Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-7

1969-1 C.B. 186

Sec. 801

IRS Headnote

A life insurance company may not take into account, in computing life insurance reserves, amounts with respect to risks under guaranteed renewable accident and health policies that were reinsured with another company.

Full Text

Rev. Rul. 69-7

Advice has been requested whether a life insurance company may take into account, in computing its life insurance reserves, certain amounts with respect to policies subject to a reinsurance agreement under the circumstances described below.

During the taxable year 1966 X, a solvent life insurance company taxable under section 802 of the Internal Revenue Code of 1954, reinsured with Y, also a solvent life insurance company taxable under section 802 of the Code, some of its guaranteed renewable accident and health policies that qualified as such under section 1.801-3(d) of the Income Tax Regulations. With respect to these policies, X maintained, in addition to unearned premiums, reserves that qualified as life insurance reserves under section 801(b) of the Code. Under the reinsurance agreement X reinsured with Y, on a one-year term basis, 100 percent of the risk on those policies reinsured. The reinsurance agreement did not affect the contractual relationship between the policyholders and X, however, since X retained the obligation to renew the coverage. Y retained the right to cancel the reinsurance agreement at any time upon 120 days notice, or to refuse renewals of previously reinsured policies upon 90 days notice.

Section 1.801-3(d) of the regulations defines a guaranteed renewable life, health and accident insurance policy as one which is not cancellable by the company but under which the company reserves the right to adjust premium rates by classes in accordance with its experience under the type of policy involved, and with respect to which a reserve in addition to the unearned premiums must be carried to cover that obligation.

Section 1.801-4(d) of the regulations includes in reserves which are to be included as life insurance reserves, the reserves held under guaranteed renewable health and accident contracts (as defined in paragraph (d) of section 1.801-3) provided they meet the requirements of section 801(b) of the Code.

Section 1.801-4(a) of the regulations, with respect to life insurance contracts reinsured, sets forth an example that indicates that where the reinsurer is only on the risk for the current insurance protection afforded by an ordinary life policy, the reserve for that current protection is treated as held by the reinsurer, and the balance of the reserve (for the other guarantees in the policy) is treated as held by the issuing company.

Similar to the issuer of the life insurance contracts in the example of the above-cited regulation, X, the issuer of the guaranteed renewable accident and health policies in the instant case, may take into account life insurance reserves only with respect to its obligations to renew the policies reinsured.

Accordingly, in determining its life insurance reserves at the end of the taxable year, X may take into account the amounts necessary to cover its obligations to renew the policies reinsured with Y. X may not include as part of its life insurance reserves any amount attributable to the risks reinsured with Y on a one year term basis.