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Income Tax Act 2007

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

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

You could also call this:

“How insurance companies calculate reserves for certain policies”

In this law, you learn how insurance companies calculate something called a ‘premium smoothing reserving amount’ for certain types of insurance policies. This amount helps them manage their money over time.

To figure out this amount for a year, the insurance company uses a simple math formula. They take the ‘opening premium smoothing reserve’ and subtract the ‘closing premium smoothing reserve’.

The ‘opening reserve’ is usually the amount from the end of the previous year. If there wasn’t one for the previous year, they use a special calculation instead.

The ‘closing reserve’ is calculated at the end of the current year using specific rules.

These rules say that the reserve amounts should balance out with the part of the premiums that covers life risk over time. They also say that the reserve shouldn’t include money for policies that have ended.

Insurance companies need to use their best estimates when calculating these amounts. They can group similar policies together when doing these calculations.

The law also explains what they mean by ‘expected life risk proportion’. This is the part of the premiums that’s meant to cover the life risk and related expenses for each year of the policy.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515855.

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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”

EY 26: Unearned premium reserving amount: non-participation policies not annuities, or

“Calculating reserve for future insurance premiums on non-annuity policies”

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

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

For an income year (the current year), a life insurer has a premium smoothing reserving amount for a class of policies, during the policies' PSR periods, calculated using the formula—
$opening premium smoothing reserve − closing premium smoothing reserve.$

Where:
In the formula,—
opening premium smoothing reserve is—
1. the amount of the life insurer’s closing premium smoothing reserve for the class of policies, for the income year (the prior year) before the current year; or
2. the amount that would be the premium smoothing reserve for the class of policies, using the principles in subsection (3) with necessary modifications, calculated at the end of the prior year, if the life insurer has no closing premium smoothing reserve for the prior year:
closing premium smoothing reserve is the amount of the life insurer’s premium smoothing reserve calculated under the principles in subsection (3) for the class of policies, calculated at the end of the current year.

For policies in a class of policies and for PSR periods of the policies, reserving amounts must be calculated using the principles—
for an income year, the sum of a reserving amount and the life risk component of premiums equals the expected life risk proportion; and
for PSR periods, the sum of a reserving amount and the life risk component of premiums equals the total life risk component of premiums recognised for financial reporting purposes; and
the amount in the premium smoothing reserve does not include amounts for policies for which all obligations have ceased.

Closing and opening premium smoothing reserve amounts must be actuarially determined, using best estimate assumptions.
For the purposes of determining premium smoothing reserve amounts, life insurance policies may be grouped together if the policies have in common,—
substantially the same contractual terms and conditions, other than their PSR periods; and
substantially the same assumptions for pricing their life risk.

In this section, expected life risk proportion means, for life insurance policies in a class of policies and an income year, the proportion of the premiums that fairly reflects the proportion of the life risk and the life risk renewal expenses, for the term of the policy, expected to be borne in the income year and is determined from the corresponding proportions calculated, for each PSR period that begins, continues, or ends in the income year,—
as at the beginning of the income year or the beginning of the PSR period, whichever is later; and
assuming that the policies still exist at the end of the income year or the end of the PSR period, whichever is earlier.

Notes

Section EY 25: substituted, on 1 July 2010, by section 190(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section EY 25(2)(a)(ii): amended (with effect on 1 July 2010), on 7 September 2010, by section 47(1) of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
Section EY 25(3)(a): amended (with effect on 1 July 2010 and applying for the income year including 1 July 2010 and later income years), on 30 March 2017, by section 88(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
Section EY 25(3) heading: replaced, on 30 March 2017 (applying for income years beginning after this date), by section 88(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
Section EY 25(3): replaced, on 30 March 2017 (applying for income years beginning after this date), by section 88(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
Section EY 25(6): replaced, on 30 March 2017 (applying for income years beginning after this date), by section 88(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).