
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC846]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                    Subchapter L--Insurance Companies
 
               PART III--PROVISIONS OF GENERAL APPLICATION
 
Sec. 846. Discounted unpaid losses defined


(a) Discounted losses determined

           (1) Separately computed for each accident year

        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.

                      (2) Method of discounting

        The amount of the discounted unpaid losses as of the end of any 
    taxable year attributable to any accident year shall be the present 
    value of such losses (as of such time) determined by using--
            (A) the amount of the undiscounted unpaid losses as of such 
        time,
            (B) the applicable interest rate, and
            (C) the applicable loss payment pattern.

            (3) Limitation on amount of discounted losses

        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.

               (4) Determination of applicable factors

        In determining the amount of the discounted unpaid losses 
    attributable to any accident year--
            (A) the applicable interest rate shall be the interest rate 
        determined under subsection (c) for the calendar year with which 
        such accident year ends, and
            (B) 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.

(b) Determination of undiscounted unpaid losses

    For purposes of this section--

                           (1) In general

        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.

       (2) Adjustment if losses discounted on annual statement

        If--
            (A) the amount of unpaid losses shown in the annual 
        statement is determined on a discounted basis, and
            (B) the extent to which the losses were discounted can be 
        determined on the basis of information disclosed on or with the 
        annual statement,

    the amount of the unpaid losses shall be determined without regard 
    to any reduction attributable to such discounting.

(c) Rate of interest

                           (1) In general

        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).

                  (2) Determination of annual rate

        (A) In general

            The annual rate determined by the Secretary under this 
        paragraph for any calendar year shall be a rate equal to the 
        average of the applicable Federal mid-term rates (as defined in 
        section 1274(d) but based on annual compounding) effective as of 
        the beginning of each of the calendar months in the test period.

        (B) Test period

            For purposes of subparagraph (A), the test period is the 
        most recent 60-calendar-month period ending before the beginning 
        of the calendar year for which the determination is made; except 
        that there shall be excluded from the test period any month 
        beginning before August 1, 1986.

(d) Loss payment pattern

                           (1) In general

        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.

                     (2) Method of determination

        Determinations under paragraph (1) for any determination year 
    shall be made by the Secretary--
            (A) by using the aggregate experience reported on the annual 
        statements of insurance companies,
            (B) 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,
            (C) as if all losses paid or treated as paid during any year 
        are paid in the middle of such year, and
            (D) in accordance with the computational rules prescribed in 
        paragraph (3).

                       (3) Computational rules

        For purposes of this subsection--

        (A) In general

            Except as otherwise provided in this paragraph, the loss 
        payment pattern for any line of business shall be based on the 
        assumption that all losses are paid--
                (i) during the accident year and the 3 calendar years 
            following the accident year, or
                (ii) 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.

        (B) Treatment of certain losses

            Except as otherwise provided in this paragraph--
                (i) 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, and
                (ii) in the case of a line of business described in 
            subparagraph (A)(ii), losses paid after the close of the 
            period applicable under subparagraph (A)(ii) shall be 
            treated as paid in the last year of such period.

        (C) Special rule for certain long-tail lines

            In the case of any long-tail line of business--
                (i) the period taken into account under subparagraph 
            (A)(ii) shall be extended (but not by more than 5 years) to 
            the extent required under clause (ii), and
                (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 losses treated as 
            paid in the 9th year after the accident year (or, if lesser, 
            the portion of the unpaid losses not theretofore taken into 
            account).

        Notwithstanding clause (ii), to the extent such unpaid losses 
        have not been treated as paid before the last year of the 
        extension, they shall be treated as paid in such last year.

        (D) Long-tail line of business

            For purposes of subparagraph (C), the term ``long-tail line 
        of business'' means any line of business described in 
        subparagraph (A)(ii) if the amount of losses which (without 
        regard to subparagraph (C)) would be treated as paid in the 10th 
        year after the accident year exceeds the losses treated as paid 
        in the 9th year after the accident year.

        (E) Special rule for international and reinsurance lines of 
                business

            Except as otherwise provided by regulations, any 
        determination made under subsection (a) with respect to unpaid 
        losses relating to the international or reinsurance lines of 
        business shall be made using, in lieu of the loss payment 
        pattern applicable to the respective lines of business, a 
        pattern determined by the Secretary under paragraphs (1) and (2) 
        based on the combined losses for all lines of business described 
        in subparagraph (A)(ii).

        (F) Adjustments if loss experience information available for 
                longer periods

            The Secretary shall make appropriate adjustments in the 
        application of this paragraph if annual statement data with 
        respect to payment of losses is available for longer periods 
        after the accident year than the periods assumed under the rules 
        of this paragraph.

        (G) Special rule for 9th year if negative or zero

            If the amount of the losses treated as paid in the 9th year 
        after the accident year is zero or a negative amount, 
        subparagraphs (C)(ii) and (D) shall be applied by substituting 
        the average of the losses treated as paid in the 7th, 8th, and 
        9th years after the accident year for the losses treated as paid 
        in the 9th year after the accident year.

                       (4) Determination year

        For purposes of this section, the term ``determination year'' 
    means calendar year 1987 and each 5th calendar year thereafter.

(e) Election to use company's historical payment pattern

                           (1) In general

        The taxpayer may elect to apply subsection (a)(2)(C) with 
    respect to all lines of business by using a loss payment pattern 
    determined by reference to the taxpayer's loss payment pattern for 
    the most recent calendar year for which an annual statement was 
    filed before the beginning of the accident year. Any such 
    determination shall be made with the application of the rules of 
    paragraphs (2)(C) and (3) of subsection (d).

                            (2) Election

        (A) In general

            An election under paragraph (1) shall be made separately 
        with respect to each determination year under subsection (d).

        (B) Period for which election in effect

            Unless revoked with the consent of the Secretary, an 
        election under paragraph (1) with respect to any determination 
        year shall apply to accident years ending with the determination 
        year and to each of the 4 succeeding accident years.

        (C) Time for making election

            An election under paragraph (1) with respect to any 
        determination year shall be made on the taxpayer's return for 
        the taxable year in which (or with which) the determination year 
        ends.

      (3) No election for international or reinsurance business

        No election under this subsection shall apply to any 
    international or reinsurance line of business.

                           (4) Regulations

        The Secretary shall prescribe such regulations as may be 
    necessary or appropriate to carry out the purposes of this 
    subsection including--
            (A) regulations providing that a taxpayer may not make an 
        election under this subsection if such taxpayer does not have 
        sufficient historical experience for the line of business to 
        determine a loss payment pattern, and
            (B) regulations to prevent the avoidance (through the use of 
        separate corporations or otherwise) of the requirement of this 
        subsection that an election under this subsection applies to all 
        lines of business of the taxpayer.

(f) Other definitions and special rules

    For purposes of this section--

                          (1) Accident year

        The term ``accident year'' means the calendar year in which the 
    incident occurs which gives rise to the related unpaid loss.

                 (2) Unpaid loss adjustment expenses

        The term ``unpaid losses'' includes any unpaid loss adjustment 
    expenses shown on the annual statement.

                        (3) 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.

                        (4) Line of business

        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.

                      (5) Multiple peril lines

        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.

     (6) Special rule for certain accident and health insurance 
                              lines of business

        Any determination under subsection (a) with respect to unpaid 
    losses relating to accident and health insurance lines of businesses 
    (other than credit disability insurance) shall be made--
            (A) 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--
                (i) the prevailing State assumed interest rate shall be 
            the rate in effect for the year in which the loss occurred 
            rather than the year in which the contract was issued, and
                (ii) the limitation of subsection (a)(3) shall apply in 
            lieu of the limitation of the last sentence of section 
            807(d)(1), and

            (B) 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.

(g) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this section, including--
        (1) regulations providing proper treatment of allocated 
    reinsurance, and
        (2) regulations providing appropriate adjustments in the 
    application of this section to a taxpayer having a taxable year 
    which is not the calendar year.

(Added Pub. L. 99-514, title X, Sec. 1023(c), Oct. 22, 1986, 100 Stat. 
2399; amended Pub. L. 100-647, title I, Sec. 1010(e)(1), (2), Nov. 10, 
1988, 102 Stat. 3453; Pub. L. 101-508, title XI, Sec. 11305(b), Nov. 5, 
1990, 104 Stat. 1388-451.)


                               Amendments

    1990--Subsec. (g). Pub. L. 101-508 inserted ``and'' at end of par. 
(1), redesignated par. (3) as (2), and struck out former par. (2) which 
required regulations providing proper treatment of salvage and 
reinsurance recoverable attributable to unpaid losses.
    1988--Subsec. (f)(6)(B). Pub. L. 100-647, Sec. 1010(e)(1), 
substituted ``paid in the middle of the year'' for ``paid during the 
year''.
    Subsec. (g)(3). Pub. L. 100-647, Sec. 1010(e)(2), added par. (3).


                    Effective Date of 1990 Amendment

    Amendment by Pub. L. 101-508 applicable to taxable years beginning 
after Dec. 31, 1989, see section 11305(c)(1) of Pub. L. 101-508, set out 
as a note under section 832 of this title.


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                             Effective Date

    Section 1023(e) of Pub. L. 99-514, as amended by Pub. L. 100-647, 
title I, Sec. 1010(e)(3), Nov. 10, 1988, 102 Stat. 3453, provided that:
    ``(1) In general.--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.
    ``(2) Transitional rule.--For the first taxable year beginning after 
December 31, 1986--
        ``(A) 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
        ``(B) 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,
shall be determined as if the amendments made by this section had 
applied to such unpaid losses and expenses unpaid in the preceding 
taxable year and by using the interest rate and loss payment patterns 
applicable to accident years ending with calendar year 1987. For 
subsequent taxable years, such amendments shall be applied with respect 
to such unpaid losses and expenses unpaid by using the interest rate and 
loss payment patterns applicable to accident years ending with calendar 
year 1987.
    ``(3) Fresh start.--
        ``(A) In general.--Except as otherwise provided in this 
    paragraph, any difference between--
            ``(i) 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
            ``(ii) such amount determined with regard to paragraph (2),
    shall not be taken into account for purposes of the Internal Revenue 
    Code of 1986.
        ``(B) Reserve strengthening in years after 1985.--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.
        ``(C) Effect on earnings and profits.--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.
    ``(4) Application of fresh start to companies which become subject 
to section 831(a) tax in later taxable year.--If--
        ``(A) an insurance company was not subject to tax under section 
    831(a) of the Internal Revenue Code of 1986 for its 1st taxable year 
    beginning after December 31, 1986, by reason of being--
            ``(i) subject to tax under section 831(b) of such Code, or
            ``(ii) described in section 501(c) of such Code and exempt 
        from tax under section 501(a) of such Code, and
        ``(B) such company becomes subject to tax under such section 
    831(a) for any later taxable year,
paragraph (2) and subparagraphs (A) and (C) of paragraph (3) shall be 
applied by treating such later taxable year as its 1st taxable year 
beginning after December 31, 1986, and by treating the calendar year in 
which such later taxable year begins as 1987; and paragraph (3)(B) shall 
not apply.''

                  Section Referred to in Other Sections

    This section is referred to in sections 807, 832, 847 of this title.
