R-Ratio / R-Factor

The purpose of the "r" factor, however, is really quite simple.

If the actual account value is less than the GMF <Guaranteed Maturity Fund>, then future guaranteed policy benefits will run out before the maturity date.

--  Shane Chalke

1984 - NAIC UPDATE, Society of Actuaries

Universal Life Insurance Model Regulation (#585)

"The letter “r” is equal to one, unless the policy is a flexible premium policy and the policy value is less than the guaranteed maturity fund, in which case “r” is the ratio of the policy value to the guaranteed maturity fund." 

The funding level affects:

1. Universal life commissioners reserve valuation method reserves -- In particular the r factor is the ratio of the actual fund value to the guaranteed maturity fund. Since r is capped at I00%, using a ratio based on the average fund for all policies may not produce the actual reserve.

2. Cash values -- The funding level affects cash values since 100% of the surrender charge may not be available on minimally funded policies.

3. Premium Assumptions -- Different funding levels will have different premium payment patterns, which range from a term level premium to fully funded premium to dump-in premiums. Premium persistency may also vary by funding level.

4. Future earnings -- As a result of a combination of the above items, future earnings may differ by funding level.

1994VALUATION ACTUARY SYMPOSIUM PROCEEDINGS SESSION 8 Life and Deferred Annuity Liability, Society of Actuaries

In essence, the model regulation <Universal Life Model Regulation> assumes that at issue, all universal life policies are permanent plans.

The r-ratio is meant to measure the extent to which the policy is on track" as a permanent plan.

Statutory Valuation of Individual Life and Annuity Contracts | 5th Edition, Claire, Lombardi and Summers