Tax
IRS Updates Insurance Loss Reserve Discounting (Again)
Article reading time: 2 minutes, 30 seconds
Hot Take:
Just when insurance companies (and their tax advisers) thought they had finalized their loss reserve discounting templates, the IRS issued final regulations under IRC Section 846 and two accompanying revenue procedures providing additional guidance and revised discount factors.
Revenue Procedure 2019-30 waives the requirement to file a Form 3115 when an insurer changes its method of accounting for discounting 1) unpaid losses and expenses, 2) estimated salvage recoverable and 3) unearned premiums attributable to title insurance, in order to comply with IRC Section 846, as amended by the Tax Cuts and Jobs Act. Revenue Procedure 2019-31 provides revised discount factors to be used for the 2019, 2018 and earlier accident years.
The most significant difference between the proposed and final regulations is that the annual rate determined under the proposed regulations was 3.12 percent, whereas the annual rate determined under the final regulations is 2.94 percent.
Full Article
On July 22, 2019, the IRS published two revenue procedures specific to the insurance industry.
Revenue Procedure 2019-30 provides simplified procedures for an insurance company to change its method of accounting for discounting 1) unpaid losses and expenses, 2) estimated salvage recoverable, and 3) unearned premiums attributable to title insurance, in order to comply with IRC Section 846, as amended by the Tax Cuts and Jobs Act (TCJA). Most notably, the requirement to file a Form 3115 to obtain consent for this change in method of accounting is waived for tax years beginning after December 31, 2017 and ending on or before December 31, 2019.
Revenue Procedure 2019-31 provides revised discount factors (“Revised Discount Factors”) for the 2019, 2018 and earlier accident years to be used in computing discounted unpaid losses under IRC Section 846 and estimated salvage recoverable under IRC Section 832. These discount factors are based on recently published final regulations under IRC Section 846. The most significant difference between the proposed and final regulations is that the annual rate determined under the proposed regulations was 3.12 percent, whereas the annual rate determined under the final regulations is 2.94 percent.
For a detailed discussion on the proposed regulations under IRC Section 846 and Revenue Procedure 2019-06 prescribing proposed discount factors (“Proposed Discount Factors”) for discounting unpaid losses and estimated salvage recoverable, refer to JLKR’s prior article Modifications to Loss Reserve Discounting Rules for Insurance Companies.
An insurance company may use either the revised or the proposed discount factors in its first taxable year beginning after December 31, 2017, and ending before June 17, 2019. An insurance company that uses the Proposed Discount Factors in its first taxable year beginning after December 31, 2017, must calculate an adjustment to take into account the difference in the proposed and revised discount factors for that year. This adjustment, referred to as the Remainder Adjustment in Revenue Procedure 2019-31, is taken into account ratably over seven years, starting with the second taxable year beginning after December 31, 2017. Alternatively, an insurance company that filed its return using the Proposed Discount Factors may file an amended return for that year to use the Revised Discount Factors.
For a taxpayer using the Revised Discount Factors, the 481(a) adjustment for unpaid losses is recognized into income over an eight-year period starting with the first taxable year after December 31, 2017. The 481(a) adjustment for estimated salvage recoverable is taken into account over 1 year for a negative adjustment and over 4 years for a positive adjustment. Refer to the chart below for a summary of the 481(a) adjustment periods.
