26 U.S.C. § 846: Discounted unpaid losses defined

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. the amount of the undiscounted unpaid losses as of such time, the applicable interest rate, and the applicable loss payment pattern. 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. the applicable interest rate shall be the interest rate determined under subsection (c) for the calendar year with which such accident year ends, and 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. 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. the amount of unpaid losses shown in the annual statement is determined on a discounted basis, and the extent to which the losses were discounted can be determined on the basis of information disclosed on or with the annual statement, 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). 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). 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. by using the aggregate experience reported on the annual statements of insurance companies, 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, as if all losses paid or treated as paid during any year are paid in the middle of such year, and in accordance with the computational rules prescribed in paragraph (3). during the accident year and the 3 calendar years following the accident year, or 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. 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. The period taken into account under subparagraph (A)(ii) shall be extended to the extent required under subclause (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. For purposes of this section, the term “determination year” means calendar year 1987 and each 5th calendar year thereafter. The term “accident year” means the calendar year in which the incident occurs which gives rise to the related unpaid loss. The term “unpaid losses” includes any unpaid loss adjustment expenses shown on the annual statement. 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. 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. 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. 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 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. regulations providing proper treatment of allocated reinsurance, and regulations providing appropriate adjustments in the application of this section to a taxpayer having a taxable year which is not the calendar year. The amendments made by this section [enacting this section and amending sections 807 and 832 of this title] shall apply to taxable years beginning after December 31, 1986 . the unpaid losses and the expenses unpaid (as defined in paragraphs (5)(B) and (6) of section 832(b) of the Internal Revenue Code of 1986) at the end of the preceding taxable year, and the unpaid losses as defined in sections 807(c)(2) and 805(a)(1) of such Code at the end of the preceding taxable year, the amount determined to be the unpaid losses and expenses unpaid for the year preceding the 1st taxable year of an insurance company beginning after December 31, 1986 , determined without regard to paragraph (2), and such amount determined with regard to paragraph (2), Subparagraph (A) shall not apply to any reserve strengthening in a taxable year beginning in 1986, and such strengthening shall be treated as occurring in the taxpayer’s 1st taxable year beginning after December 31, 1986 . The earnings and profits of any insurance company for its 1st taxable year beginning after December 31, 1986 , shall be increased by the amount of the difference determined under subparagraph (A) with respect to such company. subject to tax under section 831(b) of such Code, or described in section 501(c) of such Code and exempt from tax under section 501(a) of such Code, and such company becomes subject to tax under such section 831(a) for any later taxable year, the unpaid losses and the expenses unpaid (as defined in paragraphs (5)(B) and (6) of section 832(b) of the Internal Revenue Code of 1986) at the end of the preceding taxable year, and the unpaid losses as defined in sections 807(c)(2) and 805(a)(1) of such Code at the end of the preceding taxable year,