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Company Comments on Proposed Hedge Fund Reinsurance Regs

JUL. 23, 2015

Company Comments on Proposed Hedge Fund Reinsurance Regs

DATED JUL. 23, 2015
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July 23, 2015

 

 

Internal Revenue Service

 

CC: PA: LPD: PR (REG-108214-15)

 

Room 5203

 

1111 Constitution Avenue, NW

 

Washington, D.C. 20224-0001

 

Re: Proposed Regulations on Passive Foreign Investment Companies/Insurance Company Exception (IRS REG-108214-15)

 

Reinsurance Group of America, Incorporated (RGA) is a U.S.-based publically-traded company whose subsidiaries reinsure life and health insurance products on a global basis. RGA's subsidiaries, which currently reinsure more than $2.9 trillion in insurance benefits, operate both in the U.S. and in more than 20 countries in support of our clients, the direct (primary) insurance companies selling life and health insurance around the globe. We appreciate the Treasury's efforts to clarify the definition of a foreign insurance (or reinsurance) company that is actively engaged in an insurance business for purposes of the Passive Foreign Investment Company (PFIC) rules under IRC § 1297(b)(2)(B).

Our comments are limited to the request for appropriate methodologies for determining the portion of assets held to meet insurance and annuity obligations. We understand that other comments will be made offering varying methods, but we are offering two additional approaches to be applied to a life and health reinsurer.

The first additional method can be summarized as a capital or "Total Asset Requirement" (TAR) approach. Insurance and reinsurance companies are subject to regulatory requirements designed to ensure they are financially able to meet obligations related to the policies they sell or reinsure. In many jurisdictions, the financial solidity of life and health insurers is determined using a total balance sheet approach (both reserves and capital are considered). Therefore, a consideration of both reserves and capital is necessary when developing a test to determine what is an active insurance business. Complicating matters more are differences between capital and reserving requirements established by regulatory regimes around the globe. While the common outcome of these regimes tends to be solvency focused, each approach yields a different result between the level of reserves and required capital. As a result, if the final rules are too narrowly constructed, they will likely bring bona fide insurance companies into the PFIC regime. For example, a test based solely on reserves is not appropriate for application to a life and health reinsurer. Both reserves and capital must be considered.

There are also changes currently being debated and, in some cases, implemented regarding reserving and capital requirements around the world. With these changes there will be substantially less consistency in the determination of regulatory reserves and capital requirements for life insurance in the various jurisdictions. Unlike the U.S., many regulatory regimes now start with a view towards the calculation of a TAR and later allocate this amount between life insurance reserves and capital requirements. The determination of regulatory reserves may be substantially different by jurisdiction.

It is typical to reinsure only some risks under a life insurance policy. Reinsurance written on a "yearly renewable term" (YRT) basis, in which the insurer pays the reinsurer a premium every year to cover the risk of death under the reinsured policies is one such example. The premiums would typically have a reasonable relationship to expected mortality in that period with an expectation that there would also be some profit for the reinsurer. As such, YRT reinsurance does not typically result in the build-up of significant reserves to cover claims in future periods. Under U.S. statutory rules, the reserves for these products would be low, but there would be a capital requirement which would be much larger (likely multiples) than the reserve.

The Solvency II Directive of the EU, to be effective January 1, 2016, codifies and harmonizes the EU insurance regulation with the primary emphasis being the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. Under Solvency II, the reserves on some products could very well be negative, reflecting the expected profit on a best estimate basis.

Given the changes in regulatory requirements around the world, of which Solvency II is only one example, a test based solely on reserves is not an appropriate basis for determining the amount of assets necessary for a reinsurance company to be engaged in the life reinsurance business. We recommend that an alternative test that considers the sum of reserves plus capital required (the TAR) would be appropriate.

In addition to adding a TAR approach option, we recommend that the final regulations include as another alternative, a test that evaluates the ratio of the foreign company's Net Insurance Product Receipts ("NIPRs") to the company's total revenues so as to appropriately recognize the legitimacy of reinsurers primarily writing YRT and other reinsurance programs that do not result in the maintenance of significant reserves. Broadly speaking, NIPRs would encompass net cash flows received by reinsurers from ceding insurers (or policyholders in the case of direct insurance) under the terms of the reinsurance contracts (or insurance policies in the case of direct insurance). A company with a ratio of NIPR/Total Revenues exceeding fifty percent (50%) would be considered to be predominantly engaged in an insurance business.

We would welcome the opportunity to discuss such tests with the goal of identifying rules intended to permit a life reinsurance company to record as required assets, only the minimum amount of assets necessary to carry on the business of reinsurance. These would be those assets supporting the reserve obligations, plus any additional capital required by regulations to be held by the reinsurer.

Thank you for your consideration and attention.

Kent P. Zimmerman

 

Senior Vice President,

 

Global Tax

 

Direct: 636-736-7429

 

kzimmerman@rgare.com

 

Reinsurance Group of America

 

Chesterfield, MO
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