View all text of Part III [§ 841 - § 848]
§ 846. Discounted unpaid losses defined
(a) Discounted losses determined
(1) Separately computed for each accident year
(2) 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—
(A) the amount of the undiscounted unpaid losses as of such time,
(B) the applicable interest rate, and
(C) the applicable loss payment pattern.
(3) Limitation on amount of discounted losses
(4) Determination of applicable factors
In determining the amount of the discounted unpaid losses attributable to any accident year—
(A) the applicable interest rate shall be the interest rate determined under subsection (c) for the calendar year with which such accident year ends, and
(B) 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.
(b) Determination of undiscounted unpaid losses
For purposes of this section—
(1) In general
(2) Adjustment if losses discounted on annual statement
If—
(A) the amount of unpaid losses shown in the annual statement is determined on a discounted basis, and
(B) 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.
(c) Rate of interest
(1) In general
(2) Determination of annual rate
(d) Loss payment pattern
(1) In general
(2) Method of determination
Determinations under paragraph (1) for any determination year shall be made by the Secretary—
(A) by using the aggregate experience reported on the annual statements of insurance companies,
(B) 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,
(C) as if all losses paid or treated as paid during any year are paid in the middle of such year, and
(D) in accordance with the computational rules prescribed in paragraph (3).
(3) Computational rules
For purposes of this subsection—
(A) 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—
(i) during the accident year and the 3 calendar years following the accident year, or
(ii) 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.
(B) Treatment of certain losses
(i) 3-year loss payment pattern
(ii) 10-year loss payment pattern(I) In general(II) Computation of extension
(4) Determination year
(e) Other definitions and special rules
For purposes of this section—
(1) Accident year
(2) Unpaid loss adjustment expenses
(3) Annual statement
(4) Line of business
(5) Multiple peril lines
(6) 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—
(A) 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 limitation of subsection (a)(3) shall apply, and
(B) 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.
(f) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including—
(1) regulations providing proper treatment of allocated reinsurance, and
(2) regulations providing appropriate adjustments in the application of this section to a taxpayer having a taxable year which is not the calendar year.
(Added Pub. L. 99–514, title X, § 1023(c), Oct. 22, 1986, 100 Stat. 2399; amended Pub. L. 100–647, title I, § 1010(e)(1), (2), Nov. 10, 1988, 102 Stat. 3453; Pub. L. 101–508, title XI, § 11305(b), Nov. 5, 1990, 104 Stat. 1388–451; Pub. L. 115–97, title I, §§ 13517(b)(3), 13523(a)–(c), Dec. 22, 2017, 131 Stat. 2147, 2152.)