actuarial Issues (E) Working Group, which is charged with dealing with questions of application, interpretation and clarification to AG 38. The key role of the EAIWG is to respond to questions regarding the implementation of the AG 38 bifurcated requirements adopted by the NAIC in the Fall of 2012. The EAIWG provided 42 Actuarial Interpretations of AG 38.

The AG 38 bifurcated requirements are found in new sections 8D and 8E of AG 38. AG 38, 8D provides requirements for specified ULSG business issued prior to 1/1/2013. AG 38, 8E provides requirements for ULSG business issued on and after 1/1/2013, with the exception of ULSG business issued on or after January 1, 2017, for which the company elects or is required to apply VM-20 as the reserve standard. Both 8D and 8E require filings to be submitted to the domestic state who in turn will submit to the Financial Analysis Working Group (FAWG).

Pursuant to 8E, domestic states will submit the actuarial opinion and company representation filings to FAWG. Other filings are also required such as filings regarding an AG 38, 8E, Method II submission. Pursuant to 8D, domestic states will submit reports regarding specified reserve calculations to FAWG. These reports are due on April 30 for the preceding year end. FAWG is to use interpretations adopted by the EAIWG and the Financial Condition (E) Committee in their reviews of AG 38 filings. FAWG, and its represented consultants began reviewing 8D and 8E reports in 2013 and that process continues.