When it comes to loss reserve discounting, the discount rate can be one of the most confusing factors to understand. Here’s how it works.
Every year, the U.S. Treasury Department releases discount factors for each line of business by accident year. These discount factors are tied to the corporate bond yield curve. Previously, as long as certain conditions were met, a company could make the determination to create its own discount factors. This election has been repealed.
In general, the discount factors are multiplied by the undiscounted reserve.
2019 Tax Year
For the 2019 tax year, property and casualty insurance companies should use the following revenue procedures, released by the IRS in computing discounted unpaid losses and LAE, and salvage and subrogation:
- Rev. Proc. 2019-06 provides the loss payment patterns and proposed discount factors used to compute discounted unpaid losses under section 846.
- Rev. Proc. 2019-30 provides simplified procedures to change accounting methods related to section 846.
- Rev. Proc. 2019-31 provides the revised unpaid loss discount factors used to compute discounted unpaid losses under section 846. These revised factors should also be used to compute discounted estimated salvage and subrogation recoverable under section 832. This Rev. Proc. Includes factors for ALL accident years.
For more information about computing discounted unpaid losses and LAE for insurance and subrogation companies, please contact Rachel Bertelsmeier at MarksNelson 816-743-7700.