Each year, the New York State Department of Financial Services (NYDFS) releases its “Special Considerations” letter (SCL).¹ This letter outlines considerations for insurance companies doing business in New York. The SCL reserve requirements are more conservative than those in other states. As such, each year we try to highlight the key changes from the year before, as well as any issues that are of note from existing requirements but may be exacerbated in the current economic environment. In the excerpts below, text bolded in blue is newly added by the NYDFS and represents a change from the 2021 SCL.

For 2022, the impact of the changes is not as onerous as in some prior years; however, there are a handful that are useful to note.

The first change is discussed under “Actuarial Opinion and Memorandum – Filing Instructions” and relates to the four “modified” scenarios from 2021 that have now been removed as they would not come into play in the current higher interest rate environment. A new modified scenario has been added and is detailed under section “(4) Clarification of Interest Rate Scenarios per § 95.10(d).”

Per Regulation 126, the actuarial memorandum is due by March 1st. However, extensions are available upon request and when justified. In any event, all substantive asset adequacy analysis should be completed prior to rendering the actuarial opinion submitted with the annual statement, i.e., prior to the March 1st filing deadline. If an extension is granted, the actuarial opinion still should be submitted by March 1st, accompanied by a brief summary of the results of the asset adequacy analysis, with the actuarial memorandum due by the extension date. The summary of results should contain the numerical “NY7” results and the results for the modified scenario for each line of business, as well as an explanation as to how these results were considered in forming the opinion. The summary also should pay particular attention to material changes in assumptions or methodology versus the previous submission. If a material line of business was not subjected to cash flow testing, then the actual type of analysis, numerical results, and conclusions should be explained.

Note additionally that scenarios 5 to 7 are being required for the first time in several years. As a floor to these decreasing scenarios—in addition to the floor rates referenced in section (5)—the December 31, 2021-level scenario becomes the modified scenario standard to which additional reserves are limited if the decreasing scenarios indicate a need for higher reserves.

In addition to the required “NY7” scenarios, the Company may choose to run an additional level scenario using the 12/31/2021 yield curve. If the level scenario using the 12/31/2021 yield curve produces lower additional reserves than scenarios NY5, NY6 and NY7 using the 12/31/2022 yield curve, then those lower additional reserves may be used in place of the results for scenarios NY5, NY6 and NY7.

The 12/31/2021 yield curve referenced above is as follows:

The need to test all seven interest rate scenarios is reiterated later, in section “(13) Additional Review Criteria for Asset Adequacy Analysis per Regulation 126.”

Under section “(7) Defaults per § 95.10(g) and Maximum Spreads to Treasuries,” NYDFS clarifies that the spread cap is inclusive of illiquidity spread.

For assets supporting payout annuities not issued on a substandard or rated basis and with no optionality (i.e., no cash value and the annuity payment schedule cannot be modified), such net yield pick-up may be increased by the lesser of 35 bps and 30% of the average current investment grade Aa2 and A2 as of December 31, 2022 (“Payout Annuity Illiquidity Spread”). The asset adequacy results for payout annuities applying the Payout Annuity Illiquidity Spread must be shown with and without such extra spread. Please note, the total spread cap of 200 bps is inclusive of any applicable illiquidity spread.

In that same section, the 50 to 140 basis points (bps) grade-in will be removed in 2023. NYDFS last year indicated that it would be removed this year but elected to maintain it one more year. Reflecting spreads as of September 30, 2022, the grade-in has minimal impact (none for current spreads and up to 14 bps, depending on weighted average life, for long-term spreads), but may serve as a more effective "floor" at December 31, 2022, should spreads to Treasury drop in the last quarter of 2022.

One of the impactful changes is noted in section “(8) Interim Results.” For the interim surplus test, NYDFS is clarifying that a flat 4% return can be used for general account volatile assets (e.g., common stock, real estate, hybrids with significant common stock characteristics, foreign currency risks, Schedule BA assets, private equity). The SCL is also confirming the 20%/5.5% drop/recovery, but this was seemingly implied in last year's instructions.

Also noted in this section, last year interim results including the first two years could be ignored (i.e., additional reserves do not need to be established for interim shortfalls in the first two years), but this year they can be ignored only if they are a result of the drop/recovery for variable products. Reserves must be posted to cover deficiencies in the first two years.

For cash flow testing, interim results under the Level scenario must be provided for each projection year and each major line of business (Life, Health, Annuity). “Market value” interim results are not required, but the “book value” interim results must be provided, i.e., by showing the book value of assets, liabilities, and surplus. For the interim surplus test, volatile assets held in support of any variable products should be assumed to have an immediate 20% drop followed by a 5.5% annual recovery and all other volatile assets should be assumed to have a flat 4% annual return.

For other than cash flow testing, the appointed actuary should make a good faith effort with respect to the analysis and explanation of interim results. The appointed actuary should explain and justify the extent to which these results were considered in forming the actuarial opinion.

Note:
If there are any interim shortfalls (i.e., negative book value surplus) in the aggregate for all lines of business tested at any time during the projection period, with the exception of negative results due to the 20% drop for volatile assets held in support of any variable products, then additional reserves must be posted to eliminate the shortfalls as of the valuation date. If there are any interim shortfalls after year two due to the 20% drop for volatile assets held in support of any variable products, then additional reserves must be posted to eliminate such shortfalls as of the valuation date. Simply relying on future surplus to cover all projected interim shortfalls will not be accepted.

Finally, while not a change this year, note that, because interest rates are up appreciably from last year but credited rates may be largely unchanged, the required dynamic lapse formula documented in section “(9) Asset Adequacy Analysis for Particular Products” may produce sizable lapses in the increasing scenarios.

For individual fixed deferred annuity contracts and the fixed portion of individual variable annuities (excluding those policies with guaranteed living benefits), lapse rates of 20%, 40%, 60%, and 80% should be assumed when the calculated spread (CS) equals 100 bps, 200 bps, 300 bps, and 400 bps, respectively (and interpolated in between these rates).

The CS should be determined as the following:

CS = C – (CR + SC/3 + (GR – 1%)/2)

where C = competitor rate
CR = credited rate
SC = surrender charge
GR = guaranteed rate

To discuss certain considerations in light of the high interest rate environment, Yan Fridman has written an article you may find helpful: Potential actions in a rising interest rate environment: Cash flow testing considerations.

Hopefully, this summary is beneficial to those appointed actuaries opining on New York business. Please feel free to e-mail [email protected] or call at (973) 569-5838 if you would like to have a tracked-change version of the NYDFS SCL that captures the items detailed above.

¹ NYDFS (October 5, 2022). Special Considerations Relating to December 31, 2022, Reserves and Other Solvency Issues. Retrieved November 25, 2022, from https://www.dfs.ny.gov/system/files/documents/2022/10/spec_con_2022.pdf.