The IRS has released a notice to alert life insurers to federal income tax issues that may arise out of the adoption of proposed Actuarial Guideline VA-CARVM and a proposed principles-based reserving system that is being developed by regulators at the National Association of Insurance Commissioners, Kansas City, Mo.
Advocates of the new reserving framework that is being developed are weighing in on the notice.
AG-VACARVM establishes reserving for variable annuities with guarantees. The principles-based reserving project at the NAIC is a huge collaboration that has been underway for the past 3 years and has involved the work of commissioners, regulators, actuaries and life insurers. PBR, if implemented, could also apply to health insurers.
Work on elements of PBR–including a new standard valuation law and a valuation manual–are progressing, but the one element that has remained unknown is how Treasury wants to address any change to tax treatment.
In the notice, the Treasury Department and Internal Revenue Service identify areas in which they have concerns. Among these issues are:
–The need for possible guidance that would require the continued use of statutory reserves for purposes of the reserve ratio test, even if those reserves are determined under the proposed AG VA-CARVM or PBR.
–Requiring the use of the standard scenario amount for AG VA-CARVM, a more conservative reserving approach, or the deterministic reserve for purposes of the reserve ratio test.
–That it is “inappropriate for a change in statutory accounting under Section 807(d) to effect a wholesale change in the standards for qualification of contracts as ‘life insurance contracts’ under Section 7702.”
In order to prevent such a result, the notice says Treasury and IRS may exercise the authority under Section 7702 to prescribe mortality tables or to permit continued use of the 1980 Commissioners’ Standard Ordinary mortality and morbidity tables or provide a reasonable interpretation of the prevailing mortality tables.
Treasury and IRS are requesting comment on these issues. Comments are being sought on the status of any efforts to model AG VA-CARVM and PBR on a company-by-company and product-by-product basis or on an industry-wide basis; how those 2 projects limit or broaden the discretion of Treasury and IRS to provide guidance; and the use of gross premium valuation and how it will differ from current valuation methods.
Treasury and IRS also question how revising assumptions and parameters annually are consistent with the existing statutory framework.
The notice asks for comments to be submitted on or before May 5, 2008, referencing Notice 2008-18.