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IRS Cautious On Tax Issues Regarding Principles-Based Reserving

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Insurers and their tax experts are saying that a new principles-based reserving system that is being developed for life insurance products fits within current U.S. tax requirements, but a government official is responding more tentatively.

During a teleconference on tax issues surrounding principles-based reserving sponsored by the Affordable Life Insurance Alliance, Washington, Allen Booth, a life actuary with the Internal Revenue Service, Brookfield, Wis., said the conversation he heard on the call sounded like “wordsmithing,” and that “there are extreme differences of where we are and where we need to be.”

Booth noted, “There are all kinds of word nuances that would be appropriate under principles-based reserving,” but a real question to address is whether the new reserving system is “closer to economic reserves or farther away.” The current system has worked well, as evidenced by the fact that there have been no major insolvencies in 15 years, he said.

Although Booth did not say that PBR would not work or that tax issues could not be resolved, he did say that care was needed to put a system in effect that would work both today and in 15 years.

Tax experts from the law firm of Davis & Harman LLP, Washington, explained why they thought PBR would work within the current tax system. For instance, John Adney, a partner, said he believed that Section 807(d) in the tax code would be flexible enough to accommodate PBR. The section prescribes guidance for interest rates used for valuing life insurance and annuity products.

Consumers want and need life insurance products that are more flexible, and PBR would allow that to happen, said Larry Bruning, chief actuary with the Kansas insurance department and chair of the Life & Health Actuarial Task Force of the National Association of Insurance Commissioners, Kansas City, Mo.

They need one product that can offer death benefit protection or can be used for retirement income or long term care needs, as opposed to 3, 4 or 5 contracts, he explained. PBR would help provide flexibility as needs change and would do so with a single product chassis, he noted during the ALIA call.


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