Feldblum: Reserve Discounting Flashcards
Statutory accounting definition of incurred losses
Paid losses + change in full value reserves
Tax accounting definition of incurred losses
Paid losses + change in discounted reserves
Economic income
PV (future premiums) - PV (future losses)
Three components to discounted loss reserves
Undiscounted loss reserves (Schedule P part 1 – include tabular discounts)
Discount rate (from Treasury)
Loss payment pattern by LOB
Discount rate for discounting reserves
60 month moving average of “federal mid-term rates”
IRS discounting procedure assumptions
Payment date of 7/1
10-year loss payment pattern (Schedule P), with a 5-year extension for long-tail
Why IRS uses Part 1 instead of Part 3 (Schedule P)
Part 3 only contains DCC
Part 1 is audited
IRS method does not involve judgment
Determination year
Occurs in all years ending in ‘2’ or ‘7’, insurer chooses to use either own (updated every year) or industry payment patterns (vintaged until next determination year)
If company uses own payment patterns in discounting reserves
Derived from most recent Schedule P data available before beginning of AY (Ex: ‘02 would us ‘00, etc.)
Loss Reserve Discount Factor
(Discounted unpaid loss as % of incurred losses) / (Undiscounted unpaid losses as % of incurred losses)
Extending prior years row, discounting
Paid in 11th year cannot exceed incremental paid in 10th year, and so on and so forth, with any excess amount paid in the 16th year
Discounting, two-year lines
Excess paid after two-years is assumed to be paid equally over years three and four