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June 21, 2007 at 01:33 PM
An Internal Revenue Service life actuary has expressed concerns about efforts to replace the current formula-based reserving system.
The IRS actuary, Allen Booth of Brookfield, Wis., participated in a recent teleconference on principles-based reserving sponsored by the Affordable Life Insurance Alliance, Washington.
Advocates of principles-based reserving want insurers, regulators and actuaries to focus more on general principles and modern statistical modeling techniques, and less on use of static formulas, when creating and analyzing life company reserves.
Booth said the conversation about principles-based reserving tax issues that he heard during the teleconference sounded like “wordsmithing.”
“There are extreme differences [between] where we are and where we need to be,” Booth said.
“There are all kinds of word nuances that would be appropriate under principles-based reserving,” but a question to address is whether the new reserving system is “closer to economic reserves or farther away,” Booth said.
The current system has worked well, as evidenced by the fact that there have been no major insolvencies in 15 years, Booth said.
Booth did not say that principles-based reserving would not work or that related tax issues could not be resolved, but he said care is needed to put a system in effect that can work both today and in 15 years.
