Accounting Standard Updates

12 Days of SSAP: P&C Loss Discounting Gets a New Paint Job

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As the holidays approach, JLK Rosenberger is taking a new perspective on a holiday classic – the Twelve Days of Christmas. Rather than filling your head with turtle doves and gold rings, we are focusing on the latest changes to SSAP and how they will impact your insurance company in 2019 and beyond.

P&C Loss Discounting Gets a New Paint Job

In our last note, we talked about the new tax act. Now once more we come with more insurance tax hacks. This time we look at the P&C line, with a little more news that may not be kind.  This message we give deals with unpaid losses, which now have been changed by those Treasury bosses.

The background for discounting unpaid losses emanates from the Tax Reform Act of 1986, whereby the time value of money became a consideration in loss assessment philosophy. Under IRC §846 insurance companies are required to discount their unpaid loss reserves by product line (LoB) based upon rate factors published by the Treasury. Salvage value estimates carried their own unique factor separate from the factors used to discount loss reserves. Companies were provided the option of computing their own discount factors using annual rate and loss patterns based on their own experience.

Then comes the TCJA (Tax Cuts and Jobs Act, better known as tax reform). Below is a brief summary of the more impactful modifications applicable to unpaid losses:

  • Amended the method for calculating the “annual rate” replacing the average applicable federal interest rate approach with a corporate bond yield curve using investment grade corporate bonds
  • Loss payment patterns were extended for “long-tail” lines in certain situations – “short tail” line patterns were left alone
  • The long-established use of the composite rate method for discounting unpaid losses for accident years not separately reported in the NAIC annual statement is eliminated and replaced with a different methodology
  • Repealed the election under §846(e) allowing taxpayers to use their own historical payment patterns to determine discount factors
  • Separate salvage value discounting factors are eliminated and now use the unpaid loss discount factors applicable to that LoB

The sum of these changes from new tax law constructions is likely to translate to smaller insurance deductions.  So if you feel down and out due to these Treasury cronies, please know from the start that you are not alone.