Tax Cuts and Jobs Act considerations for life actuaries 20 March 2018
Presenters Hal Kolpak, ASA, MAAA Manager Insurance and Actuarial Advisory Services Ernst & Young LLP Aria Zhou, ASA, MAAA Senior Insurance and Actuarial Advisory Services Ernst & Young LLP Page 1
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Background H.R. 1 introduced in the House on November 2, 2017 House version of bill passed November 16, 2017 Senate version of bill passed December 2, 2017 Conference Report filed December 15, 2017 House and Senate passed H.R. 1 on December 20, 2017 Tax Cuts & Jobs Act (TCJA) signed into law by president Trump on December 22, 2017 Changes to Internal Revenue Code (IRC) include modifications to corporate tax rate and insurance provisions that go into effect for taxable years beginning after December 31, 2017 Page 3
Corporate tax rate 21% effective for taxable years beginning after December 31, 2017 Actuaries should be considering impact on: Product pricing Asset adequacy analysis Solvency requirements Deferred tax asset development Page 4
Reserve calculation changes Highlights of Items changed or removed under IRC section 807 Changed calculation of life insurance reserves Changed interest rate used to calculate amounts under insurance and annuity contracts that don t involve life, accident or health contingencies For purposes of determining life insurance reserves, removed requirements to utilize: Applicable Federal interest rate Prevailing state assumed interest rate Prevailing commissioners standard tables Page 5
Reserve calculation changes Additional items changed or removed under IRC section 807 Changed reserve method selection as of the issue date of contract Removed reference to two-year full preliminary term method for noncancellable accident & health (A&H) contracts Removed supplemental benefit reserve references to National Association of Insurance Commissioners (NAIC) annual statement reserves Removed qualified substandard risk rules Changed 10-year spread under IRC section 807(f) Page 6
Life insurance reserve calculation Life insurance reserve for non-variable contracts is the greater of: 1) The net surrender value of the contract 2) 92.81% of the reserve determined using the tax reserve method Life insurance reserve for variable contracts: 1) The greater of the net surrender value or the portion of reserve separately accounted for under IRC section 817, plus 2) 92.81% of the excess of the reserve using the tax reserve method over the amount determined in 1) Page 7
Tax reserve method Tax reserve method: Commissioners Reserve Valuation Method (CRVM) prescribed by the NAIC for contracts covered by CRVM Commissioners Annuities Reserve Valuation Method (CARVM) prescribed by the NAIC for contracts covered by CARVM NAIC prescribed method for noncancellable A&H contracts NAIC prescribed method for other contracts or a method that is consistent with the methods above if no NAIC method prescribed Reserve calculated using the tax reserve method, which is applicable to the contract and in effect as of the date the reserve is determined Page 8
Life insurance reserve calculation Additional observations: Deficiency reserves are not allowed Deferred and uncollected premiums are excluded Net surrender value floor applies Statutory reserve cap applies No double-counting of items to determine reserves Page 9
Other reserves IRC section 807(c)(2) unearned premiums and unpaid losses IRC section 807(c)(3) insurance and annuity contracts not involving life, accident or health contingencies IRC section 807(c)(4) dividend accumulations and amounts held at interest IRC section 807(c)(5) premiums received in advance and premium deposit funds IRC section 807(c)(6) reasonable special contingency reserves (e.g., premium stabilization) Only change was to 807(c)(3), reserve calculations Page 10
Reserves for insurance and annuity contract amounts that don t involve contingencies Applies to amounts under insurance and annuity contracts that don t involve life, accident or health contingencies Amounts discounted at interest only Interest is highest rate or rates permitted to be used to discount obligations by the NAIC Net surrender value floor applies Page 11
Reserves for supplemental benefits Reserves for qualified supplemental benefits (QSB) are computed separately as though the benefit were under a separate contract. QSBs include guaranteed insurability, accidental death or disability benefit, convertibility or disability waiver benefit. QSBs must have a separately identified premium or charge, and the net surrender value attributable to any other benefit is not available to fund the QSB. Note that reference to use of the NAIC annual statement reserve has been removed. Page 12
Transition rule for reserves Transition rule: The difference between reserves that are calculated under the new method and the old method must be determined as of the close of the current tax year. The difference between reserves must be taken into account prorata over the following eight years. Page 13
Other reserve considerations New reporting rules with respect to reserve balances and the method of computing reserves (at such time and in such manner as the Secretary shall prescribe) Change in computing reserves under IRC section 807(f) treated as a change in method of accounting (effect spread over a maximum of four years) Page 14
Other impacts to life insurance companies DAC tax changes under IRC section 848: Amortization period increased to 180 months (was 120) Capitalization percentages increased as follows: Specified annuity contracts = 2.09% (was 1.75%) Specified group life insurance contracts = 2.45% (was 2.05%) Other specified contracts = 9.20% (was 7.70%) Page 15
Other impacts to life insurance companies Moved the definition of prevailing commissioners standard tables from IRC section 807 to IRC section 7702 New base erosion and anti-abuse tax (BEAT tax) imposes a minimum tax on US taxpayers that make deductible payments to non-us related parties Small life insurance company deduction repealed Page 16
Other impacts to life insurance companies Net operating loss (NOL) deductions for life insurance companies are generally subject to same rules as all other corporations Dividends received deduction (DRD) modified to set company s share to 70% and policyholder s share to 30% Repealed pre-1984 policyholders surplus accounts (PSA) and imposed tax on balances Page 17
Other impacts to life insurance companies Life insurance contracts: Reversal of the position in Revenue Ruling 2009-13. No adjustment is made for the cost of insurance when determining basis for a life insurance or annuity contract. A reporting requirement was added for the acquirer of an interest in a life insurance contract and the payor of death benefits. The transfer for value rules under section 101(a) modified with respect to a reportable policy sale. Page 18
Questions? Page 19
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