Feldblum: Reserve Discounting

Question 1

Statutory accounting definition of incurred losses

Answer 1

Paid losses + change in full value reserves

Question 2

Tax accounting definition of incurred losses

Answer 2

Paid losses + change in discounted reserves

Question 3

Economic income

Answer 3

PV (future premiums) - PV (future losses)

Question 4

Three components to discounted loss reserves

Answer 4

Undiscounted loss reserves (Schedule P part 1 – include tabular discounts)
Discount rate (from Treasury)
Loss payment pattern by LOB

Question 5

Discount rate for discounting reserves

Answer 5

60 month moving average of “federal mid-term rates”

Question 6

IRS discounting procedure assumptions

Answer 6

Payment date of 7/1

10-year loss payment pattern (Schedule P), with a 5-year extension for long-tail

Question 7

Why IRS uses Part 1 instead of Part 3 (Schedule P)

Answer 7

Part 3 only contains DCC
Part 1 is audited
IRS method does not involve judgment

Question 8

Determination year

Answer 8

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)

Question 9

If company uses own payment patterns in discounting reserves

Answer 9

Derived from most recent Schedule P data available before beginning of AY (Ex: ‘02 would us ‘00, etc.)

Question 10

Loss Reserve Discount Factor

Answer 10

(Discounted unpaid loss as % of incurred losses) / (Undiscounted unpaid losses as % of incurred losses)

Question 11

Extending prior years row, discounting

Answer 11

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

Question 12

Discounting, two-year lines

Answer 12

Excess paid after two-years is assumed to be paid equally over years three and four