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Proposed Revisions to ASOP 2 May Impact Your Product Pricing and Litigation Exposure

The Actuarial Standards Board (ASB) exposed wholesale changes to Actuarial Standard of Practice No. 2 - Nonguaranteed Charges or Benefits for Life Insurance Policies and Annuity Contracts (ASOP 2), which has not changed since 2004. ASOP 2 provides actuaries guidance for determining nonguaranteed elements (NGEs) in individual and certain group life insurance and annuity products. NGE determinations, such as cost of insurance (COI) rate increases, have spawned widespread class action litigation, state investigative and enforcement actions, and, most recently, new NGE-related state regulations (e.g., N.Y. Regulation 210).

Although ASOP 2 applies only to actuaries, insurers should be alert to its indirect impact on their NGE processes and pricing. The exposed changes mandate expanded and more prescriptive technical requirements for actuaries’ NGE determinations, provide specific guidance concerning opinions and disclosures, and require a broader array of disclosures in actuarial reports. Some of the most significant proposed changes and potential implications include:

  • Important definitional changes. For example, the respective lists of “examples” in the definitions of “Anticipated Experience Factor” and “Guaranteed Policy Factor” have been modified.
  • The new definition, “NGE Framework” imposes enhanced duties on actuaries when considering each of the Framework elements and their interplay, including understanding a comprehensive list of methodologies and models used by the insurer.
  • New, detailed requirements apply when actuaries are advising an insurer on: (i) developing or modifying its determination policy; (ii) applying the determination policy; (iii) establishing or changing policy classes, including separate, differing requirements in the context of new products, future sales of existing products, and in-force products; and (iv) the determination process of NGE scales, again with separate, context-based prescriptive requirements, including those for reviewing or reconstructing prior determinations, analyzing experience, considering whether to recommend revisions to NGE scales, and determining revised NGE scales.
  • Requiring actuarial advice on in-force products to be consistent with two overriding principles — NGEs are revised only if anticipated experience factors have changed, and NGEs are not revised with the objective of recouping past losses or distributing past gains.
  • Actuarial reports must include disclosures relating to, among other things, results and observations from any profitability or sensitivity analyses, use of prior analyses and any reconstructed determinations or reasonable approaches used when prior determinations were not available or could not be reconstructed, and results from tests performed to ascertain whether illustrated NGE scales are supportable when using anticipated experience factors that are not more favorable than actual recent historical experience.

Comments on the current exposure draft are due by July 15, 2019. After the comment period closes, it is expected that the ASB will take about six months to determine whether to adopt ASOP 2 as exposed (or with changes not requiring further exposure) or to reexpose an updated version for comment. Assuming no reexposure or modification of the effective date provision, new ASOP 2 would apply to all actuarial services performed four months after adoption, most likely during the second quarter of 2020. Nonetheless, it behooves actuaries and insurers to take immediate note of how the proposed changes may impact new products under development and prospective repricing of existing products, including considerations relating to contract language, the insurer’s determination policy, state filing and approval timelines, and the management of ongoing and potential future litigation.

    ©2011-2020 Carlton Fields, P.A. National Law Review, Volume IX, Number 198


    About this Author

    Cliff Gruhn Finance Lawyer Carlton Fields

    Cliff Gruhn's practice involves defending financial services institutions in complex litigation matters and class actions in federal and state courts throughout the United States.

    Cliff litigates cases involving a variety of issues surrounding life, long-term care, and property-casualty insurance, including coverage disputes and bad faith allegations at both the trial and appellate levels. In addition, he litigates matters involving allegations of trade secrets, fraud, breach of contract, breach of fiduciary duty, and violations of federal statutes, including RICO, ERISA, RESPA, and...

    Steven Kass Litigation Attorney Carlton Fields
    Of Counsel

    Steven Kass brings extensive experience to a wide range of issues facing insurance companies and other financial services providers. In 35 years as a business lawyer, his primary role, Steve has represented clients in an array of transactional matters and counseled on compliance and regulatory issues that range from cutting edge to routine, including:

    • Corporate and securities transactions; mergers and acquisitions; business planning; contracts; and corporate governance.
    • State insurance law regulatory and compliance counseling; insurance product development and drafting; and redetermination of non‑guaranteed elements.
    • Insurance regulatory filings and hearings.
    • Regulatory complaints, investigations, market conduct examinations, and enforcement.
    • Risk assessments and exposure analyses, compliance audits, and best practices reviews.
    • Unclaimed property reporting, examinations, and self-audits.

    Steve also regularly participates in complex federal and state litigation with other Carlton Fields attorneys, bringing his extensive product, business operations, and industry knowledge to litigation teams defending claims involving insurance products and practices.

    Steve’s legal practice is informed by a strong financial background, and in the course of representing insurance industry clients, he often works directly with company and consulting actuaries on product, reinsurance, and litigation matters. He was formerly a certified public accountant, and is the firm’s treasurer.

    Steve also serves, part time, as director of the Berger Entrepreneur Law Clinic at Nova Southeastern University's Shepard Broad College of Law.