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Income Tax Act 2007

Timing and quantifying rules - Life insurance rules - Non-participation policies: reserves

EY 23: Reserving amounts for life insurers: non-participation policies

You could also call this:

“Setting aside money for non-profit participating life insurance policies”

This section talks about how life insurance companies set aside money for certain types of life insurance policies. These are policies that have a life risk part but are not profit participation policies.

You need to know that an expert called an actuary must work out the amounts to be set aside for each group of similar policies. If the amount they work out is positive, the insurance company counts it as income. If it’s negative, they can take it off their taxes.

For each year and group of policies, the insurance company has to set aside money for different things:

  1. For claims that haven’t been paid yet.
  2. For smoothing out premiums over time, if they choose to do this and if the policies fit certain rules.
  3. For premiums that have been paid but haven’t been used yet, if they don’t do the smoothing thing.
  4. For guaranteeing a certain amount of money.

Once an insurance company starts smoothing premiums for a group of policies, they can’t switch to the other method.

There’s a special term called a “PSR period”. This is a time of a year or more when the life risk parts of the premiums stay about the same, or when there’s a big difference between when the life risk happens and when people pay for it.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515849.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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EY 22: Shareholder base allowable deductions: profit participation policies, or

“How life insurers calculate deductions for profit-sharing policies”

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EY 24: Outstanding claims reserving amount: non-participation policies not annuities, or

“Calculating unpaid insurance claims for certain life insurance policies”

Part E Timing and quantifying rules
Life insurance rules: Non-participation policies: reserves

EY 23Reserving amounts for life insurers: non-participation policies

  1. This section and sections EY 24 to EY 27 apply to calculate, a life insurer's reserving amounts for life insurance policies, other than annuities, that have a life risk component and that are not profit participation policies.

  2. All reserving amounts must be actuarially determined, for each class of policies that includes life insurance policies to which this section applies.

  3. If a reserving amount calculated under sections EY 24 to EY 27 is a positive amount, the life insurer has that amount as income included in their shareholder base income. If a reserving amount calculated under sections EY 24 to EY 27 is a negative amount, the life insurer has that amount as a deduction included in their shareholder base allowable deductions.

  4. For an income year and a class of policies, a life insurer has a reserving amount described in—

  5. section EY 24, for outstanding claims reserves (the outstanding claims reserving amount):
    1. section EY 25, for premium smoothing reserves (the premium smoothing reserving amount) if the life insurer chooses to calculate a premium smoothing reserving amount and the PSR periods for policies in the class of policies begins, continues or ends in the income year:
      1. section EY 26, for unearned premium reserves (the unearned premium reserving amount), if the life insurer chooses to not calculate a premium smoothing reserving amount:
        1. section EY 27, for capital guarantee reserves (the capital guarantee reserving amount).

          1. Despite subsection (4)(b) and (c), a life insurer may not change between calculating a premium smoothing reserving amount and an unearned premium reserving amount for a class of policies once the premium smoothing reserving amount is used for the class of policies. If a policy in a class of policies does not meet the relevant requirements described in subsection (6), then a life insurer has an unearned premium reserving amount for that class of policy.

          2. PSR period means, for an income year and a policy in a class of policies, a period—

          3. that is a year or more in length; and
            1. that is the income year or is a period that begins, continues, or ends in the income year and begins or ends in another income year, and
              1. for which—
                1. the amounts of the life risk components of premiums payable in the period are level or substantially level:
                  1. there is a material mismatch between the timing of life risk and the timing of the life risk component of premiums payable in the period.

                  Notes
                  • Section EY 23: substituted, on , by section 190(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section EY 23(1): amended, on (applying for income years beginning after this date), by section 87(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                  • Section EY 23(2): amended, on , by section 87(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                  • Section EY 23(4): amended, on , by section 87(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                  • Section EY 23(6): replaced, on , by section 87(4) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).