2005 Arizona Revised Statutes - Revised Statutes §20-696.07  Additional considerations for analysis

A. For the purposes of asset adequacy analysis for the statement of actuarial opinion under section 20-696.05, reserves and assets may be aggregated by either of the following methods:

1. Aggregate the reserves and related actuarial items and the supporting assets for different products or lines of business, before analyzing the adequacy of the combined assets to mature the combined liabilities. The appointed actuary shall be satisfied that the assets held in support of the aggregated reserves and related actuarial items are managed in a manner that the cash flows from the aggregated assets are available to help mature the liabilities from the blocks of business that have been aggregated.

2. Aggregate the results of asset adequacy analysis of one or more products or lines of business, the reserves for which prove through analysis to be redundant, with the results of one or more products or lines of business, the reserves for which prove through analysis to be deficient. The appointed actuary shall be satisfied that the asset adequacy results for the various products or lines of business for which the results are so aggregated either:

(a) Are developed using consistent economic scenarios.

(b) Are subject to mutually independent risks.

B. If the actuary aggregates reserves under subsection A of this section, the actuary shall disclose in the actuary's opinion which method of aggregation was used and shall describe the aggregation in the supporting memorandum.

C. The appointed actuary shall analyze only those assets that are held in support of the reserves that are the subject for specific analysis and that are called "specified reserves". A particular asset or portion of a particular asset that supports a group of specified reserves cannot support any other group of specified reserves. An asset may be allocated over several groups of specified reserves. Except pursuant to subsection D of this section, the annual statement value of the assets that are held in support of the reserves shall not exceed the annual statement value of the specified reserves. If the method of asset allocation is not consistent from year to year, the supporting memorandum shall describe the extent of its inconsistency.

D. An asset adequacy analysis shall use an appropriate allocation of assets in the amount of the interest maintenance reserve, whether positive or negative. An analysis of risks regarding asset default may include an appropriate allocation of assets supporting the asset valuation reserve. The asset valuation reserve assets may not be applied to any other risks with respect to reserve adequacy. An analysis of these and other risks may include assets supporting other mandatory or voluntary reserves that are available to the extent they are not used for risk analysis and reserve support. The memorandum shall disclose the amount of the assets used for the asset valuation reserve in the table of reserves and liabilities of the opinion and shall also disclose the method that was used for selecting particular assets or allocated portions of assets.

E. For the purposes of performing the asset adequacy analysis required by this article, the qualified actuary shall comply with standards adopted by order of the director. In establishing standards, the director shall consider the standards that are adopted by the actuarial standards board. The appointed actuary shall consider in the analysis the effect of at least the following interest rate scenarios:

1. Level with no deviation.

2. Uniformly increasing over ten years at a half per cent per year and then level.

3. Uniformly increasing at one per cent per year over five years and then uniformly decreasing at one per cent per year to the original level at the end of ten years and then level.

4. An immediate increase of three per cent and then level.

5. Uniformly decreasing over ten years at a half per cent per year and then level.

6. Uniformly decreasing at one per cent per year over five years and then uniformly increasing at one per cent per year to the original level at the end of ten years and then level.

7. An immediate decrease of three per cent and then level.

F. For the purposes of subsection E of this section, the projected interest rates for a five year treasury note do not need to be reduced beyond the point at which the five year treasury note yield would be fifty per cent of its initial level. The beginning interest rates may be based on interest rates for new investments as of the valuation date that are similar to recent investments allocated to support the product being tested or that are based on an outside index of assets of the appropriate length on a date close to the valuation date. The appointed actuary shall specifically define which method is used to determine the beginning yield curve and associated interest rates. The beginning yield curve and associated interest rates shall be consistent for all interest rate scenarios.

G. The company and appointed actuary shall retain for at least seven years sufficient documentation that indicates the procedures followed, the analyses performed, the bases for assumptions and the results obtained.