Tax considerations are playing an important role in the race to create a modern, principles-based life insurance reserving system.
Experts talked about the implications of tax considerations for the principles-based reserving movement during a Web seminar sponsored by the Affordable Life Insurance Alliance, Washington.
State insurance regulators, life insurers and life actuaries have started the principles-based reserving project in an effort to reduce use of traditional static formulas and rely more on careful, flexible use of basic actuarial principles.
Advocates of the project say it will help insurers maintain adequate reserves while using capital more efficiently.
The Internal Revenue Service will look at principles-based reserve shifts to see whether they are comparable and auditable, said John Adney, a partner at Davis & Harman, Washington.
Principles-based reserving advocates have to avoid straying too far from the Commissioners’ Reserve Valuation Method associated with federal tax legislation that was enacted in 1984, Adney said.
Adney also talked about the importance of taking a cautious approach to changing mortality tables.
Although using existing mortality tables should not raise eyebrows at the Treasury Department, using brand new mortality tables could cause problems, Adney said.
Historically, tables have been developed approximately every 20 years. If the industry changes tables more quickly, it will have to explain why, Adney said.
“We have so many other things to explain” about the new reserving concept, Adney said.
If Treasury does not feel comfortable with the tables being used, it has the authority to develop its own tables, Adney warned.
Adney also said the industry needs to make sure that a principle-based system is auditable, so that the IRS can tie numbers together.
Ed Robbins, president-elect of the Society of Actuaries, Schaumburg, Ill., talked about the difficulty of making any reserving changes retroactive.
A retroactive application could create variability and large tax inefficiencies for carriers with different blocks of business subject to different rules, Robbins said.