Discounted unpaid losses defined
Discounted losses determined
Separately computed for each accident year
Method of discounting
The amount of the discounted unpaid losses as of the end of any taxable year attributable to any accident year shall be the present value of such losses (as of such time) determined by using—
the amount of the undiscounted unpaid losses as of such time,
the applicable interest rate, and
the applicable loss payment pattern.
Limitation on amount of discounted losses
Determination of applicable factors
In determining the amount of the discounted unpaid losses attributable to any accident year—
the applicable interest rate shall be the interest rate determined under subsection (c) for the calendar year with which such accident year ends, and
the applicable loss payment pattern shall be the loss payment pattern determined under subsection (d) which is in effect for the calendar year with which such accident year ends.
Determination of undiscounted unpaid losses
For purposes of this section—
In general
Adjustment if losses discounted on annual statement
If—
the amount of unpaid losses shown in the annual statement is determined on a discounted basis, and
the extent to which the losses were discounted can be determined on the basis of information disclosed on or with the annual statement,
the amount of the unpaid losses shall be determined without regard to any reduction attributable to such discounting.
Rate of interest
In general
Determination of annual rate
In general
Test period
Loss payment pattern
In general
Method of determination
Determinations under paragraph (1) for any determination year shall be made by the Secretary—
by using the aggregate experience reported on the annual statements of insurance companies,
on the basis of the most recent published aggregate data from such annual statements relating to loss payment patterns available on the 1st day of the determination year,
as if all losses paid or treated as paid during any year are paid in the middle of such year, and
in accordance with the computational rules prescribed in paragraph (3).
Computational rules
For purposes of this subsection—
In general
Except as otherwise provided in this paragraph, the loss payment pattern for any line of business shall be based on the assumption that all losses are paid—
during the accident year and the 3 calendar years following the accident year, or
in the case of any line of business reported in the schedule or schedules of the annual statement relating to auto liability, other liability, medical malpractice, workers’ compensation, and multiple peril lines, during the accident year and the 10 calendar years following the accident year.
Treatment of certain losses
Except as otherwise provided in this paragraph—
in the case of any line of business not described in subparagraph (A)(ii), losses paid after the 1st year following the accident year shall be treated as paid equally in the 2nd and 3rd year following the accident year, and
in the case of a line of business described in subparagraph (A)(ii), losses paid after the close of the period applicable under subparagraph (A)(ii) shall be treated as paid in the last year of such period.
Special rule for certain long-tail lines
In the case of any long-tail line of business—
the period taken into account under subparagraph (A)(ii) shall be extended (but not by more than 5 years) to the extent required under clause (ii), and
the amount of losses which would have been treated as paid in the 10th year after the accident year shall be treated as paid in such 10th year and each subsequent year in an amount equal to the amount of the losses treated as paid in the 9th year after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account).
Notwithstanding clause (ii), to the extent such unpaid losses have not been treated as paid before the last year of the extension, they shall be treated as paid in such last year.
Long-tail line of business
Special rule for international and reinsurance lines of business
Adjustments if loss experience information available for longer periods
Special rule for 9th year if negative or zero
Determination year
Election to use company’s historical payment pattern
In general
Election
In general
Period for which election in effect
Time for making election
No election for international or reinsurance business
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection including—
regulations providing that a taxpayer may not make an election under this subsection if such taxpayer does not have sufficient historical experience for the line of business to determine a loss payment pattern, and
regulations to prevent the avoidance (through the use of separate corporations or otherwise) of the requirement of this subsection that an election under this subsection applies to all lines of business of the taxpayer.
Other definitions and special rules
For purposes of this section—
Accident year
Unpaid loss adjustment expenses
Annual statement
Line of business
Multiple peril lines
Special rule for certain accident and health insurance lines of business
Any determination under subsection (a) with respect to unpaid losses relating to accident and health insurance lines of businesses (other than credit disability insurance) shall be made—
in the case of unpaid losses relating to disability income, by using the general rules prescribed under section 807(d) applicable to noncancellable accident and health insurance contracts and using a mortality or morbidity table reflecting the taxpayer’s experience; except that—
the prevailing State assumed interest rate shall be the rate in effect for the year in which the loss occurred rather than the year in which the contract was issued, and
the limitation of subsection (a)(3) shall apply in lieu of the limitation of the last sentence of section 807(d)(1), and
in all other cases, by using an assumption (in lieu of a loss payment pattern) that unpaid losses are paid in the middle of the year following the accident year.
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including—
regulations providing proper treatment of allocated reinsurance, and
regulations providing appropriate adjustments in the application of this section to a taxpayer having a taxable year which is not the calendar year.
Source
(Added Pub. L. 99–514, title X, § 1023(c),Notes
Amendments
Effective Date of 1990 Amendment
Effective Date of 1988 Amendment
Effective Date
In general.—
The amendments made by this section [enacting this section and amending sections 807 and 832 of this title] shall apply to taxable years beginning after
Transitional rule.—
For the first taxable year beginning after
the unpaid losses and the expenses unpaid (as defined in paragraphs (5)(B) and (6) of section 832(b) of the Internal Revenue Code of 1986) at the end of the preceding taxable year, and
the unpaid losses as defined in sections 807(c)(2) and 805(a)(1) of such Code at the end of the preceding taxable year,
shall be determined as if the amendments made by this section had applied to such unpaid losses and expenses unpaid in the preceding taxable year and by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 1987. For subsequent taxable years, such amendments shall be applied with respect to such unpaid losses and expenses unpaid by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 1987.
Fresh start.—
In general.—
Except as otherwise provided in this paragraph, any difference between—
the amount determined to be the unpaid losses and expenses unpaid for the year preceding the 1st taxable year of an insurance company beginning after
such amount determined with regard to paragraph (2),
shall not be taken into account for purposes of the Internal Revenue Code of 1986.
Reserve strengthening in years after 1985.—
Subparagraph (A) shall not apply to any reserve strengthening in a taxable year beginning in 1986, and such strengthening shall be treated as occurring in the taxpayer’s 1st taxable year beginning after
Effect on earnings and profits.—
The earnings and profits of any insurance company for its 1st taxable year beginning after
Application of fresh start to companies which become subject to section 831(a) tax in later taxable year.—
If—
an insurance company was not subject to tax under section 831(a) of the Internal Revenue Code of 1986 for its 1st taxable year beginning after
subject to tax under section 831(b) of such Code, or
described in section 501(c) of such Code and exempt from tax under section 501(a) of such Code, and
such company becomes subject to tax under such section 831(a) for any later taxable year,
paragraph (2) and subparagraphs (A) and (C) of paragraph (3) shall be applied by treating such later taxable year as its 1st taxable year beginning after