CHAPTER 97
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS USED TO HEDGE
THE GROWTH IN INTEREST CREDITED FOR INDEXED INSURANCE PRODUCTS
AND ACCOUNTING FOR THE INDEXED INSURANCE PRODUCTS RESERVE
191—97.1(508) Authority. This chapter is promulgated by the commissioner of insurance pursuant to Iowa Code section 505.8.
[ARC 8061B, IAB 8/26/09, effective 9/30/09]
191—97.2(508) Purpose. The purpose of this chapter is to allow insurance companies to utilize certain alternative asset and reserve accounting practices for eligible derivative assets and indexed products, respectively, in order to better match asset and reserve accounting as it relates to interest crediting for indexed products and to provide for a more true and fair representation of the capital position of insurance companies that offer or have in force indexed products. Specifically, this chapter addresses the mismatch related to the changes in value of an eligible derivative asset as compared to the interest accrual in the reserve calculation for the underlying indexed product and provides insurance companies with the ability, once certain criteria are met, to: (1) account for eligible derivative assets using the amortized cost method, and (2) use a reserve calculation methodology for indexed annuity products under which interest credits based upon one or more external indices are included in the reserve only after those interest credits have been credited to the contract holder under the terms of the annuity contract.
[ARC 8061B, IAB 8/26/09, effective 9/30/09]
191—97.3(508) Definitions. For the purposes of this chapter, the following definitions shall apply:
“Eligible derivative asset” means:
	1.	A call or put option derivative asset that is purchased to hedge the growth in interest credited to an indexed product as a direct result of changes in the related external index or external indices, or
	2.	A call or put option derivative asset that is written to offset all or a portion of a call or put option derivative asset that meets the criteria set forth in paragraph “1” of this definition.
Other derivative instruments, such as index futures, swaps and “swaptions,” that may be used to hedge the growth in interest credited to indexed products as a direct result of changes in the related external index or external indices are not eligible derivative assets because an amortized cost for such instruments does not exist.
“External index” means an index of publicly traded securities that is published or disseminated by a source external to the insurance company, such as, but not limited to, the Standard & Poor’s 500 Composite Stock Index (the S&P 500® Index), the Nasdaq-100 Index®, the Dow Jones Industrial AverageSM, the Hang Seng Index, and the Dow Jones EURO STOXX 50® Index.
“Indexed annuity products” means fixed indexed annuity contracts that:
	1.	Provide a minimum guaranteed interest accumulation on a portion of all premium payments, and
	2.	Include interest crediting provisions under which interest (which may be subject to caps, participation rates, spreads, terms or similar limitations) is credited based upon the performance of one or more external indices.
“Indexed life products” means fixed indexed life insurance policies that:
	1.	Provide a minimum guaranteed interest accumulation on a portion of all premium payments, and
	2.	Include interest crediting provisions under which interest (which may be subject to caps, participation rates, spreads, terms or similar limitations) is credited based upon the performance of one or more external indices.
“Indexed products” means indexed annuity products and indexed life products.
“Interest crediting period” means the period of time over which the performance of an external index or external indices is measured for purposes of determining the amount of interest credited under an indexed product.
[ARC 8061B, IAB 8/26/09, effective 9/30/09]
191—97.4(508) Asset accounting. Insurance companies may elect to account for eligible derivative assets at amortized cost, if the insurance company can demonstrate that such eligible derivative assets meet all of the following criteria for an economic hedge:
	97.4(1) At inception of the hedge, or as of the date that an insurance company elects to use the accounting practices prescribed by this chapter if later, there must be formal documentation of the economic hedging relationship and the insurance company’s risk management objective and strategy for undertaking the economic hedge, including identification of the specific eligible derivative assets purchased to hedge indexed products, the nature of the particular risk being hedged, and how the eligible derivative assets’ effectiveness will be assessed, retrospectively and prospectively, on a qualitative basis.
	97.4(2) At inception of the hedge, or as of the date that an insurance company elects to use the accounting practices prescribed by this chapter if later, and at the end of each quarterly reporting period thereafter, the insurance company must maintain documentation that the economic hedge is expected to be and continues to be highly effective as defined by the criteria in 97.4(1) in achieving offsetting changes in fair value attributable to the hedged risk during the period that the economic hedge is designated.
[ARC 8061B, IAB 8/26/09, effective 9/30/09]
191—97.5(508) Indexed annuity product reserve calculation methodology. Insurance companies account for indexed annuity product reserves in accordance with Iowa Code section 508.11 and with the applicable actuarial guidelines and statutory accounting principles. Based on the current guidelines, this chapter provides insurance companies with the ability to make the following adjustment to their indexed annuity product reserves:
	97.5(1) Insurance companies determine indexed annuity product reserve calculations based on the Actuarial Guideline XXXV reserve, assuming the market value of the eligible derivative assets associated with the current interest crediting period is zero, regardless of the observable market for such eligible derivative assets.
	97.5(2) At the conclusion of each interest crediting period, interest credited to an indexed annuity product is reflected in the reserve as realized, based on the actual performance of the relevant external index or external indices.
[ARC 8061B, IAB 8/26/09, effective 9/30/09]
191—97.6(508) Indexed life product reserve calculation methodology. Insurance companies account for indexed life product reserves in accordance with the applicable actuarial guidelines and statutory accounting principles. This chapter does not provide for any adjustment to the reserve calculation methodology for indexed life products.
[ARC 8061B, IAB 8/26/09, effective 9/30/09]
191—97.7(508) Other requirements.
	97.7(1) Indexed annuity products. The alternative accounting practices prescribed by this chapter must be applied to both the indexed annuity product reserves and eligible derivative assets used to hedge indexed annuity products.
	97.7(2) Indexed life products. The alternative accounting practices prescribed by this chapter must be applied only to eligible derivative assets used to hedge indexed life products. This chapter shall not impact the calculation of indexed life product reserves.
	97.7(3) If an insurance company elects to use the alternative accounting practices prescribed by this chapter, it shall report quarterly to the company regulation bureau of the Iowa insurance division, for analysis purposes, the market value of its eligible derivative assets and what the Actuarial Guideline XXXV reserves would be using market value of such eligible derivative assets.
	97.7(4) Application of this chapter is not mandatory. An insurance company that elects to use the alternative accounting practices prescribed by this chapter may not elect to change its accounting practices back to those that would apply in the absence of this chapter without the prior approval of the Iowa insurance commissioner.
[ARC 8061B, IAB 8/26/09, effective 9/30/09]
These rules are intended to implement Iowa Code chapter 508.
[Filed ARC 8061B (Notice ARC 7915B, IAB 7/1/09), IAB 8/26/09, effective 9/30/09]