Rev. Proc. 2023-10

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.

.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 FR 55646, 55651.

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.

.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.

.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.

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 number).