Posted by Fred Lake

Guideline on Discounting Rules for Insurance Companies

Guideline on Discounting Rules for Insurance Companies

The IRS, in conjunction with the Treasury Department, has released final regulations containing changes from the TCJA (2017). With these rules, taxpayers can determine discounted unpaid losses of property and casualty insurance companies. 

These changes apply for taxable years after Dec 31, 2017. The rule addresses the following:

Composite Method: With the composite method, taxpayers can discount loss reserves scheduled for accident years ten years or more. The composite process should be gone with the proposed regulation. Discounted According to opinion from some people, eliminating the composite method will make it difficult to compile data that they need for discounted unpaid losses. When you consider the limitation of company data for other accident years, it holds up this belief system. Responding to this, the final regulation continues to allow people to employ the composite method. 

Smoothing Adjustment: with the smoothing adjustment, the IRS can take care of the loss of any business's payment pattern.  This will help avoid any negative payment and facilitate a reliable way of positive discount factors, not up to one. Based on the final regulation, the rules for smoothing adjustment came to play. One of the sections reveals that the loss payment pattern announced by the business's secretary will need a reference to the loss payment pattern had in the past. These are losses peculiar to such a line of business. 

Discounted salvage recoverable: in introducing the proposed regulations, there was a request for comments that revealed whether salvage that can be discovered should use the published discount factor as a discount, as stated in the IRC section 832. Quite many people supported this change, and the introduction to the final regulation made known the difference. Similarly, the estimated salvage that can be recovered enjoyed some discount that has to do with the unpaid losses. 

International Lines of Business and Reinsurance: the provision for estimating loss payment patterns under IRC section 846 is no longer supported for international business lines beyond three years after the accident.

 

Procedure for Change of Accounting Revenue 

Revenue procedure 2019-30 makes available some systems for taxpayers to adjust their accounting method for unpaid loss reserves discount. This change applies for taxable years after Dec 31, 2019, and ending two years after. The difference is to make the loss reserve comply with the tax reform changes, as seen in IRC section 846. There is also a waiver of the requirement to file Form 3115 to get approval to switch the accounting method for this revenue procedure.

 

Procedure for Discounting Rates Revenue 

There were provisions for unpaid loss discounts in revenue procedure 2019:06. This was for the 2018 accident year, which helped calculate discounted outstanding loss according to the proposed IRC regulation, section 846. 

Judging by the final regulation, there are revised discounting rates for discounting 2018 loss reserves and revaluation of loss reserves for 2017 and the year after. 

On a final note, using the proposed factors makes it necessary to use the revised elements in Revenue Procedure 2019. This applies when supplemental computing adjustment to account takes care of the difference between the discount gotten from the revenue procedures.


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