Practical Advice on PBR Implementation Where are we, and how are companies preparing?

Transcription

1 Practical Advice on PBR Implementation Where are we, and how are companies preparing? ABA Section of Taxation Insurance Companies Committee January 20, 2017 Regina Rose, ACLI Mark S. Smith, PricewaterhouseCoopers, LLP (moderator)

2 PBR Implementation Overview Life PBR represents at least as great a change for tax reserves as it does for statutory reserves Unlike the NAIC, the IRS must administer a Federal statute the Internal Revenue Code which uses statutory accounting as a starting point but did not contemplate the mechanics of Life PBR IRS has provided guidance under AG 43 Notice , which is incomplete and has been criticized IRS has NOT provided guidance on many issues under Life PBR, but plans to do so 2

3 PBR Implementation (continued) Overview Current status of tax issues - Some issues have been addressed (Section 7702 compliance) - Other issues are still in development (Transition, Substantive Reserve Rules) How are companies preparing for implementation given these uncertainties - Evaluating systems and governance requirements - Anticipating tax positions 3

4 Prior IRS guidance Notice Issued by IRS in Feb. 2008, when PBR was still in development stages for both life and annuities - Identified areas in which Treasury and IRS had concerns - Requested comments - Treasury and IRS indicated it would be inappropriate to: Cause life companies to be taxed as nonlife companies due solely to changes in statutory reserve guidance Effect a wholesale change in the standards for qualification of life insurance contracts 4

5 Prior IRS guidance (continued) Notice Issued by IRS in March 2010, shortly after AG 43 became effective - Defined an interim safe harbor for variable annuity contracts issued on or after 12/31/2009; anticipated more study and follow up guidance - No inference should be drawn from this notice on any other federal tax issues, including those arising from Life PBR 5

6 Tax considerations Three broad areas of concern Policyholder Tax Compliance Reserve Transition Rules Substantive Reserve Rules 6

7 Life PBR Policyholder tax compliance PwC Title 7

8 Policyholder tax compliance Valuation manual At 2016 Spring National Meeting, NAIC Executive/Plenary adopted VM amendments to implement the 2017 CSO mortality table Permitted for nonforfeiture values and NPR on contracts issued beginning in 2017, and required for contracts issued in 2020 or later 8

9 Policyholder tax compliance Internal revenue code Section 7702: Qualification as a life insurance contract - Contract must be a life insurance contract under the applicable law - Contract must either: Meet the cash value accumulation test, or Meet the guideline premium requirements AND fall within cash value corridor - Actuarial tests are based on reasonable mortality charges that meet requirements of regulations and that, except as provided in regulations, do not exceed the prevailing commissioners standard tables as of the time the contract is issued 9

10 Policyholder tax compliance Prior guidance What rules apply when new mortality tables become prevailing? Notice Provided guidance upon the adoption of 1980 CSO tables - Generally relied upon section 7702 effective date rules to determine when a contract is treated as newly issued and therefore tested under most recent tables Notice Provided guidance upon the adoption of the 2001 CSO tables - Generally built upon the approach of Notice Optional three year transition period - Set forth as safe harbors a number of circumstances that are not treated as resulting in the issuance of a new contract or as requiring testing under new tables 10

11 Policyholder tax compliance Notice Addresses issues arising under Life PBR (as under any other change in tables) CSO tables as the prevailing tables - Optional three year transition period - Accommodation of some routine, non tax motivated changes - Enumerated changes pursuant to terms of the contract - Reductions in benefits - Reinstatements within 90 days or pursuant to state law Companies generally have certainty on section 7702 compliance What about product pricing? (We ll come back to this) 11

12 Life PBR Transition rules PwC Title 12

13 Transition rules Valuation manual Generally, Life PBR is expected to be effective for contracts issued on or after 1/1/2017 but there are exceptions - Initial three year transition period Companies may elect to use existing requirements for business issued in first three years after operative date Small company exemption permits companies to use existing requirements if they meet defined criteria Single state exemption available in many states, with permission from commissioner Not all states will have adopted Life PBR by 1/1/

14 Transition rules Internal Revenue Code Section 807(d) provides rules for determining life insurance reserves for any contract - Greater of net surrender value or Federally prescribed reserve - In no event greater than amount which would be taken into account with respect to such contract... in determining statutory reserves Federally prescribed reserve (FPR) - Method CRVM prescribed by the NAIC which is in effect on the date of the issuance of the contract (for a contract covered by the CRVM) 14

15 Transition rules Existing guidance Notice Anticipated new rules would apply for tax purposes only to contracts issued after the date of adoption, regardless of transitions permitted for statutory reserves Notice Safe harbor provided that phased in implementation for statutory reserving has no effect on FPR - Phased in implementation was reflected in statutory cap - Impact due to change in statutory cap on inforce business was spread over 10 years 15

16 Transition rules Discussion of issues If a company defers implementation or is exempt from Life PBR, when (if at all) must it implement Life PBR for purposes of computing the FPR? If a company is not subject to Life PBR because it operates only in states that have not enacted the current SVL, or it operates in only one state and is exempted from Life PBR, when (if at all) must it implement Life PBR for purposes of computing the FPR? Different structure for effective date and transition rules in Life PBR vs. AG 43 (No 10 year spread) Widespread assumption is that IRS will not require a company to use Life PBR for tax purposes earlier than when it implements Life PBR for statutory purposes (if at all) Enormous systems implications for tax only implementation or for stat only implementation 16

17 Life PBR Substantive reserve issues PwC Title 17

18 Reserve components under life PBR Valuation manual Three components: Net premium reserve (NPR) Seriatim and formulaic Prescribed assumptions Floored at net surrender value Deterministic reserve (DR) Aggregate, using cash flow modeling Company specific assumptions Stochastic reserve (SR) Aggregate, using cash flow modeling Company specific and stochastic assumptions CTE 70 (average of 30% worst scenarios) 18

19 Reserve components under life PBR Internal Revenue Code Section 807(d) outlines requirements for FPR - Method CRVM prescribed by the NAIC which is in effect on the date of the issuance of the contract (for a contract covered by the CRVM) - Interest rate greater of applicable Federal interest rate or prevailing State assumed interest rate as of beginning of year in which contract was issued - Mortality tables prevailing commissioners standard tables (adjusted as appropriate) when the contract was issued 19

20 Net premium reserve component Existing guidance Notice NPR did not exist at the time - Requested comments on a large number of issues Notice Safe harbor provided that standard scenario amount of AG 43 is permitted as the FPR, adjusted for mortality and interest requirements under section 807(d) 20

21 Net premium reserve component Discussion of issues - Mortality - Interest - Consideration of lapses - Potential unlocking of mortality and lapse assumptions 21

22 DR and SR components Existing guidance Notice Treasury/IRS concerns - Nature of modeled reserves Aggregate rather than contract by contract calculations Deduction for reserves in excess of expected value are they solvency or contingency reserves? Gross premium methodology; inclusion of expenses, lapses and margins in cash flows Nature of assumptions - Use of company specific prudent estimate assumptions - Interpretations of prevailing interest rate and mortality table - Annual unlocking of assumptions Difficulty in auditing 22

23 DR and SR components (continued) Existing guidance Notice Safe harbor provided that stochastic component (CTE excess) under AG 43 was not included in FPR - No conclusion stated on treatment of CTE excess under AG 43 in statutory cap 23

24 Deterministic and Stochastic Reserve components Discussion of issues To what extent are the deterministic and stochastic reserve components included in Federally prescribed reserves? - What adjustments, if any, are required to gross premiums reserves? - How are company specific assumptions taken into account? - What is the appropriate treatment when assumptions unlock? - How are tax adjustments (if any) integrated with adjustments to other VM 20 reserve components? - What issues arise under the use of a CTE 70 reserve methodology? - How will IRS audit Life PBR reserves? - How are contract by contract comparisons made? 24

25 What are the implementation issues? Collaboration between actuarial and tax functions Systems requirements to implement Non implementation is not an option Risk assessments vary according to issues and companies Product section 7702 compliance Notice Product pricing Transition Company taxation/reserve valuation 25

26 Questions? PwC Title 26