IRS RELEASES NEW DISCOUNTED UNPAID LOSS FACTORS FOR 1992.

Rev. Proc. 92-47

SECTION 1. PURPOSE

This revenue procedure prescribes the loss payment patterns and discount factors for the 1992 determination year. These factors will be used for computing discounted unpaid losses under section 846 of the Internal Revenue Code.

SEC. 2. BACKGROUND

01 Section 846 of the Code provides that discounted unpaid losses must be separately determined for each accident year of each line of business by applying an annual 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.

Section 846(d) of the Code 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.

Section 846(e) of the Code 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 or reinsurance line of business.

Section 846(f) of the Code 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).

02 Since the 1987 determination year, the NAIC has adopted several changes to the reporting of unpaid loss experience on the annual statement for fire and casualty insurance companies. In the 1989 annual statement, unpaid losses which were previously reported on Schedule O and Schedule P were combined and reported on a revised Schedule P, and the contents of several categories of unpaid losses were changed. The changes included situations in which lines of business which were previously reported as part of a combined line were required to be shown as separate lines, and situations in which lines of business which were previously reported as separate lines were combined.

The 1989 annual statement also adopted a new classification for reporting loss and loss expense data relating to nonproportional reinsurance. Loss and loss expense data relating to nonproportional reinsurance are divided into three categories depending on the type of business reinsured (Reinsurance A, Reinsurance B, and Reinsurance C). A fourth category, Reinsurance D, provides run-off information for unallocated loss and loss expense data relating to reinsurance losses occurring in 1988 and earlier accident years.

03 Rev. Proc. 90-23, 1990-1 C.B. 507, prescribes the manner in which taxpayers are to apply discount factors under section 846 to unpaid losses as reported in the new configuration of lines of business that was adopted by the NAIC for the 1989 annual statement for fire and casualty insurance companies. This guidance applies until the 1992 determination year, when new loss payment patterns were determined.

04 Pursuant to section 846(d) of the Code, the Secretary has determined a loss payment pattern for each property and casualty line of business for the 1992 determination year that, pursuant to section 846(d)(1), must be applied through the 1996 accident year. The loss payment patterns for the 1992 determination year are based on the aggregate industry loss payment experience as reported on the 1990 annual statements filed by property and casualty insurance companies and compiled by A.M. Best and Co. Thus, the loss payment patterns for the 1992 determination year generally reflect loss and loss expense data organized in accordance with the configuration of lines of business on the 1990 annual statement for fire and casualty insurance companies.

05 The loss payment patterns for the 1992 determination year are based on the aggregate loss payment information reported on the 1990 annual statements of property and casualty insurance companies. Following is an additional explanation of some of the tables.

(1) FORMER SCHEDULE O LINES. The loss and loss expense data for the former Schedule O lines is now reported on Schedule P on a cumulative basis. The loss payment patterns for these lines continue to be based on the loss payment and loss expense data for the accident year plus one year, and the assumption that any remaining unpaid losses are paid equally in the second and third year following the accident year. The fraction of losses deemed paid in the second year (AY+1) is determined by using the change in the cumulative fraction of loss and loss expenses paid from the prior year (AY+0).

(2) INTERNATIONAL LINES OF BUSINESS. The loss payment pattern for unallocated unpaid losses for the international line of business has been determined using a composite of the loss payment patterns of the long-tail lines of business referred to in section 846(d)(3)(A)(ii) of the Code.

(3) NONPROPORTIONAL REINSURANCE OF SHORT-TAIL LINES. A separate loss payment pattern has been determined for unpaid losses relating to nonproportional reinsurance of short-tail lines of business (Reinsurance A and Reinsurance C). The 1990 annual statements report loss and loss expense data for Reinsurance A and Reinsurance C for the accident year plus three years. In accordance with section 846(d)(3)(E) and (F) of the Code, the loss payment pattern for Reinsurance A and Reinsurance C uses a five-year duration. This duration reflects the number of years after the accident year for which the losses in Reinsurance A and Reinsurance C are separately stated, combined with an assumption that the unpaid losses at the end of AY+2 are paid equally in the following two years (AY+3 and AY+4).

The loss payment pattern for unpaid losses relating to nonproportional reinsurance of long-tail lines of business (Reinsurance B) has been determined using a composite of the loss payment patterns of the long-tail lines referenced in section 846(d)(4)(A)(ii) of the Code. Because Reinsurance B relates to long- tail lines of business, the available data on the 1990 annual statements do not provide an adequate basis to develop a loss payment pattern.

(4) FACTORS TO BE USED WHEN TABLES INDICATE LOSS FULLY PAID. 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.

SEC. 3. SCOPE

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

SEC. 4. TABLES OF DISCOUNT FACTORS

01 The following tables present separately for each line of business the discount factors under section 846 of the Code for accident year 1992. All the discount factors presented in this section were determined using the applicable interest rate under section 846(c) for 1992, 8.40 percent, and by assuming all loss payments occur in the middle of a calendar year.

02 If the groupings of individual lines of business on the annual statement changes, taxpayers must discount the unpaid losses on the resulting lines of business in accordance with the discounting patterns that would have applied to those unpaid losses based on their classification on the 1990 annual statement.

03 Tables.

 A. Homeowners/Farmowners

This revenue procedure is effective for taxable years beginning after December 31, 1991.

DRAFTING INFORMATION

The principal author of this revenue procedure is Katherine A. Hossofsky of the Office of the Assistant Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure contact Ms. Hossofsky on (202) 566-4336 (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.