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[lmi] Non-QAB charges and 7702A deemed cash value

From: Greg Chicares
Subject: [lmi] Non-QAB charges and 7702A deemed cash value
Date: Thu, 08 Oct 2009 23:50:29 +0000
User-agent: Thunderbird (Windows/20090812)

Today we discovered a contradiction in our 7702A specifications.
Paragraph 11/3 says:

  Both benefits and charges for non-qualified additional benefits
  are completely disregarded if their charges cannot flow through
  the AV". [Otherwise, they don't increase any premium limit,]
  although they do decrease the DCV.

However, "When monthiversary processing is performed" in the MEC-
testing algorithm says:

  Update DCV for CVAT contracts [...]
  Disregard charges for nonqualified additional benefits

with a footnote referring back to 11/3.

I believe the original intention was to follow 11/3, so I would
revise the other section to read, e.g.:

  Disregard charges for nonqualified additional benefits whose
  charges cannot flow through the AV

to make it conform to the paragraph it cites as authoritative.
It may be desirable to support the excessively-narrow "disregard"
language (as it stands today) as a configurable option that is
conservative and simple to implement.

The legislative history says only this, and nothing more:

  The deemed cash surrender value of any contract equals the cash
  surrender value (determined without regard to any surrender
  charge or policy loan) that would result if the premiums paid
  under the contract had be [sic] credited with interest at the
  policy rate and had been reduced by the applicable mortality
  and expense charges.... The applicable mortality and expense
  charges for any contract are those charges that were taken into
  account for prior periods under the cash value accumulation
  test... [TAMRA Conference Report at 481]

which can be read as supporting either of our (contradictory)
statements. Then again, of course, it doesn't even clearly say
whether any expense charges are applicable to a CVAT contract
[DesRochers et al., 2004, page 111; the 2008 supplement says
nothing about this subject].

DesRochers [loc. cit.] speaks of defining DCV consistent with the

  purpose of limiting contract funding to that which would be
  required on a guaranteed basis to fund the tested level of

[but notes that "reasonable" rather than guaranteed mortality and
expense charges might be required]. Thus, DCV is akin to a CRVM
guaranteed maturity fund. To the extent that non-QAB charges flow
through AV, it seems unnecessarily severe to disregard them in
the DCV calculation.

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