1. Tax Cuts and Jobs Act considerations for life actuaries
22 May 2018

2. Presenters
Jeff Stabach, FSA, MAAA Manager Insurance and Actuarial Advisory Services Ernst & Young LLP

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4. 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

5. 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

6. 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

7. 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)

8. Life insurance reserve calculation
Life insurance reserve for non-variable contracts is the greater of:
The net surrender value of the contract
92.81% of the reserve determined using the tax reserve method
Life insurance reserve for variable contracts:
The greater of the net surrender value or the portion of reserve separately accounted for under IRC section 817, plus
92.81% of the excess of the reserve using the tax reserve method over the amount determined in 1)

9. 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”

10. Life insurance reserve calculation
Additional observations:
Deficiency reserves and asset adequacy 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

11. 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

12. 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

13. Transition rule for reserves
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 pro rata over the following eight years.

14. 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)

15. 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%)

16. Questions ?

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