2017 loss reserve discount factors for insurers released by IRS

In Revenue Procedure 2018-13, the Internal Revenue Service (IRS) released the unpaid loss discount factors and salvage discount factors for the 2017 accident year. These factors are to be used in taxable years beginning on or before Dec. 31, 2017. Insurance companies should use these factors for computing discounted unpaid losses and estimated salvage recoverable for each property and casualty line of business.

2017 determination year

It is important to note that 2017 is a "determination year" in which an insurance company can elect to use its own company experience discount factors, which are based on the company’s historical payment patterns, instead of the prescribed Department of Treasury (Treasury) discount factors noted in the Revenue Procedure above. If an insurance company elects to use its own company experience discount factors, all eligible lines of business by accident year must be discounted using this method for the 2017 accident year.

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA), signed into law on Dec. 22, 2017, repeals the election permitting a taxpayer to use its own company experience discount factors, as well as modifies how the Treasury will calculate its discount factors, for taxable years beginning after Dec. 31, 2017. A transitional rule exists for the first taxable year beginning in 2018 under which the amount of unpaid losses and expenses at the end of the preceding year (2017) are to be recalculated under the new provisions of the TCJA. Such adjustment is spread over eight years in the first taxable year beginning in 2018 and the seven succeeding taxable years.

Discount factors for 2018 and subsequent years

The Revenue Procedure mentions the intent of the Treasury and the IRS to publish discount factors to be used in accordance with the transition rule as described above, but does not provide a timeframe for doing such.

For more information on this topic, or to learn how Baker Tilly insurance specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.