Every year, the U.S. Treasury Department releases discount factors by accident year and for each line of business. Under certain circumstances, a company may elect to create its own discount factors based on its own experience for unpaid losses and loss adjustment expenses (LAEs). However, this is not an option for salvage and subrogation, which require use of the Treasury Department discount tables. In general, the discount factors are multiplied by the undiscounted reserve.
Updates for the 2017 tax year are summarized below.
H.R. 1, originally called the Tax Cuts and Jobs Act, passed into law December 22, 2017. This repealed the option for companies to create their own experience-based factors for unpaid losses and LAE and added a transitional rule for the first taxable year beginning in 2018. Under this rule, the amount of unpaid losses and LAE at the end of the preceding taxable year are determined using the new provisions. The resulting adjustment will be spread over eight years starting in 2018. The Treasury Department and the IRS will provide additional guidance and transitional rule discount factors, but the timing for these releases are unknown at this time.
2017 Tax Year
For the 2017 tax year, property and casualty insurance companies should use the following revenue procedure, released by the IRS in computing discounted unpaid losses and LAE and salvage and subrogation:
Rev. Proc. 2018-13 provides both the discount factors used to compute discounted unpaid losses under section 846 and the discount factors used to compute discounted estimated salvage and subrogation recoverable under section 832