Rev. Proc. 2019-06: Unpaid loss discount factors, salvage discount factors for 2018 accident year (insurance)
December 19, 2018
The IRS today released an advance version of Rev. Proc. 2019-06 setting forth the unpaid loss discount factors and salvage discount factors for the 2018 accident year.
The discount factors provided by Rev. Proc. 2019-06 [PDF 129 KB] are to be used to compute discounted unpaid losses under section 846 and the discounted estimated salvage recoverable under section 832.
Legislative changes to discounting rules
The discount factors prescribed in Rev. Proc. 2019-06 are determined under section 846, as amended by a provision of the new U.S. tax law (section 13523 of Pub. L. No. 115-97, also referred to as the “Tax Cuts and Jobs Act” or TCJA) and proposed regulations under section 846 (as published in the Federal Register on November 7, 2018). If necessary, after the proposed regulations are published as final regulations, Treasury and the IRS intend to publish for each property and casualty line of business revised unpaid loss discount factors for the 2018 accident year for use in tax years ending on or after the date the final regulations are published.
The changes to the discounting rules reflect amendments that were made to the annual rate under section 846(c) and to the computational rules for loss payment patterns under section 846(d). The new tax law measure (section 13532(c) of the TCJA) repealed the election that was previously set forth in section 846(e) to use the taxpayer’s own historical loss payment pattern.
A transition rule provides that, for the first tax year beginning after December 31, 2017, the unpaid losses and the expenses unpaid at the end of the preceding tax year, and the unpaid losses at the end of the preceding tax year, will be determined as if the amendments made by the new tax law had applied to such unpaid losses and expenses unpaid in the preceding tax year and by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 2018. Any adjustment is then to be taken into account ratably in such first tax year and the seven succeeding tax years.
For subsequent tax years, the legislative changes will be applied with respect to unpaid losses and expenses unpaid for accident years ending with or before calendar year 2018 by using the interest rate and loss payment patterns applicable to accident years ending with calendar year 2018.
Loss payment patterns for the 2017 determination year were previously prescribed in Rev. Proc. 2018-13 [PDF 35 KB]. In that revenue procedure, Treasury and the IRS also announced the intention to publish revised loss payment patterns for the 2017 determination year in accordance with the TCJA transition rule.
Proposed regulations
Section 1.846-1(c) of the proposed regulations provides that the annual rate for any calendar year is the average of the monthly spot interest rates on corporate bonds with times to maturity of not more than 17.5 years based on a yield curve that reflects the average, for the most recent 60-month period ending before the beginning of the calendar year, of monthly yields on corporate bonds described in section 430(h)(2)(D)(i).
Section 1.846-1(d)(1) of the proposed regulations provides that, in general, the loss payment pattern determined by the Treasury Secretary for each line of business is determined by reference to the historical loss payment pattern applicable to such line of business determined in accordance with the method of determination set forth in section 846(d)(2) and the computational rules prescribed in section 846(d)(3) on the basis of data from annual statements described in section 846(d)(2)(A) and (B). However, under Prop. Reg. section 1.846-1(d)(2), the Secretary may adjust the loss payment pattern for any line of business using a methodology described by the Secretary in other published guidance if necessary to avoid negative payment amounts and otherwise produce a stable pattern of positive discount factors less than one.
Discount factors for accident year 2018 and prior accident years
The discount factors prescribed in Rev. Proc. 2019-06 are determined by using the applicable interest rate for accident year 2018 under section 846(c) and the proposed regulations and revised loss payment patterns determined by the Secretary for the 2017 determination year under section 846(d) and the proposed regulations.
Pursuant to section 846(c) and the proposed regulations, the Secretary has determined that the annual rate for the 2018 calendar year is 3.12%, compounded semiannually.
The Secretary has determined a revised loss payment pattern for each property and casualty line of business for the 2017 determination year for use with respect to unpaid losses incurred in accident year 2018 and prior accident years. The revised loss payment patterns are based initially on the aggregate loss payment information reported on the 2015 annual statements of property and casualty insurance companies, as compiled. The lines of business for the 2017 determination year are the same as the lines of business for the 2012 determination year.
The Secretary may adjust the loss payment pattern for any line of business using a methodology described by the Secretary in other published guidance. For the 2017 determination year, only one line of business requires adjustments under the proposed regulations. That line of business is: Other Liability – Claims Made.
The initial payment pattern results in negative payment amounts for the fifth, seventh, and ninth years after the accident year.
Tables of discount factors
The tables in section 4 of Rev. Proc. 2019-06 present separately for each line of business the unpaid discount factors under section 846 for use in the first tax year beginning after December 31, 2017, and for use in calculating the TCJA adjustment.
All of the discount factors presented in these tables are determined by using the applicable interest rate for 2018 under section 846(c) and the proposed regulations—3.12% compounded semiannually—and the revised payment patterns for the 2017 determination year determined by the Secretary under section 846(d) and the proposed regulations.
Tables 1 and 2 present separately for each line of business the unpaid loss discount factors under section 846 for use in the first tax year beginning after December 31, 2017. Consistent with the TCJA transition rule, any taxpayer using the discount factors prescribed in Tables 1 and 2 for its first tax year beginning after December 31, 2017, must for that tax year, use the discount factors prescribed in Tables 3 and 4 for purposes of determining the unpaid losses and expenses unpaid. The taxpayer must also use for its first tax year after December 31, 2017, the unpaid loss discount factors prescribed in Tables 3 and 4 to determine the amount of the TCJA adjustment to be taken into account in that tax year and, unless revised discount factors have been published, the amount of the TCJA adjustment to be taken into account in subsequent tax years. Tables 1 through 4 separately provide discount factors for taxpayers that have elected to use the composite method.
KPMG observation
The release of Rev. Proc. 2019-06 before year-end is helpful and provides a methodology for taxpayers to use for year-end tax provisions. However, the proposed regulations generated several comment letters and may require the IRS to revise these calculations. To the extent necessary, after the proposed regulations are published as final regulations, Treasury and the IRS intend to publish for each property and casualty line of business revised unpaid loss discount factors for the 2018 accident year for use in tax years ending on or after the date the final regulation are published. Therefore, taxpayers need to keep this in mind when applying the revenue procedure.
For more information, contact a tax professional with KPMG’s Washington National Tax:
Sheryl Flum | +1 (202) 533-3394 | sflum@kpmg.com
Fred Campbell-Mohn | +1 (212) 954-8316 | fcampbellmohn@kpmg.com
Bill Olver | +1 (617) 988-1642 | wolver@kpmg.com
