Tax

Question 1

Economic income equation:

Answer 1

Economic income = PV (future premiums) - PV(future losses)

Question 2

How is the discount rate to be used in tax calculated

Answer 2

For each AY, the discount rate is the 60mnth moving average of the “federal mid-term rates”, ending Dec 1 of the prior AY

Question 3

Reason that tax calculations use Schedule P Part 1, instead of Part 3:

Answer 3

• Part 3 contains only DCC, not AAO. Part 1 contains all LAE.
• Part 1 is audited, whereas Part 3 is not.
• Some actuarial methods rely on judgment to select paid LDFs. The IRS method does not involve judgment.

Question 4

Portion of Tax exempt income that is taxed due to proration provision:

Answer 4

15%

Question 5

Due to the DRD, what portion of dividends are tax exempt:

Answer 5

• if the taxpayer owns less than 20% of the firm, 70 (unaffiliated)
• if the taxpayer owns between 20 & 80%, 80% (affiliated)
• if the taxpayer owns more than 80%, 100% (controlled)

Question 6

Equations to determine Tax Basis EP:

Answer 6

WP - 80% × Change in UEPR;

Statutory EP + 20% × Change in UEPR

Question 7

Equations to determine Tax Basis IL:

Answer 7

Paid losses + Change in discounted reserves;

Statutory Incurred Losses - Change in Reserve Discount

Question 8

AMTI equation:

Answer 8

AMTI = RTI + 0.75 × Income that escapes taxation