IRS PUBLISHES LOSS PAYMENT PATTERNS AND DISCOUNT FACTORS FOR 1997.

Rev. Proc. 98-11

SECTION 1. PURPOSE

[1] This revenue procedure prescribes the loss payment patterns and discount factors for the 1997 determination year. These factors will be used for computing discounted unpaid losses under section 846 of the Internal Revenue Code.

SECTION 2. BACKGROUND

[2] .01 Section 846 provides that discounted unpaid losses must be separately determined for each accident year of each line of business by applying an interest rate determined under section 846(c) and the appropriate loss payment pattern to the amount of unpaid losses as measured at the end of the tax year.

[3] Section 846(d) directs the Secretary to use the most recent aggregate loss payment data of property and casualty insurance companies to determine and publish a loss payment pattern for each line of business every five years. This payment pattern is used to discount unpaid losses for the accident year ending with a determination year and for each of the four succeeding accident years.

[4] Section 846(e) allows a taxpayer to make an election in each determination year to use its own historical payment pattern instead of the Secretary's tables. This election does not apply to any international insurance or reinsurance line of business.

[5] Section 846(f)(4) defines the term "line of business" as a category for the reporting of loss payment patterns on the annual statement for fire and casualty companies approved by the National Association of Insurance Commissioners (NAIC), except that the multiple peril lines shall be treated as a single line of business. Section 846(f)(5) states that the term "multiple peril lines" means the lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery.

[6] .02 Pursuant to section 846(d), the Secretary has determined a loss payment pattern for each property and casualty line of business for the 1997 determination year that, pursuant to section 846(d)(1), must be applied through the 2001 accident year. The loss payment patterns for the 1997 determination year are based on the aggregate industry loss payment experience as reported on the 1995 annual statements filed by property and casualty insurance companies and compiled by A.M. Best and Co.

[7] .03 The loss payment patterns for the 1997 determination year are based on the aggregate loss payment information reported on the 1995 annual statements of property and casualty insurance companies. The tables are now arranged in alphabetical order. Following is an additional explanation of some of the tables.

(1) NAIC changes in lines of business.

[8] The NAIC has changed the reporting of unpaid loss experience on the annual statement for fire and casualty insurance companies. These changes are reflected in the lines of business set forth below.

(2) Treatment of Multiple Peril Lines.

[9] Section 846(f)(4) defines the term "line of business" and states that the multiple peril lines are to be treated as a single line of business. The term "multiple peril lines" means lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery. On the 1990 annual statement the multiple peril line was represented by the following three lines: Homeowners/Farmowners; Commercial Multiple Peril; and Special Liability (Ocean Marine, Aircraft (all Perils), Boiler and Machinery. On the 1995 annual statement, the multiple peril lines continue to be represented by the same three lines.

[10] Revenue Procedure 92-47, 1992-2 C.B. 980, prescribed the loss payment patterns and discount factors for the 1992 determination year. In that revenue procedure, the loss payment patterns that were used followed the changes made to the 1990 annual statement, including reporting the multiple peril lines as three separate lines of business. Subsequent revenue procedures did the same. See Rev. Proc. 93-29, 1993-2 C.B. 344, for the 1993 accident year; Rev. Proc. 94-47, 1994-2 C.B. 688, for the 1994 accident year; Rev. Proc. 95-40, 1995-2 C.B. 402, for the 1995 accident year; and Rev. Proc. 96-44, 1996-2 C.B. 330, for the 1996 accident year.

[11] Because section 846(f)(4) requires that the multiple peril lines be treated as a single line of business, the lines of business that are shown on the 1995 annual statement as Homeowners/Farmowners; Commercial Multiple Peril; and Special Liability (Ocean Marine, Aircraft (all Perils), Boiler and Machinery) are merged in this revenue procedure as one multiple peril line of business. The merged line is entitled "Multiple Peril Lines (Homeowners/Farmowners Multiple Peril, Commercial Multiple Peril, and Special Liability (Ocean Marine, Aircraft (All Perils), Boiler and Machinery))."

(3) Factors to be used when tables indicate loss fully paid.

[12] In many situations, losses are deemed fully paid under the Secretary's table prior to AY+14, and no discount factor is shown for AY+14 and earlier accident years. If taxpayers have unpaid losses relating to an accident year which is older than the last accident year for which a discount factor is presented in the Secretary's table, those unpaid losses should be discounted using the discount factor for the last accident year in the Secretary's table.

SECTION 3. SCOPE

[13] This revenue procedure applies to any taxpayer that is required to discount unpaid losses under section 846 for a line of business using the discount factors published by Secretary.

SECTION 4. TABLES OF DISCOUNT FACTORS

[14] .01 The following tables present separately for each line of business the discount factors under section 846 of the Code for accident year 1997. All the discount factors presented in this section were determined using the applicable interest rate under section 846(c) for 1997, 6.33 percent, and by assuming all loss payments occur in the middle of the calendar year.

[15] .02 If the groupings of individual lines of business on the annual statement change, taxpayers must discount the unpaid losses on the resulting line of business in accordance with the discounting patterns that would have applied to those unpaid losses based on their classification on the 1995 annual statement.

[16] .03 Tables

ACCIDENT AND HEALTH (OTHER THAN DISABILITY INCOME OR CREDIT DISABILITY INSURANCE)

The discount factor for all years equals 96.9777 percent.

 AUTO PHYSICAL DAMAGE

 COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL

 COMPOSITE DISCOUNT FACTORS

 FIDELITY/SURETY

 FINANCIAL GUARANTY/MORTGAGE GUARANTY

 INTERNATIONAL (COMPOSITE)

 MEDICAL MALPRACTICE -- CLAIMS-MADE

 MEDICAL MALPRACTICE -- OCCURRENCE

 MISCELLANEOUS CASUALTY

 MULTIPLE PERIL LINES (HOMEOWNERS/FARMOWNERS MULTIPLE PERIL,

 OTHER (INCLUDING CREDIT)

 OTHER LIABILITY -- CLAIMS-MADE

 OTHER LIABILITY -- OCCURRENCE

 PRIVATE PASSENGER AUTO LIABILITY/MEDICAL

 PRODUCTS LIABILITY -- CLAIMS-MADE

 PRODUCTS LIABILITY -- OCCURRENCE

 REINSURANCE A (NONPROPORTIONAL PROPERTY)

 REINSURANCE B (NONPROPORTIONAL LIABILITY)

 REINSURANCE C (FINANCIAL LINES)

 SPECIAL PROPERTY (FIRE, ALLIED LINES, INLAND MARINE, EARTHQUAKE,

 WORKERS' COMPENSATION

SECTION 5. EFFECTIVE DATE

[17] This revenue procedure is effective for taxable years beginning after December 31, 1996.

DRAFTING INFORMATION

[18] The principal author of this revenue procedure is Katherine A. Hossofsky of the Office of Assistant Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Ms. Hossofsky on (202) 622- 3970 (not a toll-free call).