The Internal Revenue Service has issued advice about applying new variable annuity reserve valuation methods without coming to any conclusions about principles-based reserves for life insurance.
In the notice, IRS officials provide highly technical interim guidance for issuers of variable annuity contracts.
The notice covers the problems that could arise when insurers come up with life insurance reserve totals for federal income tax purposes.
Section 807 and Section 816 of the Internal Revenue Code let life insurers deduct investment earnings on required reserves from taxable income, but they put limits on the amount of reserves that can count as life insurance reserves.
When the National Association of Insurance Commissioners, Kansas City, Mo., adopted Annuity Guideline XLIII, Commissioners’ Annuity Reserve Valuation Methodology for Variable Annuities, and made it effective starting Dec. 31, 2009, it changed state VA reserve requirements.
The IRS began to grapple with how it might respond to A.G. 43 in February 2008, in IRS Notice 2008-18.
“The purpose of A.G. 43 is to interpret the standards for the valuation of reserves for variable annuity and other contracts involving certain guaranteed benefits similar to those offered with variable annuities,” IRS officials write. “Generally, A.G. 43 requires that the aggregate reserve for contracts falling within its scope equal” and amount that is enough to handle severe emergencies or “Conditional Tail Expectation” conditions, and is not less than the “Standard Scenario Amount,” or the amount of reserves needed to handle very severe conditions.