Regulators say the National Association of Insurance Commissioners could replace a key life insurance mortality table by the end of the year.
Replacing the 1980 Commissioners Standard Ordinary life insurance mortality table with the 2001 CSO table could lead to tax problems and other headaches for some companies, meeting participants acknowledged here at the NAICs summer meeting.
But an update would also eliminate the difficulties involved with using an outdated table to calculate reserve requirements reduce reserve requirements by about 20%, participants predicted.
“Insurers just cant have an ancient mortality table,” said Tom Herget, executive vice president at PolySystems Inc., Chicago, a valuation software company.
A CSO table task force at the American Academy of Actuaries, Schaumburg, Ill., is developing the table and a draft regulation that could be used to implement the table.
The NAIC has agreed to expose the table and the draft regulation for public comment by July 15. The Kansas City, Mo.-based association hopes to put the table and the draft regulation on the agenda in December, at the NAICs winter meeting.
The new mortality table addresses mortality for men, women, smokers and nonsmokers. The table also gives figures for a composite insured, along with figures for issue ages from birth to 99 years and attained ages from birth to 120 years.
The minimum statutory reserves set forth in the proposed table should be sufficient to cover claims 85% of time, according to Paul Skalecki, the academy task force co-chair.
The new requirements would cut reserve levels about 20% and “increase policyholder value without sacrificing reasonable solvency protection,” Skalecki said.
The draft regulation that might be used to implement the new CSO table would require 26 states to adopt the new table before the table would begin taking full effect. Once 26 states adopted the regulation, the table would become the state prevailing table for tax reserves under Section 807 of the Internal Revenue Code, according to Bill Carroll, a life actuary with the American Council of Life Insurers, Washington.
If, for example, the NAIC adopted the table and the regulation by Dec. 31, 15 states adopted the regulation in 2002 and 15 more states adopted the regulation in 2003, the table would become part of the tax code in 2003.
Under the code, a three-year transition period would follow, Carroll said.
Starting three years after the table became part of the states tax code, all policies would be required to use the new table.
One question that cropped up at the NAIC meeting was the length of the transition period.
The states used a nine-year transition period when they adopted the 1980 CSO table, Carroll said. He recommended that the NAIC add an extra year to the three-year transition period given in the current version of the draft regulation.
Another question the table and the draft regulation raised deals with the official definition of “life insurance” given in Section 7702 of the tax code.
Life insurance must meet certain tests, including a premium test, to qualify for an exemption on taxation of inside buildup, Carroll said.
If insurers failed to meet those standards as a result of the transition to the new mortality table, the IRS might not treat the products sold as life insurance, Carroll warned.
Because of that possibility, Carroll added, the industry needs to act quickly to get all states on board once the required 26 states have adopted the new CSO table.
“If a state does not adopt [the new table], it would be difficult, if not impossible, to meet the definition of life insurance and do business in those states,” Carroll said.
If the new CSO table is adopted in December, ACLI will meet with the IRS to discuss the definition of life insurance and other table-related issues, Carroll said.
ACLI analysts believe the table could also affect a life insurers taxes by reducing its reserves and increasing its taxable income, but insurers could offset that increase by decreasing premiums, Carroll said.
Mutual companies may be able to reduce taxable income by using much of the newly liberated surplus to increase dividend payments, according to Bill Koenig, senior vice president with Northwestern Mutual Life Insurance Company, Milwaukee.
Mutual company dividends are tax deductible, Koenig noted.
Larry Gorski, chief actuary with the Illinois Insurance Department, said the current rules for calculating risk-based capital requirements address the net amount of risk.
Although the proposed mortality table might cut reserve requirements, an increase in the net amount of risk a life insurer assumed could increase the amount of risk-based capital it required, Gorski said.
Several meeting participants wondered how long the proposed 2001 mortality might last.
Because of rapid changes in mortality patterns and product offerings, the NAIC will probably have to act far more quickly to replace the 2001 table than it did to replace the 1980 table, according to Barbara Lautzenheiser of Lautzenheiser & Associates, Hartford.
Reproduced from National Underwriter Edition, June 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.