Section 216 of the Amended Insurance Code (Republic Act 10607) changed the methodology in the valuation of life- insurance reserves (liabilities), from Net Premium Valuation to Gross Premium Valuation. Section 216 now provides that valuation of reserves “shall be made, according to the standard adopted by the company, as prescribed by the Commissioner in accordance with internationally accepted actuarial standards.” Circular Letter 2016-66 was issued on December 28, 2016, to formalize the change from NPV to GPV, which is now the recognized global and international standard. It was implemented on January 1, 2017.
The GPV is recognized as a market-consistent approach and provides the best estimate of the insurance company’s liabilities. Under the old NPV regime, insurance companies were only required to value their life insurance reserves according to a standard mortality table with interest capped at 6 percent. In a GPV regime, other assumptions are considered such as morbidity, lapse and/or persistency, expenses, non-guaranteed benefits and the margin for adverse deviation (MfAD).
These are all determined by an actuary. It also allows insurance companies to use discount rates prevailing at the market, which is not fixed and therefore volatile, instead of the 6 percent under the NPV method.
The accounting implication is that the shift to GPV would generally entail an increase or additions in reserves, which would be indicated as an expense in the income statement for the year. This change, in effect, was a change in accounting method or policy, which required the consent of the Commissioner of Internal Revenue under Section 168 of Revenue Regulations No. 02-40. As ruled in BIR Ruling 005-06 dated March 8, 2006: “The Tax Code itself prescribed no hard and fast rule that would guide taxpayers in allocating expenses…. Allocation of costs is essentially an accounting issue….”
This change in accounting method is allowed under Section 43 of the National Internal Revenue Code in relation to Section 167 and 168 of Revenue Regulations 2-40. The Commissioner of Internal Revenue gave his consent under BIR Ruling 005-06, dated April 30, 2018. The ruling further provided that “the transition adjustments (i.e., the cumulative prior year impact of the change in reserving methodology from NPV to GPV) as of December 31, 2016, shall be treated as nondeductible expense/nontaxable other income.” And pursuant to Section 37 of the NIRC, “the net additions/released reserve under the GPV method prescribed under IC Circular Letter 2016-66 shall be reported as Profit/Loss items (i.e., morbidity, lapse and/or persistency, expenses, non-guaranteed benefits and MfAD) and shall be treated as deductible expenses/taxable other income.” Finally, “the increase or decrease in reserves resulting from changes in discount rates shall be reported as Other Comprehensive Income/Loss items in accordance with the IC financial reporting framework for Reserve Accounts consistent with the Philippine Financial Reporting Standards for Insurance Contracts. Considering that the change in discount rate is not a result of the insurance company’s transactions, this shall be treated as nondeductible expenses/nontaxable other income for tax purposes.”
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Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.