Expect Focus Life, Annuity, and Retirement Solutions, June 2019

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

Life, Annuity, and Retirement Solutions   |   Financial Services Regulatory   |   Securities & Investment Companies   |   Insurance   |   July 11, 2019

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.


©2023 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications


The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.