Illustration Testing – Use of surplus to pass tests for in-force

[lksegal]

I’d welcome any insights or opinions regarding the use of surplus as a subsidy to enable an inforce block (i.e., no new business) of nonpar UL to pass the self and lapse support tests.  In particular, ASOP 24, Section 3.7 (excerpted below) indicates that surplus could be considered if it can be demonstrated that it’s currently being paid AND that the insurer has indicated the intent and ability to continue to do so prospectively.  From a practical perspective, this suggests that objective analysis would need to be performed to quantify the effect of the surplus and show that the currently payable would have been lower in the absence of the subsidy.  Although not explicitly stated, ASOP 24 does not appear to allow for consideration of surplus that might derive from sources other than the policy form being tested.  Any comments or insights on this topic would be greatly appreciated.  Thank you.

“In the context of in-force illustrations for policies receiving distributions of accumulated surplus or prior gains (including those resulting from the formation of a closed block), the actuary should consider including these distributions both in the disciplined current scale and in the illustrated scale, only to the extent that (1) such distributions are currently being paid to the policyholders by the insurer, and (2) the insurer has indicated its intent and ability to continue to do so for the foreseeable future. Such accumulated surplus or prior gains may be used in conducting the tests for self-support and lapse-support.”

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