Negotiating the tax implications of moving to a principles-based reserving system will require care but is achievable, says an expert from the Affordable Life Insurance Alliance.[@@]

The tax rules are flexible enough to allow a principles-based system as a reserve system, says John Adney, an attorney with the law firm, Davis & Harmon and an expert for ALIA, Washington.

“There is nothing inherent in a principles-based system that presents an insurmountable obstacle to maintain the existing tax rules,” Adney said in a presentation to ALIA.

Principle-based reserving is a new approach to reserving for life insurance products, and conceivably for property-casualty products. It puts less emphasis on formulas than conventional reserving approaches and more emphasis on company modeling and actuarial judgment.

The project, just getting underway, is new ground that will require work to see how it fits with current tax laws and regulatory guidelines such as the Standard Valuation Law and the Standard Nonforfeiture Law.

During the ALIA presentation, Adney said although the Treasury Department has the right to ask Congress to review tax laws on reserving, it probably would not do so unless the reserving technique reduces tax revenues. There is no reason to believe that a principle-based approach to reserving would reduce tax revenues, he said. Taxes need to reflect economic income accurately, he explained.

ALIA will ask Treasury for guidance, and the American Council of Life Insurers, Washington, has made a preliminary visit to Treasury about the proposal, according to Adney.

Meanwhile, state insurance regulators at the National Association of Insurance Commissioners, Kansas City, Mo., can take several steps to advance principles-based reserving, Adney said. Those steps include:

?Having a formula for apportioning the amount of principle-based reserves to each contract;

?Adopting a principle-based reserve system as the prescribed method for the life insurance contract it covers; and

?Continuing to publish standard mortality tables.

It is important the NAIC continues to approve standard mortality tables and that they then be adopted by at least 26 states so that they will be considered the standard nationwide, Adney said.