Tax Notes logo

IRS Issues Unpaid Loss and Salvage Discount Factors for 2022

DEC. 23, 2022

Rev. Proc. 2023-10; 2023-3 IRB 411

DATED DEC. 23, 2022
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2022-40614
  • Tax Analysts Electronic Citation
    2022 TNTF 247-15
    2023 TPR 1-10
Citations: Rev. Proc. 2023-10; 2023-3 IRB 411
[Editor's Note:

View related tables in the PDF version of the document.

]

26 CFR 601.201: Rulings and determination letters.
(Also: Part I, Sections 832, 846; 1.832-4, 1.846-1.)

SECTION 1. PURPOSE

This revenue procedure prescribes the loss payment patterns for the 2022 determination year and the discount factors for the 2022 accident year for use by insurance companies in computing discounted unpaid losses under §846 of the Internal Revenue Code and discounted estimated salvage recoverable under §832. This revenue procedure also provides, for convenience, discount factors for losses incurred in the 2022 accident year and earlier accident years for use in taxable years beginning in 2022. The discount factors for accident years before 2022 were prescribed in earlier revenue procedures. See, e.g., Rev. Proc. 2021-54, 2021-52 I.R.B. 903.

SECTION 2. BACKGROUND

.01 Section 846 provides that discounted unpaid losses must be separately determined for each accident year of each line of business by applying an interest rate determined under §846(c) and the appropriate loss payment pattern to the amount of unpaid losses as measured at the end of the tax year.

.02 Section 846(c) provides for the use of an annual rate of interest determined on the basis of the corporate bond yield curve (as defined in §430(h)(2)(D)(i), determined by substituting “60-month period” for “24-month period” therein). Section 1.846-1(c) of the Income Tax Regulations further provides that the annual rate for any calendar year is determined on the basis of 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). The annual rate is the average of that yield curve's monthly spot rates with times to maturity from four and one-half years to ten years.

.03 The applicable interest rate for 2022 under §846(c) and §1.846-1(c), is 2.67 percent, determined using semiannual compounding.

.04 Section 846(d) directs the Secretary to use the most recent aggregate loss payment data of property and casualty insurance companies to determine and publish a loss payment pattern for each line of business every five years. This payment pattern is used to discount unpaid losses for the accident year ending with a determination year and for each of the four succeeding accident years. See §846(d)(1). Pursuant to §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. The preamble to proposed regulations under §846 (REG-103163-18) published in the Federal Register (83 FR 55646) on November 7, 2018 (Proposed Regulations) described a proposed methodology for adjusting the loss payment pattern for any line of business. Commenters on the Proposed Regulations expressed support for the smoothing adjustments described in the preamble to the Proposed Regulations, and §1.846-1(d)(2) of the Proposed Regulations was adopted as proposed in final regulations under §846 (T.D. 9863, 84 FR 27947) published on June 17, 2019.

.05 Pursuant to §846(d) and §1.846-1(d)(2), the Secretary has determined a loss payment pattern for each property and casualty line of business for the 2022 determination year that, pursuant to §846(d)(1), must be applied through the 2026 accident year. The loss payment patterns for the 2022 determination year are based, initially, on the aggregate loss payment information reported on the 2020 annual statements of property and casualty insurance companies and compiled by A.M. Best and Co. The lines of business for the 2022 determination year are the same as the lines of business for the 2017 determination year. See Rev. Proc. 2019-31, 2019-33 I.R.B. 643, and Rev. Proc. 2019-06, 2019-02 I.R.B. 284, for background concerning the loss payment patterns and application of the discount factors. Losses are reported on the annual statement net of losses on reinsurance ceded but include losses on assumed proportional reinsurance. Losses with respect to assumed non-proportional reinsurance are reported in three separate lines of business (for property, liability, and financial reinsurance). The loss data include defense, cost containment, adjusting, and other loss expenses, but are not reduced for salvage and subrogation receipts. For the 2022 determination year, only one line of business requires adjustments under §1.846-1(d)(2). That line of business is Products Liability – Claims Made. The initial payment pattern for that line of business results in a negative payment amount for the fifth year after the accident year. Therefore, the payment amounts for the fourth through the sixth year after the accident year are adjusted following the steps listed in the preamble to the Proposed Regulations. See 83

SECTION 3. SCOPE

This revenue procedure applies to any insurance company that is required to discount unpaid losses under §846 for a line of business using the discount factors published by the Secretary. This revenue procedure also applies to any insurance company that is required to discount estimated salvage recoverable under §832.

SECTION 4. DISCOUNT FACTORS FOR THE 2022 ACCIDENT YEAR

.01 The tables in this section 4 present separately for each line of business the discount factors for losses incurred in the 2022 accident year for use by insurance companies in computing discounted unpaid losses under §846 and estimated salvage recoverable under §832. The discount factors presented in this section are generally determined by using the applicable interest rate for 2022 under §846(c) and §1.846-1(c), which is 2.67 percent, determined using semiannual compounding. The exceptions are the discount factors for long-tail lines of business determined using the composite method described in section V of Notice 88-100, 1988-2 C.B. 439. These discount factors are to be used in taxable years beginning in 2032 for losses incurred in accident years not separately reported on the annual statement for 2032. For taxable years beginning after 2032, the discount factors to be used for losses incurred in the 2022 accident year will be those determined using the composite method for later accident years. These discount factors will be published in later years. All discount factors are determined by assuming all loss payments occur in the middle of the calendar year.

.02 Section V of Notice 88-100, 1988-2 C.B. 439, sets forth a composite method for computing discounted unpaid losses for accident years that are not separately reported on the annual statement. Tables 1 and 2 separately provide discount factors for insurance companies that have elected to use the composite method of Notice 88-100. See Rev. Proc. 2002-74, 2002-2 C.B. 980. The discount factors computed using the composite method are unrelated to the composite discount factors referred to in §1.846-1(b)(1)(ii) and (4), which apply to lines of business for which the Secretary has not published discount factors. The composite discount factors for use with respect to such lines of business are labelled “Short-Tail Composite” (in Table 1, part B) and “Long-Tail Composite” (in Table 2, part B). The “Miscellaneous Casualty” discount factors referenced in §1.846-1(b)(2) are not set forth in tables but are equivalent to the “Short-Tail Composite” discount factors.

Table 1 (part A)
Discount Factors Under Section 846 (percent)
For Losses Incurred in Accident Year 2022 in Short-Tail Lines of Business

Taxable Year Beginning in

Auto Physical Damage

Fidelity/Surety

Financial Guaranty/Mortgage Guaranty

International

Other*

2022

98.5087

96.0741

95.6153

96.2003

97.2283

2023

97.3911

97.3911

97.3911

97.3911

97.3911

Taxpayer Not Using Composite Method

Years after 2023

98.6826

98.6826

98.6826

98.6826

98.6826

Taxpayer Using the Composite Method

2024

98.6826

98.6826

98.6826

98.6826

98.6826

Years after 2024 Use composite method discount factors published for the relevant accident year.**

* For the Accident and Health line of business (other than disability income or credit disability insurance), the discount factor for taxable year 2022 is 98.6826 percent. This is also the discount factor used in later taxable years for taxpayers not using the composite method. For taxpayers using the composite method, the discount factor for losses incurred in 2022 is the discount factor published for Accident and Health lines of business for losses incurred in the accident year coinciding with the taxable year.

**The relevant accident year is the accident year that is two years prior to the specified taxable year.

Table 1 (part B)
Discount Factors Under Section 846 (percent)
For Losses Incurred in Accident Year 2022 in Short-Tail Lines of Business

Taxable Year Beginning in

Reinsurance
— Non-
proportional Assumed Financial Lines

Reinsurance
— Non-
proportional Assumed Liability

Reinsurance
— Non-
proportional Assumed Property

Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Burglary & Theft)

Warranty

Short-Tail Composite

2022

96.1755

95.3149

96.5023

97.7793

98.5010

97.4381

2023

97.3911

97.3911

97.3911

97.3911

97.3911

97.3911

Taxpayer Not Using Composite Method

Years after 2023

98.6826

98.6826

98.6826

98.6826

98.6826

98.6826

Taxpayer Using the Composite Method

2024

98.6826

98.6826

98.6826

98.6826

98.6826

98.6826

Years after 2024

Use composite method discount factors published for the relevant accident year.**

**The relevant accident year is the accident year that is two years prior to the specified taxable year.

Table 2 (part A)
Discount Factors Under Section 846 (percent)
For Losses Incurred in Accident Year 2022 in Long-Tail Lines of Business

Taxable Year Beginning in

Commercial Auto/Truck Liability/Medical

Medical Professional Liability — Claims-Made

Medical Professional Liability — Occurrence

Multiple Peril Lines

Other Liability Claims-Made

Other Liability — Claims-Occurrence

2022

94.5127

92.3146

87.8300

95.7799

92.0534

90.7411

2023

95.0679

93.3168

89.6041

94.3300

92.9253

91.5404

2024

95.5799

93.6166

90.9006

94.3613

92.9667

92.1947

2025

95.8620

94.4096

92.1748

94.3016

93.1601

92.5186

2026

95.7709

94.2538

92.9215

94.1052

93.1010

92.7994

2027

95.3403

94.8407

93.2830

94.3444

93.1449

91.8641

2028

95.3617

94.4493

93.6423

94.4224

92.8241

91.8523

2029

95.8006

95.2523

93.5226

96.0402

94.3791

92.5452

2030

96.6886

96.4696

95.1962

96.8042

96.6887

93.4680

2031

98.3919

97.8157

96.7412

98.1299

97.2308

95.1537

Taxpayer Not Using Composite Method

2032

98.6826

98.6826

97.9293

98.6826

98.4739

96.3804

2033

98.6826

98.6826

98.6826

98.6826

98.6826

97.5988

Years after 2033

98.6826

98.6826

98.6826

98.6826

98.6826

98.6826

Taxpayer Using the Composite Method

2032

98.6826

98.6826

97.9293

97.9691

98.5007

97.0865

Years after 2032

Use composite method discount factors published for the relevant accident year.**

**The relevant accident year is the accident year that is ten years prior to the specified taxable year.

Table 2 (part B)
Discount Factors Under Section 846 (percent)
For Losses Incurred in Accident Year 2022 in Long-Tail Lines of Business

Taxable Year Beginning in

Private Passenger Auto Liability/Medical

Products Liability — Claims-Made

Products Liability — Occurrence

Workers' Compensation

Long-Tail Composite

2022

96.1701

89.9633

89.3630

89.7304

93.8901

2023

95.8589

91.1883

90.6396

88.3566

93.2372

2024

95.9333

91.4161

91.6708

87.8161

93.0141

2025

95.8576

90.5530

92.2079

87.3806

92.4240

2026

95.0320

91.9350

92.5125

87.6583

92.1521

2027

94.4641

93.4070

92.9497

87.1058

91.7300

2028

94.9895

95.0050

93.8016

87.6622

91.9589

2029

95.1268

95.4107

94.0743

89.0452

93.1631

2030

95.8190

96.5637

95.0202

90.3572

94.4061

2031

97.7990

98.0949

96.8704

91.2131

95.5892

Taxpayer Not Using Composite Method

2032

98.6826

98.6826

98.0610

92.3944

96.8119

2033

98.6826

98.6826

98.6826

93.5960

98.0004

2034

98.6826

98.6826

98.6826

94.8180

98.6826

2035

98.6826

98.6826

98.6826

96.0602

98.6826

2036

98.6826

98.6826

98.6826

97.3206

98.6826

2037

98.6826

98.6826

98.6826

98.5887

98.6826

Years after 2037

98.6826

98.6826

98.6826

98.6826

98.6826

Taxpayer Using the Composite Method

2032

98.6826

95.7515

97.8062

92.0973

96.1839

Years after 2032

Use composite method discount factors published for the relevant accident year.**

**The relevant accident year is the accident year that is ten years prior to the specified taxable year.

SECTION 5. DISCOUNT FACTORS FOR TAXABLE YEARS BEGINNING IN 2022

.01 The tables in this section 5 present separately for each line of business discount factors for losses incurred in the 2022 accident year and earlier accident years for use by insurance companies in computing discounted unpaid losses under §846 and estimated salvage recoverable under §832 in taxable years beginning in 2022.

.02 Tables 3 and 4 separately provide discount factors for insurance companies that have elected to use the composite method of Notice 88-100. See Rev. Proc. 2002-74. The discount factors computed using the composite method are unrelated to the composite discount factors referred to in §1.846-1(b)(1)(ii) and (4), which apply to lines of business for which the Secretary has not published discount factors. The composite discount factors for use with respect to such lines of business are labelled “Short-Tail Composite” (in Table 3, part B) and “Long-Tail Composite” (in Table 4, part B). The “Miscellaneous Casualty” discount factors referenced in §1.846-1(b)(2) are not set forth in tables but are equivalent to the “Short-Tail Composite” discount factors.

Table 3 (part A)
Discount Factors Under Section 846 (percent)
For Taxable Year(s) Beginning in 2022
Short-Tail Lines of Business

Accident Year

Auto Physical Damage

Fidelity/Surety

Financial Guaranty/Mortgage Guaranty

International

Other*

2022

98.5087

96.0741

95.6153

96.2003

97.2283

2021

97.2290

97.2290

97.2290

97.2290

97.2290

Taxpayer Not Using Composite Method

2020

98.4834

98.4834

98.4834

98.4834

98.4834

2019

98.4785

98.4785

98.4785

98.4785

98.4785

Years before 2019

98.5513

98.5513

98.5513

98.5513

98.5513

Taxpayer Using the Composite Method

Years before 2021

98.4834

98.4834

98.4834

98.4834

98.4834

*For the Accident and Health line of business (other than disability income or credit disability insurance), the discount factor for taxable year 2022 is 98.6826 percent.

Table 3 (part B)
Discount Factors Under Section 846 (percent)
For Taxable Year(s) Beginning in 2022
Short-Tail Lines of Business

Accident Year

Reinsurance
— Non-
proportional Assumed Financial Lines

Reinsurance
— Non-
proportional Assumed Liability

Reinsurance
— Non-
proportional Assumed Property

Special Property (Fire, Allied Lines, Inland Marine, Earthquake, Burglary & Theft)

Warranty

Short-Tail Composite

2022

96.1755

95.3149

96.5023

97.7793

98.5010

97.4381

2021

97.2290

97.2290

97.2290

97.2290

97.2290

97.2290

Taxpayer Not Using Composite Method

2020

98.4834

98.4834

98.4834

98.4834

98.4834

98.4834

2019

98.4785

98.4785

98.4785

98.4785

98.4785

98.4785

Years before 2019

98.5513

98.5513

98.5513

98.5513

98.5513

98.5513

Taxpayer Using the Composite Method

Years before 2021

98.4834

98.4834

98.4834

98.4834

98.4834

98.4834

Table 4 (part A)
Discount Factors Under Section 846 (percent)
For Taxable Year(s) Beginning in 2022
Long-Tail Lines of Business

Accident Year

Commercial Auto/Truck Liability/Medical

Medical Professional Liability — Claims-Made

Medical Professional Liability — Occurrence

Multiple Peril Lines

Other Liability — Claims-Made

Other Liability — Occurrence

2022

94.5127

92.3146

87.8300

95.7799

92.0534

90.7411

2021

94.9297

92.8717

89.2979

93.8725

91.9550

90.5083

2020

95.0694

92.5421

90.0641

93.7004

91.8577

90.3548

2019

95.0945

92.8130

91.4323

92.8864

91.8764

90.4989

2018

95.2024

93.2805

92.7664

91.4064

92.0976

90.6836

2017

95.0498

93.3035

93.5069

91.6039

92.6040

90.7542

2016

95.3260

94.2423

94.3189

91.3154

93.0770

90.7788

2015

94.9804

95.1291

94.9993

91.0177

93.8378

91.9830

2014

96.4102

96.0160

96.1220

93.5200

94.9264

92.6228

2013

98.3585

97.7503

97.7902

94.8530

96.6876

94.4974

Taxpayer Not Using the Composite Method

2012

98.5513

98.5513

98.5513

96.1895

98.0033

95.8511

2011

98.5513

98.5513

98.5513

97.5045

98.5513

97.2176

Years before 2011

98.5513

98.5513

98.5513

98.5513

98.5513

98.5513

Taxpayer Using the Composite Method

Years before 2013

98.5513

98.5513

98.5513

96.9185

98.0920

96.7300

Table 4 (part B)
Discount Factors Under Section 846 (percent)
For Taxable Year(s) Beginning in 2022
Long-Tail Lines of Business

Accident Year

Private Passenger Auto Liability/Medical

Products Liability — Claims-Made

Products Liability — Occurrence

Workers' Compensation

Long-Tail Composite

2022

96.1701

89.9633

89.3630

89.7304

93.8901

2021

95.4438

86.7679

89.4762

86.9319

91.9840

2020

95.0391

87.6480

89.4512

84.8651

91.0823

2019

95.0945

92.8130

91.4323

92.8864

91.8764

2018

94.2325

85.0889

89.8810

83.4129

88.7546

2017

94.2824

86.4184

89.9309

82.8905

88.6421

2016

94.5205

87.8040

90.8527

83.2567

88.6258

2015

95.0550

89.0388

91.8072

84.1036

89.1661

2014

95.6473

90.2969

92.1992

84.7150

90.3858

2013

97.7282

91.5785

94.4133

86.5946

92.1457

Taxpayer Not Using the Composite Method

2012

98.5513

92.8838

95.7739

87.8065

93.4541

2011

98.5513

94.2124

97.1571

89.0414

94.7812

2010

98.5513

95.5629

98.5513

90.2995

96.1195

2009

98.5513

96.9299

98.5513

91.5813

97.4421

2008

98.5513

98.2868

98.5513

92.8867

98.5513

2007

98.5513

98.5513

98.5513

94.2154

98.5513

2006

98.5513

98.5513

98.5513

95.5661

98.5513

2005

98.5513

98.5513

98.5513

96.9334

98.5513

2004

98.5513

98.5513

98.5513

98.2913

98.5513

Years before 2004

98.5513

98.5513

98.5513

98.5513

98.5513

Taxpayer Using the Composite Method

Years before 2013

98.5513

94.7288

96.6903

91.2579

95.0968

SECTION 6. DRAFTING INFORMATION

The principal author of this revenue procedure is Allan H. Sakaue of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure contact Mr. Sakaue at (202) 317-6995 (not a toll-free call).

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2022-40614
  • Tax Analysts Electronic Citation
    2022 TNTF 247-15
    2023 TPR 1-10
Copy RID