In July 2019, the IRS published Revenue Procedures 2019-30 and 2019-31 providing final guidance on the new loss reserve discounting rules for non-life insurers in light of the final regulations the IRS released on June 13, 2019.

Rev. Proc. 2019-30 provides simplified procedures for an insurance company to obtain automatic consent to change its methods of accounting for discounting unpaid losses and expenses, estimated salvage recoverable and unearned premiums attributable to title insurance to comply with the Tax Cuts and Jobs Act (TCJA). Rev. Proc. 2019-31 provides revised unpaid loss discount factors for the 2019 and 2018 accident years and earlier accident years along with revised discount factors for computing estimating salvage recoverable.

Tax Reform

The TCJA included many changes for insurance companies for years beginning after December 31, 2017. Several changes were made relating to loss reserve discounting for non-life insurance companies, including:

• Taxpayers may no longer elect to use their own historical loss payment patterns.
• The payment patterns calculated by the Treasury will use a corporate bond yield as opposed to applicable federal interest rates.
• Changes to the computational rules for determining loss payment patterns for certain lines of business. Taxpayers’ discounted unpaid losses as of December 31, 2017, were required to be recalculated to consider the new provisions of the TCJA, and this “transitional” adjustment is to be spread over an eight-year period beginning in 2018.

Proposed Regulations

Rev. Proc. 2019-06 was issued in November 2018 to provide guidance on implementing the changes required by the TCJA and the corresponding proposed regulations. The proposed regulations required the use of the average monthly spot interest rate with a maturity range between six months and 17.5 years, which produced an applicable interest rate of 3.12% for determining the estimated discount factors contained in Rev. Proc. 2019-06 for the 2018 and 2017 accident years. The proposed regulations provided initial guidance on how to address the transition of 2017 discounted reserves and also disallowed the composite method, which was used by many taxpayers to more easily discount reserves with accident years of 10 years and older.

Final Regulations

The final regulations include changes resulting from industry comments on the proposed regulations of Rev. Proc. 2019-06, including:

• The use of a single annual rate to determine the discount factors. Using a more precise maturity range of 4.5 to 10 years for corporate bonds, which better aligns with the investments held by the industry, resulted in a decreased interest rate of 2.94%.
• Reinstatement of the composite method.
• Further clarifications on the transition rules including confirmation of an automatic method change.

Rev. Proc. 2019-30 provides that the requirement to file Form 3115 is waived for any taxpayer making a change to its method of accounting for discounting unpaid losses, estimated salvage recoverable and unearned premiums attributable to title insurance.

For 2018, taxpayers are allowed to use either the final discount factors provided in Rev. Proc. 2019-31 or the proposed discount factors provided in Rev. Proc. 2019-06, as long as they are consistently used between the 2018 discounting and the remeasurement of 2017. If the final discount factors are used for 2018, there are no additional modifications required. 

If the proposed discount factors were used on the 2018 tax return the taxpayer has a few options: (1) file an amended return for 2018 using the final discount factors, or (2) calculate the difference between the proposed and final factors related to the 2017 and prior reserves and amortize over the remaining seven years beginning in 2019. The difference between the proposed and final factors related to the 2018 reserves can be recognized entirely in 2019 or ratably over seven years beginning in 2019.

The final regulations also prescribe that the remeasurement of the 2017 discounted salvage recoverable be recognized in one year if favorable and over a four-year period if unfavorable, which is consistent with the general method change procedures under Internal Revenue Code section (IRC) 481(a).

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