IRS PROVIDES INSURERS WITH PROCEDURE FOR DETERMINING ELIGIBLE BUSINESS LINES.

Rev. Proc. 92-76

SECTION 1. PURPOSE

This revenue procedure provides an administrative procedure by which a property and casualty insurance company determines whether a line of business is an eligible line of business for purposes of computing discounted unpaid losses based on the taxpayer's historical payment pattern.

SEC. 2. BACKGROUND

A property and casualty insurance company may elect on an timely filed Federal income tax return to use its own historical loss payment pattern (rather than the discount factors determined by the Secretary and published by the Internal Revenue Service (Service)) in computing discounted unpaid losses under section 846 of the Internal Revenue Code. A taxpayer making the election must use its own payment pattern in discounting unpaid losses for each line of business that is an eligible line of business in the applicable determination year. A determination year is calendar year 1987 and each fifth calendar year thereafter. A taxpayer's historical loss payment pattern is the pattern determined by reference to the taxpayer's loss payment pattern for the most recent calendar year for which an annual statement was filed before the beginning of the accident year. The election applies to accident years ending with the determination year and to each of the four succeeding accident years.

Section 1.846-2(b)(1) of the Income Tax Regulations provides, in general, that a line of business is an eligible line of business if on the most recent annual statement filed before the beginning of the determination year the taxpayer reports losses and loss expenses incurred for at least the number of accident years for which losses and loss expenses incurred for that line of business are required to be separately reported on that annual statement.

Section 1.846-2(b)(2) of the regulations further provides that a line of business that does not satisfy the general test will be considered an eligible line if the line satisfies the requirements prescribed by the Commissioner in published guidance. This revenue procedure sets forth requirements prescribed by the Commissioner for this purpose.

SEC. 3. SCOPE

This revenue procedure applies to a property and casualty insurance company that, on its most recent annual statement filed before the beginning of the determination year, does not report losses and loss expenses incurred for one or more lines of business for at least the number of accident years required by section 1.846- 2(b)(1) of the regulations.

SEC. 4. APPLICATION

01 A line of business will be considered an eligible line of business for purposes of computing discounted unpaid losses based on the taxpayer's historical payment pattern if both of the following conditions are satisfied on the most recent annual statement filed before the beginning of the determination year:

(1) the taxpayer has at least five accident years of loss and loss expenses incurred for the line; and

(2) the taxpayer's cumulative fraction of loss and loss expense payments (as a percent of incurred losses) in each of at least two accident years for the line equals or exceeds the cumulative fraction of loss and loss expense payments for the earliest accident year (generally AY+9) shown on the table published by the Service for the line.

02 COMPUTATION OF LOSS PAYMENT PATTERNS. For purposes of determining the loss payment pattern of an eligible line of business described in section 4.01, any losses remaining unpaid for the earliest accident year shown on the applicable annual statement shall be treated as paid at the same rate as the estimated rate of unpaid losses paid for AY+9 on the Service's table until these remaining unpaid losses are completely absorbed. To the extent that the unpaid losses have not been treated as paid prior to AY+14, they shall be treated as paid in AY+14.

03 EXAMPLES. The following examples illustrate the principles of this section:

EXAMPLE 1. The annual statement requires that the taxpayer separately report losses and loss expenses for the medical malpractice line of business for ten years, AY+0 through AY+9. The cumulative fraction published by the Service for the medical malpractice line of business in AY+9 for the 1992 determination year is 77.8395 percent. X, a calendar year taxpayer, showed total losses and loss expenses incurred on its 1990 annual statement for only seven accident years, AY+0 through AY+6, relating to its medical malpractice line of business.

The cumulative fraction of losses paid for each accident year are as follows:

           Year           Cumulative Fraction of Losses Paid

EXAMPLE 2. The facts are the same as in Example 1 except that the cumulative fraction of losses paid for each accident year are as follows:

           Year           Cumulative Fraction of Losses Paid

For purposes of determining its historical loss payment pattern used to discount unpaid losses for the 1992 accident year, X would compute a loss payment pattern by assuming that the unpaid losses remaining for AY+6 are paid in each succeeding calendar year at the same rate as the unpaid losses for the earliest accident year shown on the Service's table for the medical malpractice line of business (AY+9) until the unpaid losses are completely absorbed. The amount of loss and loss expense payments for AY+9 shown on the Service's table for the 1992 determination year is 4.0786 percent. Thus, X would determine its loss payment pattern by assuming that, with respect to the 13 percent of losses remaining unpaid for AY+6, 4.0786 percent of those losses are paid in each of the years AY+7 through AY+9, and that the remainder (0.7642 percent) of the unpaid losses are paid in AY+10).

SEC. 4. EFFECTIVE DATE

This revenue procedure applies to taxable years beginning after December 31, 1991.

DRAFTING INFORMATION

The principal author of this revenue procedure are Katherine A. Hossofsky and Ann H. Logan of the Office of the Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure contact Ms. Hossofsky or Ms. Logan on (202) 622-3970 (not a toll-free call).

Written inquiries concerning this revenue procedure should refer to its number and be addressed to the Office of the Assistant Chief Counsel (Financial Institutions and Products), P.O. Box 7604, Ben Franklin Station, Attention: CC:FI&P:4, Room 4109, Washington, D.C. 20044.