§ 846 — Discounted Unpaid Losses Defined

(1) The amount of the discounted unpaid losses as of the end of any taxable year shall be the sum of the discounted unpaid losses (as of such time) separately computed under this section with respect to unpaid losses in each line of business attributable to each accident year. (2) The amount of the discounted unpaid losses as of the end of any taxable year attributable to any accident year shall be the present value of such losses (as of such time) determined by using— (A) the amount of the undiscounted unpaid losses as of such time, (B) the applicable interest rate, and (C) the applicable loss payment pattern. (3) In no event shall the amount of the discounted unpaid losses with respect to any line of business attributable to any accident year exceed the aggregate amount of unpaid losses with respect to such line of business for such accident year included on the annual statement filed by the taxpayer for the year ending with or within the taxable year. (4) In determining the amount of the discounted unpaid losses attributable to any accident year— (A) the applicable interest rate shall be the interest rate determined under subsection (c) for the calendar year with which such accident year ends, and (B) the applicable loss payment pattern shall be the loss payment pattern determined under subsection (d) which is in effect for the calendar year with which such accident year ends. (b) For purposes of this section— (1) Except as otherwise provided in this subsection, the term “undiscounted unpaid losses” means the unpaid losses shown in the annual statement filed by the taxpayer for the year ending with or within the taxable year of the taxpayer. (2) If— (A) the amount of unpaid losses shown in the annual statement is determined on a discounted basis, and (B) the extent to which the losses were discounted can be determined on the basis of information disclosed on or with the annual statement, (1) For purposes of this section, the rate of interest determined under this subsection shall be the annual rate determined by the Secretary under paragraph (2). (2) The annual rate determined by the Secretary under this paragraph for any calendar year shall be a rate determined on the basis of the corporate bond yield curve (as defined in section 430(h)(2)(D)(i), determined by substituting “60-month period” for “24-month period” therein). (1) For each determination year, the Secretary shall determine a loss payment pattern for each line of business by reference to the historical loss payment pattern applicable to such line of business. Any loss payment pattern determined by the Secretary shall apply to the accident year ending with the determination year and to each of the 4 succeeding accident years. (2) Determinations under paragraph (1) for any determination year shall be made by the Secretary— (A) by using the aggregate experience reported on the annual statements of insurance companies, (B) on the basis of the most recent published aggregate data from such annual statements relating to loss payment patterns available on the 1st day of the determination year, (C) as if all losses paid or treated as paid during any year are paid in the middle of such year, and (D) in accordance with the computational rules prescribed in paragraph (3). (3) For purposes of this subsection— (A) Except as otherwise provided in this paragraph, the loss payment pattern for any line of business shall be based on the assumption that all losses are paid— (i) during the accident year and the 3 calendar years following the accident year, or (ii) in the case of any line of business reported in the schedule or schedules of the annual statement relating to auto liability, other liability, medical malpractice, workers’ compensation, and multiple peril lines, during the accident year and the 10 calendar years following the accident year. (i) In the case of any line of business not described in subparagraph (A)(ii), losses paid after the 1st year following the accident year shall be treated as paid equally in the 2nd and 3rd year following the accident year. (I) The period taken into account under subparagraph (A)(ii) shall be extended to the extent required under subclause (II). (II) The amount of losses which would have been treated as paid in the 10th year after the accident year shall be treated as paid in such 10th year and each subsequent year in an amount equal to the amount of the average of the losses treated as paid in the 7th, 8th, and 9th years after the accident year (or, if lesser, the portion of the unpaid losses not theretofore taken into account). To the extent such unpaid losses have not been treated as paid before the 24th year after the accident year, they shall be treated as paid in such 24th year. (4) For purposes of this section, the term “determination year” means calendar year 1987 and each 5th calendar year thereafter. (e) For purposes of this section— (1) The term “accident year” means the calendar year in which the incident occurs which gives rise to the related unpaid loss. (2) The term “unpaid losses” includes any unpaid loss adjustment expenses shown on the annual statement. (3) The term “annual statement” means the annual statement approved by the National Association of Insurance Commissioners which the taxpayer is required to file with insurance regulatory authorities of a State. (4) The term “line of business” means a category for the reporting of loss payment patterns determined on the basis of the annual statement for fire and casualty insurance companies for the calendar year ending with or within the taxable year, except that the multiple peril lines shall be treated as a single line of business. (5) The term “multiple peril lines” means the lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils) and boiler and machinery. (6) Any determination under subsection (a) with respect to unpaid losses relating to accident and health insurance lines of businesses (other than credit disability insurance) shall be made— (A) in the case of unpaid losses relating to disability income, by using the general rules prescribed under section 807(d) applicable to noncancellable accident and health insurance contracts and using a mortality or morbidity table reflecting the taxpayer’s experience; except that the limitation of subsection (a)(3) shall apply, and (B) in all other cases, by using an assumption (in lieu of a loss payment pattern) that unpaid losses are paid in the middle of the year following the accident year. (f) The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— (1) regulations providing proper treatment of allocated reinsurance, and (2) regulations providing appropriate adjustments in the application of this section to a taxpayer having a taxable year which is not the calendar year.