Changes to 7702 (b)(2)(A) Minimum Interest Rate

[DHK]

Agreed.

However, New York has always had a higher reserve requirement than every other state. I wonder if they're going to continue that requirement or not? I would assume they would.

Just pontificating, that's all.

I just thought of something. Minimum wage.

There is a FEDERAL minimum wage requirement... however states can mandate a requirement HIGHER than that. California being one and I'm sure there are a couple of others.

So, based on that analogy, I bet New York will still have the higher reserve requirements for their state, but they (or whatever else) cannot be lower than what the federal law requires.

 

[Allen Trent]

GPT and CVAT calculation rates are not currently optional for carriers.... there is nothing in the code saying the new rates are optional.

The old rates are "replaced" by the new rates to use the exact terminology.

I was mistakenly thinking in addition to the change to interest rates used to calculate the GPT & CVAT test that there was also a statement in the changes about allowing the interest rates of underlying contracts to be lower valuation rates, meaning it would permit carriers to implement new pricing assumptions based on those lower allowed interest rates used in the pricing assumptions.

I mistakenly was thinking it was 2-part in helping with changes to GPT/CVAT, but also allowing for pricing assumption adjustments. I know of several pre-paid funeral carriers that cant write plans in some states because they have minimum interest rate assumptions that dont make the product profitable when the plans are not UW & pay a commission. In todays world, some of these plans could cost you as much as the payout at the oldest ages because sometimes buy the plans when already terminal or going into nursing home. Those pricing assumption interest rate minimums are likely regulated at the state level, not the federal level

 

[Allen Trent]

I just thought of something. Minimum wage.

There is a FEDERAL minimum wage requirement... however states can mandate a requirement HIGHER than that. California being one and I'm sure there are a couple of others.

So, based on that analogy, I bet New York will still have the higher reserve requirements for their state, but they (or whatever else) cannot be lower than what the federal law requires.

agree, but I believe what scagnt83 is saying is that the Covid relief item is strictly zeroed in on how the CVAT/GPT is calculated, not about interest rates used in pricing assumptions or minimums required to be credited. Those are controlled at the state level. The IRS codes are not involved in oversight of insurance pricing or product design, they are only there to determine how they are taxed federally if they meet the 7702 & other codes.

 

[DHK]

agree, but I believe what scagnt83 is saying is that the Covid relief item is strictly zeroed in on how the CVAT/GPT is calculated, not about interest rates used in pricing assumptions or minimums required to be credited. Those are controlled at the state level. The IRS codes are not involved in oversight of insurance pricing or product design, they are only there to determine how they are taxed federally if they meet the 7702 & other codes.

Agreed. And I'm not going to get into the weeds on that. Only that however policy premiums are calculated does have a bearing on policy/premium reserves. Which made me wonder about New York.

I bet New York may have a slight relaxing of requirements, but still higher than every other state, just as before.

 

[scagnt83]

Agreed. And I'm not going to get into the weeds on that. Only that however policy premiums are calculated does have a bearing on policy/premium reserves. Which made me wonder about New York.

This is why I hoped someone with actuarial experience would chime in on this discussion.

CVAT and GPT certainly have an effect to some extent on premiums. To what extent, vs. the other pricing calculations that exist, is the big question in my mind.

 

[scagnt83]

I just thought of something. Minimum wage.

There is a FEDERAL minimum wage requirement... however states can mandate a requirement HIGHER than that. California being one and I'm sure there are a couple of others.

So, based on that analogy, I bet New York will still have the higher reserve requirements for their state, but they (or whatever else) cannot be lower than what the federal law requires.

States are free to enact stricter legislation than the Feds. State taxes would be one example. HIPAA regs are another (30day min for medical records on fed level, some states put it at 15 or 20). Lots of states have environmental regs stricter than Fed regs (california). Etc.

But they cant make things more lax than federal regulations.

 

[Allen Trent]

This is why I hoped someone with actuarial experience would chime in on this discussion.

CVAT and GPT certainly have an effect to some extent on premiums. To what extent, vs. the other pricing calculations that exist, is the big question in my mind.

Starting to hear from some actuaries that the only way MEC test on WL will result in any noticeable expanded premium room is if the carrier reprices & heavily drops their valuation rates because their understanding is 7702a that is in play says you can use as low as 2%, but if you are using 3.75% your MEC test you allow cant be run at the 2%

I believe CVAT & GPT are more related to UL products & they already have lower valuation rates in the guaranteed assumptions, so maybe you will see more premium room in UL based products than WL

Again---hoping to hear more in upcoming weeks, but that is my novice translation of what I was hearing from an actuary who has just also begun absorbing & digesting impacts

 

[scagnt83]

I bet New York may have a slight relaxing of requirements, but still higher than every other state, just as before.

It will be interesting to see what develops in NY.

This is partly designed to increase policy reserves without actually changing state reserve requirements.

So it seems a few things could happen in NY from that.

- Pricing might not change much at all

- Carriers have higher reserve policies, thus making it more feasible to operate in NY. So we could see more carriers/products in NY.

- More policies meet or come close to NY reserve requirements (albeit through different means than NY regs). So NY could possibly amend the regs to accommodate policies that meet the threshold by different means.


So, who knows the NY regs well enough to articulate exactly what the main differences are and how they get there with it? It seems that would indicate what direction is most likely if we do see an increase in NY products/carriers.

 

[scagnt83]

I believe CVAT & GPT are more related to UL products & they already have lower valuation rates in the guaranteed assumptions, so maybe you will see more premium room in UL based products than WL

WL uses CVAT. UL gives a choice.

But WL uses CVAT just like a UL uses CVAT when it's chosen.

Run a UL at CVAT and Opt1 (level dv), and you have the same mechanics of a WL minus the fee schedule.

 

[Allen Trent]

WL uses CVAT. UL gives a choice.

But WL uses CVAT just like a UL uses CVAT when it's chosen.

Run a UL at CVAT and Opt1 (level dv), and you have the same mechanics of a WL minus the fee schedule.

that is what I had thought & I hope that is the case. I impression I got is that sure, a WL could use a 2% for IRC testing, but they also have to use it in the pricing/performance & as of today, I believe the valuation regulations (maybe state based) were looking at 4% a few months ago, but just dropped on the average to require no higher than 3.75%