AG 38 Comment Letters: Let PBR Fly, Be Careful of Tax Issues

Life insurance companies embraced the bifurcated approach between new business and in-force business taken by the Commissioner-level actuarial standards review group for interpreting and applying Actuarial Guideline 38, and asked the group to consider applying principles-based reserving (PBR) methods retroactively, once they are effective for new business.

But insurers are also worrying about federal tax issues associated with retroactive application of PBR, which, although they might be complex, are expected to have limited adverse impact, according to insurers. However, state laws need to be considered.

Life insurers do assert that state laws that wouldn’t appear to prohibit the use of PBR on previously issued policies, as long as it is with the commissioner’s approval, key insurers told the NAIC.

“It should be noted that retroactive application of any new reserve law will raise certain tax issues. However, given the expected limited duration over which this retroactive application would occur, any adverse tax issues generally are expected to be limited,” said the American Council of Life Insurers in a letter Monday to a top regulator.

However, asset adequacy tests of in-force business using the strict version of AG 38 now may lead to some companies need to increase reserves this year, some say and additional reserves set up pursuant to that analysis are generally not tax deductible. Treasury is said to be looking at the issue, along with the Internal Revenues Service, but the IRS never returned a query when it was first raised.

In letters to Texas Insurance Commissioner Eleanor Kitzman, chair of the NAIC’s Joint (A) & (E) Working Group regarding her Draft Framework on AG 38, life insurers also applauded the idea proposed in the framework to hire independent consulting actuaries outside the ranks of the NAIC or state insurance departments and hoped to help pick them.

Most life insurers seem to be all on the same page as far as ditching formulaic solutions wherever they are found for modern life insurance products, and applying PBR with domestic commissioner approval, on applicable business, including traditional level premium term insurance, issued during the upcoming interim period, before PBR is officially adopted and passed.

The ACLI and the Affordable Life Insurance Alliance, (ALIA) who both weighted in, are the chief trade groups representing a broad swathe of the industry. ALIA has been representing companies on issues involving AG 38 since 2005; the ACLI letter was signed by top executives at Pacific Life Insurance Co. and John Hancock Financial Services/ManuLife.

The executives told Kitzman that the days if a formulaic approach to reserving are over, and it is futile to try and find one, begrudging the one that is employed now. The ACLI did call the NAIC’s life insurance actuarial group’s work on it “the new formulaic reserve standard,” and clearly doesn’t embrace it as it does PBR.