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STATUTORY REGULATION OF RESERVES

Because the basis on which a life insurance company�s policy liabilities are computed is subject to regulation by the various states, such liabilities are called legal reserves. The states prescribe only the basis on which minimum reserves are to be calculated. Therefore as noted earlier companies are permitted to use any other basis that will yield reserves equal to or larger than those produced by the statutory method. The specifications are couched in terms of the mortality table to be used, the maximum rate of interest to be assumed, and the formula to be applied. The specifications differ between life insurance and annuities and among ordinary, group, and industrial life insurance. Special rules apply to proceeds left with the insurance company under supplementary agreements.

Prior to 1948 the universal legal basis for computing minimum net level premium reserves for ordinary insurance was the American Experience Table and 3.5 percent interest, applied under the prospective method of valuation. In most states some modification of the net level premium reserve was recognized and approved. Under the Standard Valuation Law, which became effective in all states in 1948 and with a few exceptions was applicable to all policies issued between December 31, 1947, and December 31, 1965, the minimum reserve basis for all ordinary policies was the 1941 CSO Table and 3.5 percent interest, likewise applied under the prospective formula. However, a modified reserve standard (described in chapter 18), was prescribed in lieu of the net level premium reserve basis. The use of the 1958 CSO Table for all new ordinary insurance became mandatory in 1966; the other features of the Standard Valuation Law remained unchanged. Twenty years later the 1980 CSO Table was mandated for valuation of individual life insurance policies. Other tables are prescribed for the valuation of group insurance, industrial insurance, and annuities.

Annual valuation of policy liabilities is required in every state.

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