Feldblum: IRS Loss Reserve Discounting Flashcards
Economic Income
PV (future premiums) - PV (future losses)
Discounted loss reserve components
1) Undiscounted loss reserves
2) Discount rate (by Treasury)
3) Loss payment patter by LOB
IRS loss payment pattern assumptions
1) Payment date of 7/1
2) 10-year loss payment pattern (5 year extension for long tail)
Determination years
End in 2 or 7, insurer elects to use either industry patterns or own patterns
Discounting, long tails
Assume % paid in years 11-15 is capped at the year 10 amount; rest is paid in year 16
Discounting, two-year lines
Assume remainder after two years is paid equally in years 3 and 4
Tax basis earned premium
EP = WP - Change in UEPR - expenses (under SAP); no deferred acquisition cost
Revenue offset procedure
Policy acquisition costs = 20% of premium
Tax basis EP = WP - 80% (Change in UEPR)
Tax basis incurred losses
Paid losses + Change in discounted reserves
OR
Statutory incurred losses - change in reserve discount
Proration provision
1986 Tax Reform, 15% of tax-exempt portion of income added to regular taxable income
Effective tax rate on municipal bond interest
0.35 * 0.15 = 5.25%
Dividends received deduction (DRD)
Partially exempts dividends from taxes to reduce double taxation; size of DRD dependent on amount of company owned
DRD, Unaffiliated
Owns less than 20% of firm, 30% of dividend subject to tax
DRD, Affiliated
Owns 20%-80% of firm, 20% of dividend is subject to tax
DRD, Controlled
Owns greater than 80%, dividends are tax-exempt
