The New York Department of Financial Services (DFS) announced yesterday that it will adopt principle-based reserving (PBR) for life insurers in 2018. The decision puts New York in line with the other 45 states that have adopted the new life reserve methodology. These other states have a “go live” date in 2017.
PBR involves both deterministic and stochastic methodologies and can produce higher or lower life insurance reserves than the current methodologies used by U.S. life insurers to compute statutory (“stat”) life insurance reserves.
Read the DFS press release
Tax professionals expect life insurers will welcome New York’s decision to follow suit with other states in making PBR the approved statutory life reserving methodology. New York’s insurance regulators had been reluctant to endorse PBR, causing uncertainty for New York regulated life insurers regarding the potential requirement to use multiple statutory reserving methodologies. New York’s adoption of PBR will likely alleviate insurer concerns and simplify compliance with the PBR regime.
Life insurers have raised questions with the IRS regarding how PBR will affect the computation of life insurance reserves for federal income tax purposes. The IRS has a PBR item on its current Priority Guidance Plan and is working to provide timely guidance regarding how PBR will affect life insurance reserve computations under Code section 807. Multiple issues—including how to handle the transition to PBR and whether the stochastic element of the PBR computation will be included in tax reserves—are open and will hopefully be addressed in a series of IRS guidance. The timing of the forthcoming guidance is uncertain, but some guidance is expected prior to December 31, 2016.
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