Section 2534.44 - Factors Determining the Existence of Hazardous Operations(a) When a variable annuity is utilized for retirement purposes, it shall be deemed that the prospective purchaser or contract holder holds the viewpoints and expectations of a reasonably prudent investor. The reasonably prudent investor generally does not participate in highly speculative investments, but does have expectations of a reasonable rate of return on his or her investment. Over the long term, such an investor expects to see moderate growth in his or her investment, over a time frame consistent with his or her retirement plans and taking into account his or her ability to make appropriate investment strategy changes as conditions and expectations change over time.(b) However, the types of investments and degrees of investment risks appropriate for a reasonably prudent investor should be determined in light of the specific situation and characteristics of a given individual. Factors to be considered include the individual's age, wealth, other investments, dependents and financial obligations, long term financial prospects, lifestyle preferences, and tolerance of risk.(c) In addition, brokers and agents selling variable products must comply with suitability standards. Such standards obligate the broker or agent to make certain that there are reasonable grounds for believing that a variable contract recommended to a customer is suitable for that customer. It is expected that due diligence will be given to the consideration of suitability by brokers and agents licensed to sell variable contracts in California.(d) A variable annuity shall be considered to have hazardous operations when the variable annuity contract, viewed as a whole, and from the viewpoint of a reasonably prudent investor, is so risky an investment that it seriously jeopardizes the retirement expectations of the investor. If the investor's reasonable retirement expectations are in jeopardy of remaining substantially unfulfilled, the presumption could arise that the contact is hazardous.(e) A variable life insurance contract shall be considered to have hazardous operations when the variable life insurance contract, viewed as a whole, and from the viewpoint of a reasonably prudent investor, contains risky investment options which the Commissioner deems excessive. In addition, such options jeopardize the realization of a fair, investment return, over a long period of time. Where the insurer informs the investor of a significant number of risks and uses an unusually large number of caveats in its explanation of the policy and its investment options, a presumption shall arise that the policy is hazardous.(f) To the extent that an insurer's financial condition, or methods of operation, places the reasonable prudent investor in jeopardy of having his or her investment expectations substantially unfulfilled, that financial condition or business operation shall be presumed to involve hazardous operations.(g) The presence of the following factors may raise a presumption that hazardous operations are involved in a variable product, fund or subaccount.(1) Operations are delegated to a third party that is not a lawfully licensed agent of the company.(2) The name of the subaccount is deceptive.(3) The investment restrictions of the subaccount permit it to invest more than 20% of its assets in bonds rated less than investment grade, by a bond-rating agency such as Moody's or Standard and Poors. Such an investment will not be permitted unless the subaccount specifically identifies and discloses the nature of the investment and the attendant risks associated with it.(4) The investment restrictions of the subaccount permit borrowings to reach a level greater than 33 1/3% of its total assets.(5) The investment restrictions of the subaccount permit it to hedge by purchasing put and call options, futures contracts, or derivative instruments on securities in an aggregate amount equivalent to more than 10% of its total assets.(6) The investment adviser or subadviser does not possess sufficient investment experience in order to render reliable investment advice. Advisers must be of good professional character and in good standing with the securities licensing authorities having jurisdiction over them.(7) The portfolio turnover rate is excessive in relation to the investment goals of the subaccount. A high portfolio turnover rate shall not be considered excessive if it is consistent with the investment objectives of the portfolio or subaccount.(8) An index subaccount must substantially mirror the stock index upon which it is based.(9) References to rating services, such as A.M. Best, in advertising must explain the nature and purpose of the rating. The reference must clearly indicate that the rating does not apply to the insurer's Separate Account(s).(10) Hazardous operations may exist if the entire assets of the Separate Account are composed wholly, or in very large part, of investments in other Separate Accounts, not under the direct control of the insurer. In such situations, hazard will exist if the liquidity of the Separate Account is impaired.(11) Hazardous operations may exist if investments are made directly in gold and/or silver bullion which, when combined, exceed 10% of the assets of the underlying subaccount.(12) Hazardous operations may exist in non-income producing real estate. Such investments will be presumed speculative. Concerning International and Global Portfolios or Subaccounts:
(13) Such subaccounts must be sufficiently diversified. Diversification requires that investments must be made in a minimum of three different countries at all times. The subaccount must not invest more than 50% of its assets in any second tier country or more than 25% of its assets in any third tier country. First tier countries are defined as Germany, the United Kingdom, Japan, the United States, France, Canada, and Australia. Second tier countries are all countries not in the first or third tier. Third tier countries are defined as countries identified as "emerging" or "developing" by the International Bank for Reconstruction and Development (also known as the "World Bank") or the International Finance Corporation.(14) Regional subaccounts must be invested in a minimum of three countries and the name of the subaccount must accurately describe the subaccount. Similarly, a subaccount that uses the name of a single country to describe it must make substantial investments in that country and the name of the subaccount must accurately describe the nature of the subaccount.(h) Notwithstanding the above presumptive factors, the Commissioner reserves the right to review for possible hazardous conditions any variable contract if there is good cause to believe that the issuance of such contract may pose a hazard to California policyholders or the public. The Commissioner may also review any variable contract if there is good cause to find that any material risk is not being adequately disclosed.Cal. Code Regs. Tit. 10, § 2534.44
1. New section filed 12-13-2006; operative 1-12-2007 (Register 2006, No. 50). Note: Authority cited: Section 10506(h), Insurance Code. Reference: Section 10506(h), Insurance Code.
1. New section filed 12-13-2006; operative 1-12-2007 (Register 2006, No. 50).