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Income Tax Act 2007

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

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

You could also call this:

“Calculating unpaid insurance claims for certain life insurance policies”

This section explains how life insurers calculate their outstanding claims reserving amount for non-participation policies that are not annuities. You calculate this amount for each income year using a formula:

opening outstanding claims reserve - closing outstanding claims reserve

The opening outstanding claims reserve is usually the amount from the end of the previous year. If there’s no previous year amount, you use a special calculation. The closing outstanding claims reserve is calculated at the end of the current year.

To work out the closing outstanding claims reserve, you use another formula:

life risk claims incurred but not reported + life risk claims reported + risk adjustment

This includes estimates for claims that haven’t been reported yet, claims that have been reported but not paid, and an adjustment for uncertainty. These calculations take into account things like the chances of claims being paid and future expenses for handling the claims.

When calculating these amounts, you need to use present values that are before tax and don’t include GST. The discount rates used should be the same as those used in the life insurer’s financial statements.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515852.

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

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

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EY 25: Premium smoothing reserving amount: non-participation policies not annuities, or

“How insurance companies calculate reserves for certain policies”

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

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

  1. For an income year (the current year), a life insurer has an outstanding claims reserving amount for a class of policies calculated using the formula—

    opening outstanding claims reserve − closing outstanding claims reserve.

    Where:

    • In the formula in subsection (1),—

    • opening outstanding claims reserve is—
      1. if subparagraphs (ii), (iii), and (iv) do not apply, the amount of the life insurer’s closing outstanding claims reserve for the class of policies, for the income year before the current year (the prior year); or
        1. if the life insurer has no closing outstanding claims reserve for the prior year, the amount that would be the outstanding claims reserve for the class of policies, using subsections (3) and (4) with necessary modifications, calculated at the end of the prior year, but using a basis consistent with the one that the insurer used for tax purposes in that prior year (for example, if liability for claims incurred but not reported was not accounted for, for tax purposes, in the prior year, the opening balance calculation does not take into account liability for claims incurred but not reported); or
          1. if the current year is the first year in which the insurer adopts IFRS 17 for accounting, the amount of the insurer’s reserve for outstanding claims liability for the class of policies, calculated at the end of the prior year using the basis the insurer used for tax purposes in that prior year; or
            1. if the insurer does not adopt IFRS 17 in the current year and the current year is the first year in which the insurer applies the definition of present value (gross), the amount of the insurer’s reserve for outstanding claims liability for the class of policies, calculated at the end of the prior year using the basis the insurer used for tax purposes in that prior year:
            2. closing outstanding claims reserve is the amount of the life insurer’s outstanding claims reserve calculated under subsections (3) and (4) for the class of policies at the end of the current year.

              1. A life insurer’s outstanding claims reserve is calculated for the relevant policies using the formula—

                life risk claims incurred but not reported + life risk claims reported + risk adjustment.

                Where:

                • In the formula in subsection (3),—

                • life risk claims incurred but not reported is the actuarially determined estimate of present values (gross) for the life risk components of claims not yet reported to the life insurer before the end of the current year, but the insured-against event has occurred. The life risk components must take into account the probability of the claims being paid, and future expenses for administering the claims, but the present value (gross) of relevant life reinsurance claims must be subtracted from the total:
                  1. life risk claims reported is the present values (gross) of the life risk components of claims reported but not yet paid. The life risk components must take into account the probability of the claims being paid, and future expenses for administering the claims, but the present values (gross) of relevant life reinsurance claims must be subtracted from the total:
                    1. risk adjustment is the appropriate adjustment for the life risk components of claims described in paragraph (a) or (b), to the extent to which the adjustment is actuarially determined, reflects the uncertainty of the estimates that arise from the use of the relevant best estimate assumptions, and is not already included in the life risk components of the claims.

                      1. For the purposes of calculating a life insurer’s outstanding claims reserve under this section for a class of policies, present value (gross) for the life risk component of a claim under a life insurance policy or life reinsurance policy that is part of the class means the present value of the life risk component that is included in the outstanding claims reserve of the life insurer, calculated—

                      2. using the discount rates that would be used in calculating the present value, gross of tax, of the life risk component for the purposes of the financial statements of the life insurer; and
                        1. gross of tax; and
                          1. net of GST.

                            Notes
                            • Section EY 24: substituted, on , by section 190(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                            • Section EY 24(2)(a)(i): amended (with effect on 1 January 2023), on , by section 65(1) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(2)(a)(ii): amended (with effect on 1 January 2023), on , by section 65(2) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(2)(a)(ii): amended (with effect on 1 July 2010), on , by section 58(1) of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
                            • Section EY 24(2)(a)(ii): amended (with effect on 1 July 2010), on , by section 46(1) of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
                            • Section EY 24(2)(a)(iii): inserted (with effect on 1 January 2023), on , by section 65(3) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(2)(a)(iv): inserted (with effect on 1 January 2023), on , by section 65(3) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(3) formula: amended (with effect on 1 January 2023), on , by section 65(4)(a) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(3) formula: amended (with effect on 1 January 2023), on , by section 65(4)(b) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(4)(a): amended (with effect on 1 January 2023), on , by section 65(5) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(4)(c): amended (with effect on 1 January 2023), on , by section 65(6)(a) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(4)(c): amended (with effect on 1 January 2023), on , by section 65(6)(b) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(5) heading: inserted (with effect on 1 January 2023), on , by section 65(7) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24(5): inserted (with effect on 1 January 2023), on , by section 65(7) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24 list of defined terms GST: inserted (with effect on 1 January 2023), on , by section 65(8) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24 list of defined terms IFRS 17: inserted (with effect on 1 January 2023), on , by section 65(8) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24 list of defined terms life insurance policy: inserted (with effect on 1 January 2023), on , by section 65(8) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24 list of defined terms life reinsurance policy: inserted (with effect on 1 January 2023), on , by section 65(8) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24 list of defined terms mortality profit: repealed, on , by section 243 of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                            • Section EY 24 list of defined terms outstanding claims reserve: inserted (with effect on 1 January 2023), on , by section 65(8) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                            • Section EY 24 list of defined terms tax: inserted (with effect on 1 January 2023), on , by section 65(8) (and see section 65(9) for application) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).