BEFORE THE STATE AUDITOR AND COMMISSIONER OF INSURANCE

OF THE STATE OF MONTANA

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TO: All Concerned Persons

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1. On December 12, 2007, at 10:00 a.m., the State Auditor and Commissioner of Insurance will hold a public hearing in the 2nd floor conference room of the State Auditor's Office, 840 Helena Ave., Helena, Montana, to consider the proposed adoption of the above-stated rules.

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2. The State Auditor and Commissioner of Insurance will make reasonable accommodations for persons with disabilities who wish to participate in this rulemaking process or need an alternative accessible format of this notice. If you require an accommodation, contact the department no later than 5:00 p.m., December 5, 2007, to advise us of the nature of the accommodation that you need. Please contact Darla Sautter, State Auditor's Office, 840 Helena Ave., Helena, Montana, 59601; telephone (406) 444-2726; TDD (406) 444-3246; fax (406) 444-3497; or e-mail [email protected].

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3. The rules as proposed to be adopted provide as follows:

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NEW RULE I AUTHORITY (1) This subchapter's rules are promulgated by the Commissioner of Insurance pursuant to 33-2-523, MCA, and ARM 6.6.6707.

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AUTH: 33-1-313, MCA

IMP: 33-2-523, MCA

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NEW RULE II PURPOSE (1) The purpose of this subchapter's rules is to recognize, permit, and prescribe the use of mortality tables that reflect differences in mortality between preferred and standard lives in determining minimum reserve liabilities in accordance with 33-2-523, MCA, and ARM 6.6.6707.

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AUTH: 33-1-313, MCA

IMP: 33-2-523, MCA

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NEW RULE III DEFINITIONS For the purposes of [New Rules I through VI]:

(1) "2001 CSO Mortality Table" means the mortality table, consisting of separate rates of mortality for male and female lives, developed by the American Academy of Actuaries CSO Task Force from the Valuation Basic Mortality Table, developed by the Society of Actuaries Individual Life Insurance Valuation Mortality Task Force, and adopted by the NAIC in December 2002. The 2001 CSO Mortality Table is included in the "Proceedings of the NAIC (2nd Quarter 2002)," and supplemented by the 2001 CSO Preferred Class Structure Mortality Table defined in (2). Unless the context indicates otherwise, the "2001 CSO Mortality Table" includes both the ultimate form of that table, the select and ultimate form of that table, both the smoker and nonsmoker mortality tables, and the composite mortality tables. It also includes both the age-nearest-birthday and age-last-birthday bases of the mortality tables. Mortality tables in the 2001 CSO Mortality Table include the following:

(a) "2001 CSO Mortality Table (F)" means that mortality table consisting of the rates of mortality for female lives from the 2001 CSO Mortality Table;

(b) "2001 CSO Mortality Table (M)" means that mortality table consisting of the rates of mortality for male lives from the 2001 CSO Mortality Table;

(c) "composite mortality tables" means mortality tables with rates of mortality that do not distinguish between smokers and nonsmokers; and

(d) "smoker and nonsmoker mortality tables" means mortality tables with separate rates of mortality for smokers and nonsmokers.

(2) "2001 CSO Preferred Class Structure Mortality Table" means mortality tables with separate rates of mortality for Super Preferred Nonsmokers, Preferred Nonsmokers, Residual Standard Nonsmokers, Preferred Smokers, and Residual Standard Smoker splits of the 2001 CSO Nonsmoker and Smoker tables as adopted by the NAIC at the September 2006 national meeting and published in the "NAIC Proceedings (3rd quarter 2006)." Unless the context indicates otherwise, the "2001 CSO Preferred Class Structure Mortality Table" includes both the ultimate form of that table, and the select and ultimate form of that table. It includes both the smoker and nonsmoker mortality tables. It includes both the male and female mortality tables, and the gender composite mortality tables. It also includes both the age-nearest-birthday and age-last-birthday bases of the mortality table.

(3) "Statistical agent" means an entity with proven systems for protecting the confidentiality of individual insured and insurer information; demonstrated resources for, and history of ongoing electronic communications and data transfer ensuring data integrity with insurers, which are its members or subscribers; and a history of, and means for aggregation of data and accurate promulgation of the experience modifications in a timely manner.

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AUTH: 33-1-313, MCA

IMP: 33-2-523, MCA

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NEW RULE IV 2001 CSO PREFERRED CLASS STRUCTURE TABLE

(1) At the election of the company, for each calendar year of issue, for any one or more specified plans of insurance and subject to satisfying the conditions stated in this rule, the 2001 CSO Preferred Class Structure Mortality Table may be substituted in place of the 2001 CSO Smoker or Nonsmoker Mortality Table as the minimum valuation standard for policies issued on or after April 1, 2008. No such election shall be made until the company demonstrates at least 20% of the business to be valued on this table is in one or more of the preferred classes. A table from the 2001 CSO Preferred Class Structure Mortality Table used in place of a 2001 CSO Mortality Table, pursuant to the requirements of this rule, will be treated as part of the 2001 CSO Mortality Table only for purposes of reserve valuation pursuant to the requirements of the NAIC model regulation, "Recognition of the 2001 CSO Mortality Table for Use in Determining Minimum Reserve Liabilities and Nonforfeiture Benefits Model Regulation."

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AUTH: 33-1-313, MCA

IMP: 33-2-523, MCA

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NEW RULE V CONDITIONS (1) For each plan of insurance with separate rates for preferred and standard nonsmoker lives, an insurer may use the Super Preferred Nonsmoker, Preferred Nonsmoker, and Residual Standard Nonsmoker tables to substitute for the nonsmoker mortality table found in the 2001 CSO Mortality Table to determine minimum reserves. At the time of election and annually thereafter, except for business valued under the Residual Standard Nonsmoker Table, the appointed actuary shall certify that:

(a) the present value of death benefits over the next ten years after the valuation date, using the anticipated mortality experience without recognition of morality improvement beyond the valuation date for each class, is less than the present value of death benefits using the valuation basic table corresponding to the valuation table being used for that class; and

(b) the present value of death benefits over the future life of the contracts, using anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the valuation basic table corresponding to the valuation table being used for that class.

(2) For each plan of insurance with separate rates for preferred and standard smoker lives, an insurer may use the Preferred Smoker and Residual Standard Smoker tables to substitute for the smoker mortality table found in the 2001 CSO Mortality Table to determine minimum reserves. At the time of election and annually thereafter, for business valued under the Preferred Smoker Table, the appointed actuary shall certify that:

(a) the present value of death benefits over the next ten years after the valuation date, using the anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the preferred smoker valuation basis table corresponding to the valuation table being used for that class; and

(b) the present value of death benefits over the future life of the contracts, using anticipated mortality experience without recognition of mortality improvement beyond the valuation date for each class, is less than the present value of death benefits using the preferred smoker valuation basic table.

(3) Unless exempted by the commissioner, every authorized insurer using the 2001 CSO Preferred Class Structure Table shall annually file with the commissioner, with the NAIC, or with a statistical agent designated by the NAIC and acceptable to the commissioner, statistical reports showing mortality and such other information as the commissioner may deem necessary or expedient for the administration of the provisions of this rule. The form of the reports shall be established by the commissioner, or the commissioner may require the use of a form established by the NAIC or by a statistical agent designated by the NAIC and acceptable to the commissioner.

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AUTH: 33-1-313, MCA

IMP: 33-2-523, MCA

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NEW RULE VI SEPARABILITY (1) For the rules in this subchapter, if a part of a rule is invalid, all valid parts that are severable from the invalid part remain in effect. If a part of a rule is invalid in one or more of its applications, the part remains in effect in all valid applications that are severable from the invalid applications.

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AUTH: 33-1-313, MCA

IMP: 33-2-523, MCA

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STATEMENT OF REASONABLE NECESSITY; It is necessary to adopt New Rule I to show the statutory authority for enacting the new rules. It is also necessary to cite the companion rule which authorizes the use of mortality tables adopted by the NAIC after January 1, 2000.

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It is necessary to adopt New Rule II in order to describe the purpose of the rules, which is to reflect differences in mortality in determining reserve liabilities. Reserve liabilities are set to ensure solvency of life insurance companies. Additionally, the proposed rules promote uniformity among states since the 2001 CSO Mortality Tables will most likely be adopted by a majority of states. Uniformity will ease the administrative burden on insurers resulting in speed to market for insurance products.�

It is necessary to adopt New Rule III to define the various types of mortality tables, beyond standard mortality tables, to include preferred smoker and nonsmoker mortality tables from 2001. In general, insured life mortality has improved since the adoption of the 1980 CSO mortality table. Use of lower mortality generally results in lower reserve liabilities. As a result, companies may reduce premiums or other factors, resulting in lower insurance costs to the consumer.

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It is necessary to adopt New Rule IV which allows the use of preferred mortality tables as the minimum valuation standard. The rules allowing a split of the 2001 CSO Mortality Tables was passed to maintain a "level playing field" between term life insurers and whole life insurers. Even with the 2001 CSO Mortality Table, but not including the preferred class structure, the reserve for term life insurance is about twice the economic reserve for whole life insurers. With term life insurers having twice the economic reserves compared to whole life insurers, it is forcing term life insurers out of the market place, or forcing the term life insurer to reinsure the business written offshore as a result of economic capital requirements.

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It is necessary to adopt New Rule V to allow insurance companies to specifically break down the types of preferred smokers and nonsmokers into various tables. Additionally, several of the larger term insurance companies did not submit data during the data call when the Society of Actuaries did a study that produced the 2001 CSO Mortality Table. These larger term insurers had a much better experience than the 2001 CSO Mortality Table reflects. Therefore, this specific rule forces a life insurer to file statistical information concerning the 2001 CSO Preferred Class Mortality Tables. In this way, the next set of Preferred Tables will be more accurate.

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It is necessary to adopt New Rule VI to assure that if one part of the rule is determined to violate state or federal constitutional or statutory law, then the other parts of the rule remain in effect.

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4. Concerned persons may submit their data, views, or arguments concerning the proposed action either orally or in writing at the hearing. Written data, views, or arguments may also be submitted to Kevin F. Phillips, Staff Attorney, State Auditor's Office, 840 Helena Ave., Helena, Montana, 59601; telephone (406) 444-2040; fax (406) 444-3497; or e-mail [email protected], and must be received no later than 5:00 p.m., December 20, 2007.

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5. Kevin F. Phillips, State Auditor's Office, has been designated to preside over and conduct this hearing.

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6. The department maintains a list of concerned persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request that includes the name and mailing address of the person to receive notices and specifies for which program the person wishes to receive notices. Such written request may be mailed or delivered to Darla Sautter, 840 Helena Ave., Helena, Montana 59601; telephone (406) 444-2726; TDD (406) 444-3246; fax (406) 444-3497; or e-mail [email protected], or may be made by completing a request form at any rules hearing held by the department.

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7. An electronic copy of this Proposal Notice is available through the Secretary of State's web site at http://sos.mt.gov/ARM/Register. The Secretary of State strives to make the electronic copy of the Notice conform to the official version of the Notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the Notice and the electronic version of the Notice, only the official printed text will be considered. In addition, although the Secretary of State works to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.

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8. The bill sponsor notice requirements of 2-4-302, MCA, apply and have been fulfilled. The primary bill sponsor was notified on November 6, 2007, by regular mail.

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/s/ Christina L. Goe����������������������������������������������������� /s/ Janice S. VanRiper

Christina L. Goe���������������������������������������������������������� Janice S. VanRiper

Rule Reviewer���������������������������������������������������������������Deputy Insurance Commissioner

��������������������������������������������������������������������������������������� State Auditor/Commissioner of Insurance

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Certified to the Secretary of State November 13, 2007.