Life Perspectives, Fall 2020

Fall 2020
Vol 3 | No. 4

Q&A—White Paper Explores Implications of 2017 Tax Cuts and Jobs Act

CaramagnoThe Life Practice Council’s Tax Work Group released a white paper outlining the most significant changes in the taxation of life insurance companies that were made by the Tax Cuts and Jobs Act of 2017 (TCJA). The white paper, The Tax Cuts and Jobs Act of 2017—Effects on Life Insurers, investigates the many changes that directly affect the work of actuaries, as well as the financial reporting impact of the TCJA on the life insurance industry.

Life Perspectives spoke with Mary Elizabeth Caramagno, chairperson of the work group, about the new white paper.

Can you speak a bit about the genesis of this project? What gaps in the work literature were you seeking to fill?

The TCJA substantially changed the actuarial calculations of tax reserves, Deferred Acquisition Cost (DAC) tax, tax basis changes, and other actuarial tax items. There are only a few authoritative resources on the old tax law, and they are mainly in textbook form, which is time-consuming and cumbersome to update. We wanted to provide a reference for valuation, financial reporting, and product development actuaries that would complement the textbooks by highlighting the differences between the old and new tax laws.

The TCJA became effective for tax years beginning in 2018. Does the lag in release date of this paper speak to the complexity of the law, a desire to see more companies’ experience with the law, or a combination of the two?

The TCJA is actually simpler in many ways than the old law; however, the structure is fundamentally different. The lag in releasing this paper reflects our desire to articulate the substantial differences in the law in an accurate but understandable way. Fortunately, the timing of the final paper allowed us to include discussion of guidance recently released by Treasury/Internal Revenue Service (IRS) in the form of final regulations on the calculation of tax reserves as well a revenue ruling on tax basis changes. That long-awaited guidance should provide significant clarity for valuation actuaries.

This is a white paper on changes in the tax law. Yet the paper notes that the net impact of the TCJA may lead to changes in product design or pricing and discusses the changes in risk-based capital (RBC) requirements. Why are these references included in a paper discussing tax law changes?

Changes in the tax law have implications reaching beyond the completion of the tax return. We wanted to highlight two extremely important effects of such changes to remind actuaries of this. For example, to the extent tax reserves and DAC tax are considered in pricing, the product development actuary needs to understand the changes in the tax law.

Does the work group plan to update the white paper in light of companies’ continued experience with TCJA? What should an actuary do if he or she has input on the paper?

The work group is currently drafting a frequently asked questions (FAQs) paper as a follow-up to the white paper. The format will follow the FAQ paper that was previously released covering the prior tax law. Actuaries who have a question that they would like to see addressed are welcome to send them to lifeanalyst@actuary.org.

Virtual PBR Boot Camp Covers a Range of Topics

Clockwise from top left: Rhonda Aherns, Mike Boerner, Pat Allison, Linda Lankowski, Bruce Sartain, and Vincent Tsang present at a session

The Academy’s seventh PBR Boot Camp was held Sept. 14–17, and for the first time as a virtual event. Presenters covered a range of aspects of specifically tailored issues relevant to the now-fully implemented principle-based reserving (PBR) framework for life insurance. Sessions included an overview of life insurance and implementation of VM-20, mortality, and additional liability assumption; PBR life insurance assets, reinsurance, and model overview and model governance; variable annuities; and regulator and auditor reviews and updates.

The program also included interactive Q&A sessions, with attendees participating in focused discussions, sharing insights, and learning from others’ experience of PBR in their practice.

Academy Annual Meeting and Public Policy Forum Is Just Around the Corner

Time is running out to register for next month’s Annual Meeting and Public Policy Forum, which will be a virtual event Nov. 5–6. The agenda includes high-profile keynote and plenary speakers, life practice-area breakout sessions (and breakouts for the other practice areas), the annual professionalism plenary session, the Academy’s presidential transition and presentation of Academy service awards, , and of course plenty of opportunities for continuing education.

ParekhNew to the agenda is Anand Parekh, M.D., chief medical advisor for the Bipartisan Policy Center (BPC), who will speak at the closing public policy plenary session on Nov. 6, focusing on the response to COVID-19. Formerly with the U.S. Department of Health and Human Services, he has led the BPC’s efforts since 2015 on a variety of health-related public policy issues.

Other agenda highlights include:

Nov. 5, just two days after Election Day, will lead off with insights from Charlie Cook of the Cook Political Report, the source of the best-known independent and nonpartisan analysis for elections and campaigns. He will tell us how the results and trends Election Day reveals for the House, the Senate, governors, and the presidency came together.
Nov. 6 will kick off with remarks from presidential historian and nationally recognized author Michael Beschloss. He will help us understand the meaning of the results and trends Election Day reveals against the backdrop of the American presidency.
Florida Insurance Commissioner David Altmaier, president-elect of the National Association of Insurance Commissioners (NAIC), will present a Nov. 6 plenary session to discuss the NAIC’s initiative on race and insurance and the outlook for NAIC in the time of COVID-19. He serves as the co-chair of NAIC’s Special Committee on Race and Insurance.
Sheila Bair, who was chairman of the Federal Deposit Insurance Corporation (FDIC) during the 2007–2008 financial crisis and is the founding chair and a current member of the Systemic Risk Council, will deliver a keynote address that will set the stage for the Nov. 5 professionalism plenary panel discussion on uncertainty.

Following are the life practice-areas sessions (all times EST)—for more detail and to see all practice-area topics and times, click here:

“Implications of the SECURE Act” (Nov. 5, from 1:45 to 3 p.m.)—The Setting Every Community Up for Retirement Enhancement (SECURE) Act became law late last year. Experts will discuss the implications of the new law on the life insurance industry and explore how the new law will impact defined contribution plans and annuities.
“Effects of COVID-19 on the Life Insurance Industry” (Nov. 6, from noon to 1:15 p.m.)—While the long-term effects of the coronavirus pandemic will take months to come to fruition, this session will focus on what is currently known on the impacts to the life insurance industry.
“Regulation Best Interest and Annuity Suitability Model” (Nov. 6, from 2 to 3:45 p.m.)—In recent years, the Securities and Exchange Commission adopted Regulation Best Interest, the NAIC adopted changes to the Suitability in Annuity Transactions Model Regulation (#275), and the New York State Department of Financial Services revised Insurance Regulation 187. Experts will discuss the implications of these regulations on the life insurance industry and the role of the actuary in complying with them.

‘Actuary Voices’ Podcast Features Life VP Laura Hanson

HansonThe Academy’s latest “Actuary Voices” podcast provides an interesting and wide-ranging conversation with Academy Life Vice President Laura Hanson, who took the position last November for a 2020-2021 term. She talks about her experience with unconscious bias, how art influenced her career, and how the profession can continue to grow with new actuaries.

Academy Letter to NAIC Addresses Diversity and Inclusion

WilliamsAcademy President D. Joeff Williams sent a letter on behalf of the Academy to the National Association of Insurance Commissioners (NAIC) offering comments to NAIC’s Special Committee on Race and Insurance.

“It is of the utmost importance for all stakeholders to engage in a public discourse on race, diversity, and inclusion in the insurance sector,” the letter stated. “The Academy especially recognizes the need to acknowledge that there may be retrospective practices that could have a bearing on insurance-based disparities and to examine whether current practices perpetuate or exacerbate those disparities.”

While noting the Academy fully shares the special committee’s goals to examine the issues in its charges and work streams, with the committee’s ambitious timeline to conclude its work by year-end, however, Williams wrote that it “may require more time to fully examine the range of issues involved.”

He also cited the Academy’s new initiative to study health equity—including September’s webinar on the topic.

Life Groups Comment to NAIC

Two Academy life work groups presented to the NAIC since its summer national meeting in August and September.

C3 Life and Annuities Work Group

In August, Link Richardson, chairperson of the C3 Life and Annuities Work Group, gave a presentation to the NAIC’s Life Risk-Based Capital Working Group on the work group’s progress on an update to the current C-3 Phase I or C-3 Phase II methodology to include indexed annuities.

C-2 Work Group

In September, the C-2 Mortality Work Group presented an update to the NAIC’s Life Risk-Based Capital (E) Working Group reviewing the C-2 overall approach and current risk-based capital (RBC) factors.

The presentation reviewed the C-2 overall approach and current risk-based capital (RBC) factors; noted the work group was seeking regulator feedback on adding a new catastrophe component for a sustained mortality increase from an unknown risk, and differentiating factors for individual life products; and outlined the next steps.

ASB Approves Life-Related Exposure Draft Revisions

The Actuarial Standards Board (ASB) approved second exposure drafts of two actuarial standards of practice related to life insurance.

ASOP No. 2 Revision—Comments Due Nov. 13

The ASB approved a second exposure draft of a revision of ASOP No. 2, now titled Nonguaranteed Elements for Life Insurance and Annuity Products. The ASOP applies to actuaries when performing actuarial services with respect to the determination and, if applicable, illustration of nonguaranteed elements (NGEs) for all life insurance and annuity policies written on individual policy forms where NGEs may vary at the discretion of the insurer except where noted in the ASOP. This would include determination of NGEs on in-force policies that were issued before the ASOP took effect. The standard also applies to actuaries when performing similar actuarial services for group master contracts with individual certificates where NGEs are determined in a similar manner to products written on individual life and annuity policy forms. The comment deadline is Nov. 13—to comment, click here.

ASOP No. 22 Revision—Comments Due Nov. 30

The ASB approved a second exposure draft of a revision of ASOP No. 22, now titled Statements of Actuarial Opinion Based on Asset Adequacy Analysis for Life Insurance, Annuity, or Health Insurance Reserves and Other Liabilities. The ASOP applies to actuaries when performing actuarial services with respect to providing a statement of actuarial opinion based on asset adequacy analysis of life insurance, annuity, or health insurance reserves and other liabilities when a) the statement of actuarial opinion is prepared to comply with applicable law based on the model Standard Valuation Law and VM-30 of the NAIC Valuation Manual, or b) the statement of actuarial opinion is prepared for an insurance company to comply with other applicable law. Notable changes from the first exposure draft include clarifying the scope, revising guidance on the discount rate, and removing several defined terms including “investment yield risk” and “moderately adverse deviation.” The comment deadline is Nov. 30—to comment, click here.

Legislative/Regulatory Update

Following is a roundup of recent life-practice-related federal and state legislative and regulatory activity:

South Carolina Gov. Henry McMaster signed a bill into law on Sept. 28 containing several provisions amending insurance-related statutes, including reduction from liability for reinsurance as it relates to life insurance policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits, as well as reinsurance relating to universal life insurance policies with provisions resulting in the ability of a policyholder to keep a policy inforce over a secondary guarantee period. Among its other provisions, the bill also adopts the reciprocal jurisdiction amendment from the National Association of Insurance Commissioners.

California Gov. Gavin Newsom signed a bill into law on Sept. 26 that, effective Jan. 1, 2023, prohibits an insurer from declining an application or enrollment request for coverage under a policy or certificate for life insurance or disability income insurance based solely on the results of a positive HIV test, regardless of when or at whose direction the test was performed. However, the bill does not prevent or restrict an insurer from refusing to insure an applicant who is HIV-positive if the refusal, limitation, or charge is based on sound actuarial principles. Newsom signed another bill into law on Sept. 11 that authorizes a domestic insurer to take a credit for reinsurance if the reinsurance is ceded to an assuming insurer that has been certified by the commissioner as a reinsurer in the state of California and the insurer secures its obligations in accordance with certain requirements.

The Nevada commissioner of insurance proposed a regulation on Sept. 9 revising certain provisions relating to recommendations for the purchase of certain annuity products. Additionally, the commissioner proposed another regulation on the same date to establish uniform, national standards governing reserve financing arrangements pertaining to life insurance policies containing guaranteed non-level gross premiums, guaranteed non-level benefits, and universal life insurance policies with secondary guarantees. The Academy will continue to track the progress of these regulations.

A bill was introduced in the Pennsylvania General Assembly on Sept. 8 that would amend The Insurance Company Law of 1921 relating to insurance companies, associations, and exchanges with a provision regarding the use of genetic information for insurance purposes. The proposed bill would prohibit health, life, and long-term care insurers from using genetic information to cancel, limit, or deny insurance coverage. The Academy will continue to track the progress of this legislation.

Nebraska Gov. Pete Ricketts signed a bill into law on Aug. 6 that regarding reinsurance of life insurance policies with guaranteed nonlevel gross premiums or guaranteed nonlevel benefits, and reinsurance relating to universal life insurance policies with provisions resulting in the ability of a policyholder to keep a policy inforce over a secondary guaranteed period.